Ask Matt: Is Apple stock becoming a bubble?
— -- Q: Do you think owning Apple stock has become a mania just as buying real estate was before the housing bubble burst?
Is the excitement over Apple anything like the housing craze? If anything, the housing craze is subdued compared with what is happening with Apple, in terms of price gains.
Housing certainly had a nice run. Housing prices jumped roughly 132% between the start of the run in September 1990, through its peak in March 2007, says Ken Winans of Winans International, based on an index that removes distortions from the fact homes are often bought with borrowed money.
But housing's gains pale next to Apple's. The stock's monster run started in earnest in January 2005 when the shares were trading for $36 a share. Since then, the stock has jumped more than 1,600%.
"Apple on a bad day has outperformed housing," says Winans, who is also a market historian as well as an owner of Apple shares.
Recent investors may forget this, but Apple has had a history of being a very volatile stock. For instance, Apple hit a tech-bubble high of $37.59 on March 23, 2000, and didn't return to that high until roughly five years later in January 2005, Winans says.
Apple's stock also suffered a severe correction in 2006 and a brutal downdraft in 2008 when it lost half its value.
"Some people want to adopt Apple as an extended member of the family," Winans says. "But Apple's stock doesn't go straight up. Did we learn nothing in the dot-com bubble?"
There's no question that from time to time, there's an en vogue investment. Dot-com stocks, real estate, gold and now Apple have each taken turns being the one investment that's capturing the minds of investors.
Apple is a risky stock that has certainly become a darling. Just about all the Wall Street analysts who follow the stock rate it a buy. It's possible, too, that many of the speculators who rushed into gold in 2010 and 2011 are now pouring into Apple stock, Winans says.
Some of these investors rationalize owning Apple saying it's cheap. Apple's stock may not appear pricey on a price-to-earnings ratio, sporting a 14 P-E relative to forecasted earnings. But Apple's stock is 3.6 times higher than its expected 2012 revenue, which is about the high level it hit when it peaked previously, Winans says.
Does that mean Apple investors should sell now? No. But investors need to learn from their mistakes when they speculate on risky individual stocks such as Apple. "When you make a fortune, what's your game plan? The minute Apple (stock) breaks down, I'm gone," Winans says.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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