By Corrie Driebusch And Saumya Vaishampayan
Brian Flanagan and Jim Grossman still remember a dinner they
attended with other portfolio managers at a Goldman Sachs
conference in early 2000.
At the time, the two were co-managing a technology portfolio for
Thrivent Financial, a nonprofit financial-services firm based in
Minneapolis and Appleton, Wis. Mr. Grossman had bought for the firm
some shares of a Nasdaq-listed personal-computer company that had
rebounded after a few years earlier forcing out its chief
executive. He urged anyone else who would listen to buy the stock,
too.
The company's shares had more than doubled in 1999, outpacing
the red-hot Nasdaq Composite Index. Yet the recommendation was
widely received as fogyish in a world besotted with the Internet
and the newest communications technologies.
"He made his pitch for Apple and was almost laughed out of the
room," said Mr. Flanagan, who now manages the Thrivent Mid-Cap Core
Fund. "That was before the iPhone and the iPod came out. Everyone
believed it was just a niche company."
In the intervening 15 years, Apple Inc. has transformed itself
from an also-ran to a juggernaut that carries the world's highest
market value and recently posted the largest-ever quarterly profit.
The Cupertino, Calif., heavyweight has grown 13-fold in terms of
employment and 100-fold in terms of profitability.
On Friday, the company that owns the Dow Jones Industrial
Average said it would add Apple to the blue-chip index this month,
crowning the ascendancy of a company that once was written off but
now is the mightiest force in financial markets.
"Apple skews things," said Tim Daubenspeck, senior research
analyst at ClearBridge Investments, which manages $108 billion. "I
spent 15 to 16 years covering phones and the mobile industry, and I
never thought I'd see a company do what they're doing from a cash
standpoint and a dominance standpoint today."
Wall Street has changed its views accordingly: The company that
got Mr. Grossman laughed at in 2000 now is popularly rated as a
buy. As of last Wednesday, 38 analysts on Wall Street recommended
buying the stock and 11 recommended holding it. That compares with
10 recommending a buy and one recommending a hold in early March
2000.
Yet Apple's rise also holds a cautionary tale: An investor
surveying the top ranks of the Nasdaq in 2000 would find Microsoft
Corp., Intel Corp., Cisco Systems Inc. and Oracle Corp., all still
strong firms earning considerable profits.
Purchasers of some of those shares who held from one Nasdaq
record to the next would have lost a considerable sum.
An investor who bought Cisco on the day of the Nasdaq's record
in March 2000 and held that investment would have suffered a 53%
loss through last Friday on a total-return basis, including price
moves and dividend payments.
Buying and holding Intel in the same period would have resulted
in a 25% total-return loss. Buying and holding Microsoft and Oracle
would have produced total-return gains of 18% and 10%,
respectively, but would have lagged behind the 98% return on the
S&P 500 in the same period.
Analysts are quick to point out that Apple is a different beast
than the leaders in the Nasdaq 15 years ago.
"Apple has done the best job in technology of defining new
markets, dominating new markets and doing so profitably," said
Michael Sansoterra, who manages about $1 billion as a managing
director at Silvant Capital Management, referring to Apple's push
into the smartphone market. He said he owns Apple stock in the
firm's large-cap growth strategy.
The valuation of Apple also is much lower compared with
highflying tech stocks during the tech bubble. Apple's current
trailing price/earnings ratio is 17, compared with Microsoft's
trailing price/earnings ratio of 75 in March 2000 and Cisco's
212.
"It used to be people had massive positions in Microsoft and
Intel and they would say 'never sell these,'" said Dan Morgan,
senior portfolio manager at Synovus Trust Co., which manages about
$10.7 billion. "There was this complacency about those names being
bulletproof."
Today, the gains beyond Apple are shared among a wide swath of
sectors. Among the largest companies in the Nasdaq Composite,
Starbucks Corp. is up 27% on a price basis over the past year and
Costco Wholesale Corp. is up 32%. Apple shares have risen 67% in
the same period, while Facebook Inc. has notched a 13% gain.
Microsoft has risen 11% in the past 12 months.
Mr. Morgan was at Noble Capital Management in 2000, overseeing
client portfolios that were invested in technology companies. He
said many investors have learned from the experience of being
burned by hot stocks.
"Now they say, 'yeah this is great that they keep going up, but
keep an eye on them.'"
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