‘APPLE AND GOOGLE. THE IDEAL BUY-AND-HOLDS?,’ by James B. Stewart at smartmoney. com.

In Uncategorized on October 26, 2009 at 11:25

Apple and Google: The ideal buy-and-holds?


I’ve often made the point that it doesn’t take a lot of great investment ideas to outperform market averages. Sometimes it only takes one, or, in the present case, two.

This week I’ve been pinching myself at the good fortune to have Google (GOOG)  and Apple (AAPL) as two of my core holdings. I hope legions of Common Sense readers are experiencing the same sensation, since I’ve been vigorously recommending these innovative companies for years, most recently championing them (and adding to my holdings) during the recent slump.

After plunging to below $260 a share in November, Google has more than doubled, to about $550 a share. Apple shares have performed even better, hitting $200 intraday this week after sinking to about $78 in January. With holdings like this, it isn’t hard to surpass the S&P 500’s (.SPX)  impressive 60% trough-to-peak rise from March until now.

Even better, from my perspective, is that the gains in both stocks have been powered by solid earnings results, including the much-better-than-expected profits reported in recent days. The results indicate that Google and Apple can not only survive the worst of times, but should positively thrive during the recovery. The results reflect my conviction that both are the beneficiaries of unique competitive advantages that should propel gains for years to come — my original investment thesis for these stocks.

Google is, in my view, the rare natural monopoly. The quality of Internet search is strengthened by volume, and no one can or will match Google’s head start and share of total searches. Microsoft’s (MSFT)  hapless efforts only reinforce my conviction. Although Google remains under close antitrust scrutiny, it’s important to bear in mind that natural monopolies aren’t illegal (as opposed to anticompetitive behavior or conspiracies.)

The case for Apple is less straightforward, and I was slower to embrace it than Google, a stock I’ve owned since its public offering. Apple has seized a technological advantage with the iPhone, no small feat considering the entrenched competitors it faced. But that advantage could erode. What impresses me is how Apple is creating a seamless world of interconnected devices that will someday link all aspects of communication, entertainment and computing. I can hardly wait to see the much-rumored new tablet device that’s expected to take on Amazon’s (AMZN) Kindle.

Like all stocks, Google and Apple go down as well as up, and you could argue that now might be an ideal time to take profits, given all the recent good news and the market’s strong overall rise. I wouldn’t object if some readers told me they wanted to take some money off the table. But I won’t be among them. I consider Google and Apple to be the ultimate buy-and-hold stocks as long as my investment thesis remains sound. I have used pullbacks, such as those during the past year, to add to my positions, in some cases by buying calls. (In addition to owning shares of Google and Apple, I also currently own call options in both that expire in 2011.)

My continuing belief in these stocks also reflects my belief that when it comes to individual stocks, most investors are best served by owning a relatively small number of positions in which they have a strong conviction. There simply aren’t that many great investment ideas at any given time, which is one reason that I don’t recommend specific stocks every week. This strategy also keeps transaction costs to a minimum.

Nor do most investors have the time and expertise to follow a large number of companies. I’ve seen too many portfolios that pretty much mirror the S&P 500. Such investors would be better off owning a low-cost index fund, supplemented by the few individual stocks they strongly believe in.

This is the opposite approach from that embraced by the Galleon Group hedge fund, whose billionaire head, Raj Rajaratnam, was charged with insider trading last week. Whatever the merits of this fascinating case (Rajaratnam has insisted he’s innocent), some accounts describe a culture where Galleon employees were under intense pressure to generate constant trading ideas and gain an “edge.” Ironically, two of Galleon’s biggest holdings were Google and Apple, according to Securities and Exchange Commission filings. How much better it would have been for all concerned, including Galleon’s investors and certainly for Rajaratnam, had the funds simply bought and held those two stocks.

© 2009 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & Company, Inc. and HearstSM Partnership. SmartMoney is a registered trademark. All Rights Reserved.

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