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October 05, 2007

Trimming The Tree of Apple Profits

With the market ramping and Apple and other tech stocks leading the way, I sold a portion of Apple in many client accounts on Friday as it crossed $160. I completed sales only in accounts where the position size was pushing towards 4%.

I have a detailed spreadsheet on Apple and no matter how much I tweak it, I have a hard time getting to a target price too much above $160 based on assumptions about sales, earnings, and cash flow that I am willing to use right now. Another way of saying this is that Apple has reached my stretch target based upon my current estimates. When that occurs, my portfolio management discipline is to trim the position and capture some profits. Clients who have been with Northlake since early to mid-2005 will find this strategy to be familiar. In fact, for clients where I was buying Apple in the $30 in early 2005 this marks the third or fourth time I have trimmed it. Sure, with the benefit of hindsight I regret trimming it at $48, $71, and $110. However, there are no sure things on Wall Street and it never hurts to pocket some of your gain.

One legitimate question is whey I wouldn’t sell the entire position at $160 if it has reached my stretch target....

....The reason is that my target is based on conservative assumptions. To help control risk and find really attractive stocks, I use conservative earnings estimates in my spreadsheets. If a stock looks attractive on conservative numbers then there may be even more upside and less risk that I assume. That is always a good combination.

Apple has consistently beaten estimates over the past three years. I think that is likely to be the case through 2008 as the market share gains for Macs and iPhones continue. If I do plug in higher estimates, I can get to $180-200 for Apple. The upper end of that range now becomes my new stretch target and the next place clients should look for their positions in Apple to get a trim.

Posted by Steve Birenberg at October 5, 2007 02:46 PM in AAPL