Don’t Stick With Apple Stock Just Because You Like Its Products

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Forbes.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

I love Apple (AAPL) products. They’re intuitive, slick and host great technology, end to end. Accordingly, it’s difficult to find fault with a company whose products I really like and which has performed outstandingly well over the past decade. But . . .

This is exactly when smart investors should question how long this good fortune can last. Taking the emotion out of investing is one of the most critical steps to success.

So let’s look at some facts about Apple. The stock is up more than 70% in the past year, while its earnings are projected to grow 16.5% over the next 12 months.

The iPhone 5 recorded record sales, but disappointed investors. iMaps is a disaster, and a costly one at that. To top things off, Samsung just won the right to sell its Galaxy 10.1 tablet in the U.S.–yes, it’s an older model, but it will take some sales away from Apple.

So here’s what worries me. In the absence of an iPad mini or an Apple TV, will the company be able to beat the lofty expectations analysts have for it?

Consensus estimates are for Apple to earn $8.88 in the fourth quarter (earnings are scheduled for October 25th), and $15.44 for the first quarter. It’s the latter number that has me going.

I expect corporate earnings estimates to come down across the board, and, in my view, Apple is not immune. Worse: when popular companies disappoint, the impact on the stock can be magnified. While this is manna for traders and speculators, for the rest of us investors, it’s gut wrenching.

Smart investors who have owned the stock for a while are well suited to keep an eye on their gains. Buying some puts (which are relatively inexpensive) or selling into strength is a good way to protect your gains.

I may be wrong about Apple stock, but I know I’m not wrong about this: no one has ever gone broke taking profits.