Is Apple's Golden Age Approaching An End?

My equity selection process began to include Apple in May of 2006. That's four months shy of two years in which it's been reasonably consistently included in the portfolio.

Having managed to better the S&P for quite a few years prior to the month of entry into my selections, Apple has now had a long, multi-year run of outperformance versus the S&P500 Index.

Maybe it's near an end. I know my partner won't want to hear this. He feels deeply about Apple's management and product strategies. For what it's worth, I agree with him.

But, unfortunately, that's not sufficient to keep Apple outperforming the index.

Today, as the firm announced a slew of new and improved products, reports indicated that, if anything, the company' faithful customers were actually angered. They felt deceived as larger-capacity and/or less expensive models were introduced just months after the last, pre-Christmas slate of new products.

Usually, one or more of three factors are involved in a company's cessation of consistent index outperformance.

One source is competition. In this case, that still doesn't seem to be Apple's weakness.

Another is anti-trust or regulatory pressure. Think Wal-Mart or Microsoft. Again, though, this doesn't seem to be a source of Apple's recent stock price problems.

Finally, there is the gradual, eventual catching up of investor expectations to a company's ongoing, though excellent, performance. It seems that something like this is now occurring.

Let's look at three Yahoo-sourced charts of Apple's stock price over time, including, in one case, the S&P500 Index as well.

In the first chart, we see Apple's stock performance for the past five years. With only a few brief declines, it's been on a steadily upward trajectory since 2003. From my proprietary research, I'm aware that Apple has already entered a zone in which significantly long periods of further outperformance are becoming less likely.

Looking at the next chart, Apple's price performance since 1985, it's clear that these last five years of outperformance have been unique in the company's history. Except for its brief spurt in the mid-1980s and late 1990s, the company's stock has actually treaded water for most of 12 years.

But this last run has been longer and steadier than the earlier ones. Consequently, it provides a longer, steadier performance track record for observers, i.e., analysts and investors, to finally get their expectations fixed for Apple's future performance.

Adding the S&P500 to the second chart, we get a clearer picture of Apple's performance relative to the market. Through 2000, it was essentially even for 15 years. For the next four, it actually underperformed the index.

The recent outperformance by Apple's stock of the index essentially means that the company has been surprising the market with its well-managed, consistent operational and financial performance.

Now, the firm's continual upgrading of products and price cuts are seeming to upset its customers. They feel that every time they buy an Apple product, a better price/performance version comes out within a year.

Meanwhile, such superb product development and price management is becoming expected by the market. And, honestly, the firm's dominance of the digital music player and content download business has become so solid and long-lived that it's natural for observers to wonder if the next move isn't downward.

AppleTV hasn't taken off as the platform crossover "killer product" it was intended to be. Recent new product introductions aren't apparently 'wowing' customers and reviewers.

Historically, after two years in my portfolio selections, companies are excluded due to my research on senescence. That is, I have found that, after a fairly continuous presence in my equity portfolios, companies begin to bear an outsized risk of failing to surprise the market with their performance. Thus, some lesser-known company has a higher probability of posting an S&P-beating total return than a well-known, still-operationally successful firm.

This occurred with my holding of Kohls some years ago. The same has been true of some bio-pharma companies, as well, like Gilead.

Sad to say, I think Apple is approaching this point. The odds of its being able to consistently, significantly outperform heightened investor expectations are probably dropping with each new month.

As always, time will tell. But the law of large numbers isn't on Apple's side this time.