Last February, I wrote a thought exercise of sorts for CNBC.com weighing the stocks of the number one and two companies by market cap at the time, Apple and Exxon.
Apple, as you may recall, had just turned in one of the greatest quarters in history, annihilating estimates with record smashing iPhone sales. Its stock had shot up to $128/share, and just about everyone expected it to climb higher. Pundits were breathlessly debating how soon Apple would become the world’s first trillion-dollar company. Exxon’s stock, by contrast, was $88/share and not many people were touting it as a buy. Oil prices had crashed to $50/barrel, from over $100 less than a year earlier, and a recovery was seen as unlikely.
Despite these factors, I wrote that if I could buy only one stock between the two and hold it for the long term, Exxon was a better choice than Apple. A quarter later, as both companies prepared to release earnings again, I reiterated my preference for the energy giant.
Warren Buffett famously advised investors to “be greedy when others are fearful.” With stocks all over the world getting clubbed in recent days, there is no shortage of fear out there. The question is: will all that negative sentiment become another “wall of worry” that the markets climb to new highs? I can’t say for sure. No one can. I will say that during yesterday’s gruesome selloff, I spent more time adding to my fund’s short book than searching out potential buys. That’s because, even with the Dow and S&P suffering their worst weekly declines in four years, I still see wildly, even stupidly overvalued companies everywhere I look.
[note: an earlier version of this post originally appeared on my Yahoo! Finance page.]
A few months ago, Apple (AAPL) posted one of the greatest quarterly beats in the history of capitalism and its market cap–already the world’s largest–officially doubled the size of the next closest company, a little energy outfit you might have heard of called Exxon (XOM). Nonetheless, I wrote a piece for CNBC.com at the time saying that if I had to choose between the two stocks to buy and hold for the next twenty years, I would pick up my iPad, log into my brokerage account and order a whole bunch of XOM.
With both companies releasing earnings this week, it seems like a good time to revisit that call. Apple annihilated analysts’ expectations again on Monday. Exxon also beat, but its profits were off by almost 50 percent and its stock has been the second worst performer in the Dow, down 5 percent since New Year’s Day and over 13 percent in the last 12 months. The oil giant has even ceded the number two spot in market cap to Microsoft for the time being.
So, have I changed my mind? Do I now think AAPL is a better buy than XOM? The short answer is: no. The long answer is: absolutely not.
Last month, I wrote about avoiding “story stocks,” companies with compelling narratives but little or no revenues. As I said, a good way to avoid these money-losers is to stick with dividend paying stocks. Dividends ensure that a business is viable, but they don’t automatically mean that it’s a profitable investment. Dividend paying companies can be overvalued, too.
So how do you separate out the good stocks from the bad and the ugly ones? There’s one trick you can use: inside information.
No, not that inside information, the kind that will get you perp-walked out of your office in handcuffs. I’m talking about the perfectly legal kind.
In my last post, I talked about the enormous fees mutual funds charge their customers. There’s no doubt about it: if you’re an individual investor, your best option is index funds. But if you really want to play the market yourself, beware of stocks with too-good-to-be-true stories. They almost always have sad endings.
I’ve seen countless investors get burned by “story stocks,” businesses with little else to their names but inspiring ideas. It’s even happened–indirectly–to me.