Why You Need to Buy Apple (AAPL) and Sell Palm (Palm) Short

Regular readers, my colleagues and just about everyone else I come in contact with know I’m a big fan of Apple, Inc. (Nasdaq: AAPL). I’ve written about it here on several occasions, my family and I own a number of its computers, and we’re all “packin’ iPhones”.

So when it comes to reporting on it, you could easily come to the conclusion that I’m about as far away from an unbiased journalist as you can get.

But you’d be wrong. You see, I also own a computer that runs the Windows operating system published by Microsoft (not because I necessarily want to, but because I have to). I used to own a Palm, Inc. (Nasdaq: PALM) Treo smartphone, too.

I’m not going to write another article that’s solely a comparison of Apple’s products to its competitors. There are plenty of writers out there doing that already.

Besides, Apple is so far ahead of its competitors in product design and functionality that it’s hardly worth the comparison, except in a few cases.

But what about Apple as a company? What sets it so far apart from others in the consumer electronics sector? More importantly, how is it as an investment? Is it far ahead there as well? The short answer is a resounding “yes.”

The company rarely fails to disappoint, both on the design side and especially when it comes to revenues and earnings. The company takes a lot of heat from analysts due to its conservative stance when it comes to forecasting revenues and earnings.

But which would you rather have? A company that makes wild forecasts and rarely meets them, or one like Apple that consistently beats them? I know what makes me feel better (analysts are just like you and me in that regard).

The Mt. Everest of Cash Piles vs. Mounting Debt Pile

Apple’s balance sheet is the envy of Wall Street: It’s sitting on a mountain of cash – north of $31 billion – and not one shred of debt. An enviable position anytime, but even more so in the current recessionary climate.

Palm, on the other hand is sitting on a pile of mounting debt, and if its current losses continue, it will soon be faced with raising more cash. Not a good thing if you’re a Palm shareholder.

Here’s the bottom line on Apple as an investment: If you’d bought a few shares of Apple as a Christmas present for someone back in December 1980, they’d be your best friend. The stock has climbed 4,463% since then.

But they would be calling you names had you bought them a few shares of Palm, which has declined 97% since March of 2000 (its public debut).

How Does Apple Do It?

Ok, I’ll forget the product comparisons, but just consider these incredible facts:

• Forget the fact that its iPod has dominated the portable music player market, completely changing the way music is sold at the retail level…
• Forget for a minute that its computers command a significant price premium over similarly configured Windows machines…
• Forget that so many mobile phone companies came before it, with pricing plans cast in stone…

The company’s management is the proverbial outside-the-box thinkers:

• When Apple decides to enter a particular space, and introduce its initial product, it nearly always changes the ground rules, completely upsetting the apple cart for its competition.
• And just when a competitor thinks it has Apple’s product strategy figured out and manages to introduce a “me-too” widget, Apple introduces a faster, better one with even more features that customers want.

Notice I didn’t say cheaper: There’s never been a company in modern history that’s monetized great consumer product ideas the way that Apple has. I defy you to name one that’s done it as well.

The best part about Apple is that every time a new would-be competitor comes along, the mainstream media hacks decry “the next iPod killer,” or “the iPhone has run out of steam.” Nervous investors sell, and long-time Apple shareholders just buy their shares.

Palm’s Pre: The Next iPhone Killer? You’ve Got to Be Kidding…

Right… The latest “iPhone killer” was supposed to be the new Pre smartphone, introduced with much fanfare by Palm this past January. So where is the Pre now?

Judging from Palm’s latest anemic sales numbers, the Pre’s going nowhere fast. Even faster than most analysts estimated. So it’s not surprising that investment firms are starting to reverse course on Palm. Morgan Joseph recently downgraded Palm to a Sell rating, stating Palm is failing to meet even the lowest sales numbers for the Pre.

In a last ditch attempt to save it, I expect Palm to announce pre-holiday price cuts to try to spur sales. It won’t work, of course, and the Pre will go the way of Microsoft’s Zune music player… down and out of the picture.

Morgan’s sell target is $7.50 a share, and with Palm shares currently trading in the range of $13, shorting the stock seems like a viable idea for those investors wanting to capitalize on the negative aspects of Apple’s rising dominance in the smartphone market.

iPhone: It’s Already the Smartphone Gold Standard

The iPhone on the other hand, is so popular, during its recent earnings conference call, Apple announced that it’s having trouble keeping up with demand.

It’s no wonder: There’s more than 60,000 applications available for the iPhone, from seeing the weather where you’re standing, to reading MRIs on the golf course, and just about everything in between.

When it first came out, few analysts gave the iPhone a chance against Research in Motion’s  (Nasdaq: RIMM) very successful BlackBerry devices. But that, too, is rapidly changing, as Apple is making significant inroads into the educational, corporate and government smartphone markets.

Now Apple’s competitors are starting the all too familiar “me-too” look alike product changes. Flattering, but futile. I predict that Apple’s iPhone will continue to gain market share, and in a few short years, relegate most of the competitions devices to also-ran status.

And you just might want to be along for that ride.

Good investing,

David Fessler
Investment U