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Do Too Many People Own Too Much Apple Stock?

Every era has its must-own investment. Dot-coms ruled the day in the early 2000s. Everyone had to buy a house to flip in the mid-2000s. And in the '50s and '60s, investors couldn't resist General Electric and the other "Nifty 50."

Apple
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Apple

But now there is one stock that's taken on rock star status and shows up in more portfolios than any other: Apple. Shares of the USA's most valuable company have dazzled both individual investors and professionals, and loading up on the stock has been one of the best moves they have made.

Thumbing their noses at aged financial advice preaching for the need to spread money around dozens of investments, or diversify, investors have found that zeroing in on this one company is their ticket to a big Wall Street score. The stock has been a winner despite its recent decline, which briefly pushed it into a 10 percent correction. At its close of $635.85 Tuesday, it's still up more than 50 percent this year, which compared with the 15 percent gain in the broad Standard & Poor's 500 index makes it a runaway winner.

"I don't want to diversify that much when I have one stock doing just fine," says Matt Loud, a 28-year-old security worker in Bellingham, Wash., who has upwards of 38% of his retirement accounts in Apple.

Loud is part of a crowd of investors who have become infatuated owners of Apple — and richly rewarded as a result. Just as investors poured into Fidelity's Magellan mutual fund in the '80s, Apple stock has become a Wall Street sensation in itself that investors can't buy enough of.

Apple is by far the most widely held stock by individual investors tracked by portfolio-monitoring site SigFig, which also operates USATODAY.com's portfolio monitoring offering. The extent that shares are owned is head-turning:

  • Nearly 17 percent of all individual investors own Apple shares, SigFig says. That's three times the level of ownership of another widely-held stock, Google .
  • Four times more investors own Apple than the average ownership of the 30 stocks in the Dow Jones industrial average.
  • Apple investors, on average, have nearly 17 percent of their portfolios riding on that one stock. And Apple is the top holding of just about every type of investment style there is, including buy-and-hold, active, very active and aggressive investors, SigFig says. Buy-and-hold investors have less than 10% annual turnover of their portfolios, while aggressive investors turn over their portfolios completely each year.
  • Apple was the No. 1 most traded stock at top online brokerage TD Ameritrade every day in September except Sept. 19, when it was No. 3. Apple is routinely one of the most requested stock quotes at USATODAY.com.
  • Wall Street analysts keep urging their clients to buy more. Of the 39 analysts who cover the stock, 97 percent of them rate Apple either a "strong buy" or "buy," says Zacks Investment Research. Not a single analyst has a sell rating on the stock. And the average 12-month price target is $787, says S&P Capital IQ, a more than 20 percent gain from Tuesday's close.

A Runaway Winner

And while piling into just one stock may violate the rules of investment advisers who extol the importance of diversification, it's hard to argue with performance. Loading up with Apple stock has been one of the best moves possible for investors.

Until the swoon that started in mid-September, shares of Apple had been on such a tear that they made the rest of the stock market look like it was standing still, and that's despite the stock enjoying a pretty good performance the previous two years. The 57 percent gain in Apple this year comes on top of a 26 percent gain in 2011 and a 52 percent gain in 2010. The S&P 500 was flat in 2011 and up 13 percent in 2010.

And with performance like that, it's hard for investors to understand why they'd want to diversify — or dilute — the return of what might be their best stock. In fact, the stock has been such a runaway winner that it has become almost by default the biggest holding for investors who haven't sold.

Consider the situation of Pat Sutter, retired from the Army, who runs various businesses in Surprise, Ariz. Nearly 40 percent of Sutter's portfolio is now in Apple stock, simply because it's going up so much faster than anything else he owns. "I know in my heart I have too much Apple," he says. "But because so much of it is profit, it's not something that concerns me."

Sutter has never bought an Apple product himself, and prefers mobile devices using Google's Android operating system. But he bought Apple stock years ago anyway, watching how consumers, including his own family, will buy just about anything with an Apple logo. Apple products "aren't for me," he says. "But I like it when they (family members) upgrade to the next iPhone. I love that."

Given the demand for the iPhone, and rumors of an Apple-branded TV being on the way, Sutter thinks Apple stock could hit $850 by next summer. "If anything, I'd like to buy more," he says.

Meredith Habif, a 35-year-old housewife in the San Francisco area, has already loaded up on more, as Apple now accounts for 75 percent of her overall assets. She says she prefers to follow just a few companies and bought Apple stock when the first iPhone was released in 2007.

Nearly 25 percent of Jim Rodgers' personal portfolio, and that of his 24-member investment club, is plowed into Apple stock, says the 69-year-old retiree in State College, Pa. "It's a nice stock," he says.

It's not just individual investors who are enamored with Apple's stock. The professionals have taken a bite, too. Nearly 20 percent of all U.S. mutual funds, 1,231 of the 6,998, own shares of Apple, making it one of the most widely held issues, Morningstar says.

The professionals, to some degree, are forced to buy Apple stock, says Robert Maltbie of Millennium Asset Management. Apple accounts for 10 percent of the Nasdaq composite index and 5 percent of the S&P 500 index. Investors who don't own the stock are fighting a headwind that's difficult, if not impossible, to overcome when they try to keep pace, he says. "If you don't own it, you almost have to," he says.

Funds that have bet big on Apple, not surprisingly, have been huge winners as a result. For years, the Berkshire Focus mutual fund has had the largest percentage of its total assets in Apple of any mutual fund, Morningstar says. Nearly 24 percent of the mutual fund is invested in Apple stock, Morningstar says.

The 'Holy Grail' stock.

Malcolm Fobes, Berkshire Focus' portfolio manager, says it's his job to find the best stocks possible, and he has a tough time finding anything nearly as appealing as Apple. "Apple is the holy grail stock," he says. "It has been for years."

An Apple employee carrying new iPad tablets.
Chris Ratcliffe | Bloomberg | Getty Images
An Apple employee carrying new iPad tablets.

Demand for the company's products remains strong, which appeals to his investing sensibilities for fast-growing companies. But at the same time, by Fobes' estimation, the stock is cheap, too, a rarity among companies growing as rapidly as Apple.

Here's how he looks at it. Currently, the company is expected to earn $55 a share next calendar year. Even at the current stock price of $636, that's a P-E on 2013 earnings of 11.5. That's actually slightly cheaper than the 12.6 P-E on the S&P 500, based on estimated 2013 earnings. Furthermore, Apple just started paying a dividend and yields 1.6 percent, just behind the 1.9 percent yield of the S&P 500.

Since the stock is so reasonably priced, Fobes doesn't think there's much downside even if the company disappoints. And in fact, the stock has posted big gains this year despite the company's disappointing third fiscal quarter earnings in June as well as less-than-expected initial sales of the iPhone 5 smartphone. Claiming that Apple's stock is in any way topped out because it's owned by so many investors is "a cliche," he says. Investors who avoided the stock since it's supposedly too popular have missed out, he says.

Cautionary Tales

Yet, it's precisely when it looks like a company or stock can do no wrong that they often do. Wall Street is filled with examples of previous investment sensations that have ended badly.

The dot-com crash of 2000 was epic because many of the investors who thought they had to own Internet stocks saw their holdings lose 60 to 99 percent of their value. Similarly, the housing boom wound up in a real estate crash from which the nation is still trying to recover. Most of the Nifty Fifty stocks that were popular in the 1970s wound up underperforming the market during the bear market that didn't end until 1982. And too many people have learned the hard way the dangers of getting carried away with the hype surrounding a company — even one in a "safe" industry — and putting a disproportionate amount of their portfolio in that single stock. Enron was a prime example of that.

"The world is littered with companies that were going to conquer the world and didn't," says Kim Caughey Forrest of Fort Pitt Capital. Even a seemingly minor disruption to a company, especially in technology, can cause a stock to falter. Diversification is "what portfolio theory is all about," she says. "It's not just about gains, but it's also about keeping those gains."

Some professional investors think the hype is outpacing reality. Rupal Bhansali, a portfolio manager at Ariel Investments who runs a global fund and an international portfolio, has "zero" assets invested in the iPhone maker. She says Apple's domination won't last forever. Competitors will catch up. New innovations will emerge. Just because you are No. 1 today doesn't mean you will be No. 1 tomorrow.

"It's the nature of electronics and technology," says Bhansali. "Sony was the Apple of Japan a decade ago. Remember the Walkman?" The Japanese company, of course, is no longer considered cutting-edge, and its stock, now trading at $11.51 per share, is roughly 50 percent below its 52-week high and 90 percent off its all-time high in 1999.

Even some of Apple stock's biggest fans are wondering if the company is starting to lose some of its competitive edge, now that it's a corporate titan. Rodgers says he doesn't think Apple, under the guidance of co-founder Steve Jobs, would have released the iPhone 5 with such egregious problems with its mapping feature. And Habif laments the company's recent decision to change the port on its iPhone.

Habif is wondering if even Apple might eventually hit a wall as it becomes a victim of its own success. Each iteration of the iPhone gets increasingly repetitive, she says. Meanwhile, she worries that since Apple stock is already such a darling and in so many investors' portfolios, how much higher can it go?

Once the stock hits $750, she's selling, Habif says. "If everyone owns something, who is left to buy more?"

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