Is Apple Too Big for Another Big Run?

by Darrin Donnelly on December 7, 2010

Click on chart to enlarge.

Click on chart to enlarge.

As Darvas System traders, we’re looking for high-growth stocks that have the potential to make big runs in a short period of time. 

Ideally, we want stocks that are likely to double or triple over the next six to 12 months.  This was the standard goal for Nicolas Darvas and it continues to be the goal for his trading students today.

To achieve this goal, Nicolas Darvas focused on stocks that had the following four characteristics:

1) They were members of a hot, high-growth industry. 
2) They had huge earnings growth.
3) They had already shown the ability to move quickly. 
4) They were often mid-sized, younger companies with plenty of room to grow.

There’s little question that AAPL is a current stock market leader that meets the first three criteria. 

It’s a dominating member of a high-growth industry with huge earnings growth. 

It’s also shown the ability to make big gains quickly.  Along with many stocks, AAPL has made impressive gains over the past few months.  The stock is up nearly 70% from its 2010 lows.

However, it’s the fourth characteristic that raises questions for AAPL.

AAPL’s tremendous growth has made it the second largest company on the stock market in terms of market capitalization.  Only Exxon Mobil (XOM) trades at a higher market cap. 

With a market cap of almost $300 billion, it’s only natural to question whether it’s even possible for a stock like this to reach our Darvas System goal of doubling over the next six to 12 months.

To put this in perspective, XOM is currently trading with a market cap of $362 billion.  If AAPL were to double in price, it would be valued at a market cap of almost $600 billion.  That’s more than twice the size of PetroChina, two and a half times the size of Microsoft, and more than three times the size of companies like Google and Berkshire Hathaway!

Now, I’m obviously a big believer in not fighting the trend.  We’ve seen ridiculous valuations in the past (remember those dot-coms?) and if you rode such trends and exited when the trend was broken, you made lots of money.

But still, it’s very difficult to believe AAPL can actually double in the next year, even if it does continue to meet its phenomenal growth expectations.  At some point, even the most pro-growth institutional investors will have a hard time justifying a $600 billion market cap.

AAPL may very well continue to trend higher and higher.  In fact, due to its technical and fundamental characteristics, it is certainly an official “Darvas stock” that we will continue to trade.  Until its trend is broken, there’s no reason to exit AAPL.

But, the goal of Darvas System trading is to find the handful of top-performing stocks and trade them to maximum profits.  If your goal, like Nicolas Darvas’ was, is to double and/or triple your money in six to 12-month timeframes, AAPL simply doesn’t seem the most likely candidate to do this.

Bottom line: AAPL is a steady grower that is trending higher and it’s good to have a more stable performer like this stock in your Darvas portfolio for as long as it trends higher.  But, to achieve Darvas-type triple-digit returns, you’ll want the rest of your portfolio to focus on those high-growth stocks that have a more realistic potential to double in a short period of time. 

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* Click here to access the full portfolio of Darvas stocks in the latest issue of Darvas Trader PRO. 

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