TCS Daily


Avoid the Apple Trap

By James K. Glassman - October 2, 2000 12:00 AM

After the stock market closed Thursday, Apple Computer, Inc., announced that its revenues for the quarter ending Saturday would be about $1.9 billion and that its net income would be 30 cents to 33 cents a share. Analysts had expected revenues would be over $2 billion and that net income would be 45 cents a share. Apple stock plummeted by half in after-hours trading.

A week earlier, stock in Intel Corp. suffered a similar indignity when the semiconductor maker warned of a slow June-September quarter. Intel stock fell 25 percent in a day.

There are three obvious and one not-so-obvious lesson to draw from these breathtaking dives:

1. Get diversified! If you own a dozen or more tech stocks, you aren't much affected when one of them drops like this.

2. Be wary of tech companies that concentrate too heavily in a single product. New competition or simple consumer weariness can wreak havoc with short-term performance.

3. Still, if you love Apple, Intel or other companies that do get whacked, then take advantage of the rout to buy more.

The not-so-obvious lesson involves corporate disclosure. Clearly, Apple and Intel knew before the end of the quarter that their sales would be soft, but they gave little notice to analysts and journalists. One reason is fear of new SEC regulations that prohibit playing "favorites" - companies can only disclose this sort of information to the public generally, rather than to individual analysts. The rule has not yet gone into effect, but, as my colleague, economist Kevin Hassett (of TechCentral GreenBook fame), recently wrote in the Wall Street Journal, it's a bad rule that will lead to less disclosure, not more.

But the truth is, companies in an Internet age know, pretty much from day-to-day or even hour-to-hour, how their sales are going. The SEC requires quarterly disclosure of revenue and profit performance, but these figures would be less shocking if they came out more regularly. Why don't companies report each month? Or even every week? The SEC doesn't require it, but so what? They could report more regularly.

Some smart high-tech firm is going to break the mold, and its stock will immediately benefit. Other firms will have to follow suit or see their own stocks fall for having "secretive" managements.

Already, research by economists shows that the more a company tells investors about itself, the more the company's stock benefits. That stands to reason since stock prices are determined by three things: earnings, interest rates and the risk premium. The last is the extra return that investors demand from a stock above Treasury rates because of the stock's extra riskiness. But, with regular reporting, risk declines. So does the risk premium, and that means higher prices.

Soon, companies will catch on and give shareholders the information they need on a timely basis. Right now, as far as we can tell, no firm does.

Sure, there are drawbacks: Competitors, for example, will also get the information, too. But the benefits far outweigh the detriments. Losing half the value of your holdings in Apple in an hour is a shock that can send many investors away from Apple forever, but telegraphing to them that sales are soft could actually be a confidence-builder.
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