Once upon a time, I said Apple (AAPL) is reasonably worth $131. Despite what a lot of people said in comments here and on Seeking Alpha about how AAPL would never be that cheap again, the stock closed $1 below my target this week.

Gloating is unprofessional, and although I might find some shallow satisfaction from hammering home AAPL’s current price point to the people who said rather unpleasant things about me when I came out and said Apple closing in on $200 is crazy speculation, I’m not going to do that.

But revisiting what happened with Apple is worthwhile because I think there are two important lessons to be learned:

1. Sector rotations can do funny things to stocks.
2. Valuation matters, even to growth stocks.

In 2007, pretty much everyone was stunned by the performance of the high-multiple tech darlings of Google (GOOG) - here, Research in Motion (RIMM) - here, Amazon (AMZN), and Apple (AAPL). And as much as I regret to say it, what was happening was very obvious: plenty of institutions saw the economy was slowing, and they all piled into the fast-growing tech names. It’s simply the sector rotation that makes sense at that time, given the macroeconomic conditions at work.

Consider the performance of those four stocks in 2007:
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One thing I was criticized for repeatedly following my AAPL valuation was that I didn’t appreciate how wonderful the products are and how fast the company would grow. What too many people don’t understand is that the particular driver of growth sometimes doesn’t matter as much as the secular picture. The same people who were buying AAPL to $200 were buying RIMM to $140, and all the analysts believed in the great stories those companies had with their handsets - even though the objective valuation said they can’t both win, given the implied expectations. What mattered more was that these were fast-growing, technology-based companies in a slowing macro environment. Another fast-growing, technology-based company had one of the most boring products in the world, yet did great nonetheless. AMZN caught fire because the broader growth story there, not because selling books was suddenly sexy.

How does this relate to Apple? I’m not going to dispute the company is innovative and gets plenty of people excited about their products - but this is where investors got carried away. The same analysts who were playing poker with their price targets (”raise to $225″, “call to $250″) couldn’t care less about the feel-good side of the products, they just wanted to make money. And for a very long time it was profitable to be on the long side of the AAPL trade - because of the sector rotation going on. Yet nothing I read about Apple ever mentioned the fact that the stock was positioned to outperform just because of their sector; everything always revolved around Macbook growth and iPhones and touch screens. People got deluded into believing good times would last forever, and Apple would always be a more attractive investment option than anything else. The side effect of this is that people confused the quality of the products Apple makes with the quality of the stock in their investment decision process. Or, more simply, they ignored valuation.

“Fair values mean nothing to growth stocks.”

Or so one reader said, and he is certainly entitled to feel that way if he likes. But I tend to agree with Joe Ponzio and others who say that price always catches up to fair value. Now, do I know if my $131 valuation target from October is really right-on considering AAPL closed less than a dollar away from that to end the week? No. It’s a valuation, not an immutable number. That said, I believe it is much closer to what rational investors should pay for a share of AAPL than, say, $250 - even if Gene Munster thinks so and Fake Gene will probably make fun of me for saying this.

Chart of AAPL vs. Nasdaq, since October 13th, 2007:
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So what now? At present, I have no strong feelings on AAPL. A large portion of what I see as excessive speculation has been unwound, yes, but that doesn’t mean I would buy this stock - far from it. I’m going to make a huge leap and compare Apple to Berkshire Hathaway (BRK-A, BRK-B): with Berkshire, you can unequivocally trust management and your fellow shareholders as being partners in the business. There won’t be wild day trading in either BRK, and management focuses on building the business rather than appeasing analysts. With Apple, a large contingent of shareholders believe the company is only as good as the performance of the stock in the last quarter, and management’s consistent habit of playing guidance games has finally served to burn shareholders. Of course, the guidance games were never a problem when the stock was going up - as Todd Sullivan notes - so I have to disagree with Trader Mark that everything is alright. Things have changed (remember that part on sector rotation), and now the game is being played a different way. So why take part in the evolving Apple earnings drama, when there are plenty of other good businesses on the cheap that should benefit from sector rotation, like US Bancorp (USB) - here, American Express (AXP) - here, and Bed Bath & Beyond (BBBY) - here?

And yes, I’m serious about that: if you think AAPL is a buy here, leave a comment and let me know why.

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