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The Apple Effect

Apple is en fuego.   The company blew out their latest quarterly report, issued last night, and analysts on average see the company making $45.50 per share in earnings for fiscal 2012.  Five years ago Apple earned $3.93 per share. That’s over 1,000% earnings growth in 5 short years, or 63% compounded annual growth.  Utterly remarkable.  What is also remarkable is the extent to which Apple’s stock is having an impact on the direction of stock indices.  Take the Nasdaq 100 for instance, which includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market.  Because it’s a market capitalization weighted index (like most) Apple now makes up 19% of the index due to its current value.  Today alone the stock accounted for just shy of 60% of the Index’s 2.68% return!  Analyzed on a year to date basis, without Apple’s contribution, the index would need to lop off almost 40% of its return.   Investors need to be very aware of the distortions this can create when using indices for comparisons sake, and though it may have been beneficial recently to ‘index investors’, without the ability to control the level of exposure, unknown risks are created, only to become apparent later.   In other words, those that live by the sword may end up dying by the sword.

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