Can Apple avoid the winner’s curse?

Is Apple, the first company in history to be valued at more than $700 billion, now priced for perfection?

Up 25 per cent since mid-October, shares have doubled over the last 18 months and quadrupled over the last five years – incredible growth rates for a company of its size.

No other company is close, with Microsoft and Exxon Mobil next in line, valued at about $400 billion.

To some, it is eerily reminiscent of 2012, when iPhone 5 hype propelled Apple skywards before shares came crashing down, almost halving in price.

Record valuations, bears add, are another contrarian signal; look at Microsoft, which peaked at $613 billion in 1999, more than $200 billion above today’s valuation.

All too often, top dogs go on to underperform – the so-called winner’s curse.

However, Apple is no Microsoft. Its 1999 valuation, adjusted for inflation, is equivalent to $873 billion today.

Microsoft traded on 73 times earnings; Apple’s multiple is 18, or 15 times estimated earnings. Microsoft accounted for nearly 5 per cent of the S&P 500, as Apple did in 2012; today, Apple accounts for 3.8 per cent of the index, meaning it is not even among the top five companies by this measure.

Apple, although short-term overbought, is not remotely bubbly. It became absurdly cheap last year and the market has since caught up with reality.

Future gains will be more muted – they must be, given Apple's size – but shares are nowhere nearly as pricey as they may seem. Nasdaq eyes dotcom peak The Nasdaq is up more than 20 per cent over the last year and is now within 5 per cent of its March 2000 high, at the very peak of dotcom mania.

Talk of a tech bubble is increasing as the index closes in on its dotcom- era high. Detractors point to billion-dollar valuations given to firms like WhatsApp, Snapchat, Pinterest and even home design website Houzz.

However, none of those firms is listed. These days, firms don’t need to go public to get funding, so the IPO mania of yesteryear is absent.

There were 630 technology IPOs is 1999 and 2000, compared to just 462 over the next 13 years.

Yes, there have been many high-profile technology IPOs. Alibaba’s recent flotation was the biggest in history, while Facebook, Twitter, GoPro, LinkedIn and other stocks look expensive on most valuation metrics. Overall, however, if one excludes biotechs, this year’s technology IPOs have been priced at a median of 4.2 times sales – similar to the median value over the last 12 years (3.6) and nowhere near levels seen in 2000 (31).

As for the Nasdaq 100, it trades on 25 times earnings, or 20 times forward estimates, compared to a multiple of more than 100 in 2000.

Some stocks may look frothy, but the index is nothing like the Nasdaq of old. What goes up doesn't always . . . The S&P 500 has tripled since March 2009 and returned an annualised 16 per cent over the last five years. Are future returns destined to be below par?

No, says money manager and blogger Ben Carlson. Historically, he notes, if stocks returned 15 to 20 per cent over the previous five years, they went on to gain an average of over 13 per cent over the next five years. That’s comfortably more, not less, than average five-year returns.

Even 10-year periods of outperformance have been followed by average annual returns of 10 per cent over the next decade, he adds.

Averages can mislead, and Carlson admits future returns “can be all over the place”, ranging from big losses to sizable gains.

Additionally, US valuations relative to other developed markets look increasingly frothy.

Still, the data suggests investors should allow for a range of possible outcomes; penitential returns do not inevitably follow years of plenty.

Firing the top performers Even the very best fund managers are likely to be prematurely fired, a new Research Affiliate report suggests.

Pension funds typically place fund managers “on watch” if they underperform over a three-year period, it notes. However, over the previous 40 years, even the best performers – including Warren Buffett – would have been put on watch at some stage. Typically, they spent about a third of their time on the list, “enough time to look downright incompetent”.

The report’s title sums it up nicely: Hiring Good Managers Is Hard? Ha! Try Keeping Them.

In numbers 47 The number of times the S&P 500 has hit all-time highs in 2014, an amount last seen in 1998 and 1987.

87 Since bottoming in March 2009, US stocks have grown by 87 per cent more than the developed world’s stock markets and 89 per cent more than emerging markets.

50,000 Apple has risen by more than 50,000 per cent since its 1980 stock market debut.