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Google, Apple pullbacks a pause or tipping point?

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CIOL Bureau
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Herbert Lash

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NEW YORK: Investors in two of the year's hottest stocks -- Google Inc. and Apple Computer Inc. -- suffered some pain this week but several big holders said it wasn't enough to make them want to sell.

They are betting that the setbacks are only short-term and that the companies' rapid growth prospects will continue to propel the stocks much higher over the long run.

Shares of Internet search engine Google, which have quintupled in price since it went public 15 months ago, suffered their biggest one-day decline of the year on Tuesday.

Google had set a new high on Monday, as did Apple, which has risen almost as fast -- about 350 percent -- in the same time.

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The pullbacks suggested that some investors took profits after their torrid run-ups -- perhaps a smart move, but what if Google or Apple are primed for another big surge?

"What I've learned over the years, even if they settle back 10 or 15 percent -- it hurts as that's occurring -- if you sell them, good luck trying to get back in at a good price," said Bob Turner, chairman of Turner Investment Partners Inc.

Google closed at $404.9125 on Wednesday, down from a high two days earlier of $431.24. Apple closed at $67.82, off its high of $71.07 on Monday. Google priced at $85 in its initial public offering in August 2004, when Apple was trading at less than $16.

To be successful in investing in companies that post rapid growth in revenue and profits demands being faithful to two rules, said Turner, whose firm manages $18 billion in assets.

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"No. 1 is to sell stocks immediately if there's some concern surrounding earnings," he said. But "the greater challenger we've learned over the years is, in essence, letting the winners run."

Put another way, a company that plunges 20 percent on a profit warning may hurt, but how sweet was the ride before the announcement?

"That 20 percent drop is pretty painful, but the first 3,880 percent was very pleasurable. So that's kind of the attitude we take on these stocks," said Turner, a holder of both Apple and Google shares.

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Projecting future earnings is tough, but both companies have very bright prospects, fund managers said. Apple's product line-up -- Nano, video iPod and new personal computers -- along with the buzz its non-U.S. stores are generating, speak well, Turner said.

He also said the amount of time youth spend on the Internet, more than they spend watching television, also harbors well for Google.

Google is trading at a premium to the Standard & Poor's 500 Index, based on earnings forecasts for next year. Even after this week's decline, Google was valued at about 47 times the average profit forecast for 2006, based on Reuters data, compared with 17 times the average stock in the S&P.

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Valuations may be high but other big-name Internet companies, such as Yahoo Inc. and eBay Inc., have maintained high valuations for a decade even when their businesses weren't delivering, said Alex Motola, a fund manager at Thornburg Investment Management Inc.

"When you look at Google's level of profitability ... and you just look at the kind of earnings power they have going forward, it's pretty spectacular," said Motola, whose holdings in Google and Apple account for about 10 percent of his fund.

As for Apple, Motola said the real story is PCs, which have higher profit margins than iPods and are taking market share. Apple's PC sales grew 3 percent annually in September 2004, a rate that rose to 31 percent this September, he said.

"That's why we really like the stock," he said.

Motola said the dip in Google and Apple shares this week might be explained by investors who get spooked in the absence of news, especially for stocks with high valuations. Investors also may be slow to warm to rapidly growing companies with explosive margins, which helps spur their stock, he said.

"In my world, a 6 percent pullback in a couple of days is kind of the cost of doing business," Motola said of Google's slide this week.

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