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Earnings disappointment won’t damper bullish outlook for Apple

In its second-quarter earnings report, Apple (Nasdaq: AAPL) badly underperformed analysts’ iPad estimates – shipping just 4.7 million units during the quarter versus projections of at least 6 million – yet it still easily beat projections for earnings and revenue.

During the quarter, Apple raked in $24.7 billion in revenue. Unit sales for the iPhone were up 113 percent, contravening earlier reports that Android phones were holding iPhones back. Mac computer-related revenue soared 32 percent year over year, while unit sales improved 28 percent. Laptop revenue grew 59 percent. Revenue from the once-iconic iPod fell 14 percent year over year, but sales of music, video and e-books grew 23 percent.

And finally, the iPad. It brought in only $2.8 billion in revenue, down from $4.7 billion last quarter. Investors who are used to seeing reports of the device acting as a PC replacement may be disappointed in those numbers. But the drop is largely related to an inability to fulfill iPad demand due to the Japanese tsunami, not due to flagging interest in the devices.

Despite all the hoopla and growth, Apple’s stock does not seem grossly overvalued. Its recent P/E ratio was well below its five-year average. Consider taking a bite out of Apple. (Apple is a “Motley Fool Stock Advisor” pick, “Motley Fool Options” has recommended a bull call spread position on it, and The Fool owns shares of it, too.)

Ask the Fool

Q: What’s a “real return”? – L.N., Beverly Hills, Calif.

A: It reflects an investment’s performance that has been adjusted for inflation. For example, if your stocks and mutual funds gained 10 percent in 2010, a year with 1.6 percent inflation, your real return would be 8.4 percent. Inflation really matters in long-term investing, so it’s smart to take it into account.

Q: At what point would I own too many shares of a stock? – S.M., Butler, Pa.

A: Don’t think in terms of the number of shares. Think instead of their total value. You might have 1,000 shares of a $6 stock, worth $6,000, and 200 shares of a $125 stock, worth $25,000.

Focus on the percentage of your portfolio that each stock represents. In this example, the 1,000 shares represent a far smaller chunk of your portfolio than the 200 shares.

Don’t let any holding grow too big. If one stock represents 50 percent of your entire portfolio, for example, that’s rather risky. If anything happens to it, your portfolio will take a huge hit. If you hold scores of stocks, though, and your biggest holding amounts to just 2 percent of your portfolio, that’s not ideal, either. If that stock doubles or triples, its overall effect will be small.

Most people might aim to hold between eight and 20 stocks, depending on their confidence. Park your money in only your best ideas. You want some diversification, but you needn’t overdo it, as you don’t want to own more companies than you can easily keep up with.

If that seems like too much work, consider mutual funds instead, and look closely at broad-market index funds. Learn more at mutualfunds.htm and

My dumbest investment

My dumbest investment was in Iridium. It was sold to me by my big-name brokerage as the “next hot thing” during the halcyon formative days of the World Wide Web and mobile communications. I bought its bonds, greatly appreciating its strategic mission to put up a network of low-level communications satellites, which seemed to me to be greatly needed. My main mistake was investing without doing the needed due diligence on the company. But I then failed to follow how well the company was executing its plan and compounded it all by hanging on even after noting problems. – D.O., Phoenix

The Fool responds: Many people lost money on Iridium in the 1990s, and it declared bankruptcy in 1999. But the network it built for about $5 billion was sold for $25 million, and a new Iridium company now exists, with better prospects. (It has even been recommended in our “Motley Fool Hidden Gems” newsletter.)

You learned valuable lessons. It’s easy to get caught up by the promise of a company. It’s harder to examine its health and performance objectively.

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