Can things get any better for Apple?

The stock has been a mainstay of my portfolio since I recommended it during the depths of the financial crisis. Since then I’ve owned
Apple (
AAPL ) shares and long-term options, including those I bought in 2009 with a strike price of just $50. I recommended Apple again last year on April 27, when shares were at $272. This week they hit $345. With Apple up nearly 80% since last February — and more than 400% since its 2009 low — it has single-handedly guaranteed that my portfolio has outperformed the major averages.

Just this week,
Verizon (
VZ ) finally announced that its 93 million subscribers will be able to buy the iPhone when it’s offered in February, and I plan to be one of those frustrated Verizon customers lining up to get one. This development should bring a gusher of sales for Apple, which has already been blowing away analyst estimates. Its recent year-over-year earnings growth was 70%, on revenue gains of 67%, while its operating margin was 27%. Analysts are nearly unanimous in recommending the stock, even as it reaches new highs.

The Apple-centric world I hypothesized when first recommending Apple shares has largely materialized, at least for me. I tote around my iPad, my MacBook Air, own an iPod, and am typing this column at a work station with a large Apple desktop screen. I’m intrigued by Apple TV, and, as I said, hope soon to be brandishing an iPhone.

I see only one problem: I’m not sure what worlds are left for Apple to conquer.

I realize I’m in a minority, and that there are plenty of customers still to be wooed by Apple. But competition is stirring. At last week’s Consumer Electronics Show in Las Vegas, a resurgent
Motorola (
MOT ) — which this month split into
Motorola Solutions (
MSI ) and
Motorola Mobility Holdings (
MMI ) — trumped Apple. Motorola Mobility’s new Xoom tablet computer, designed to rival the iPad, was named
CNET’s “Best of Show,” and the Motorola Atrix was named the best smartphone.

Motorola’s Xoom will be the first tablet to use
Google’s (
GOOG ) “Honeycomb” version of its Android operating system, designed specifically for the tablet market. CNET called it a potentially “disruptive technology” that “can literally and figuratively measure up against the iPad.”

The Atrix, which Motorola calls “the world’s most powerful smartphone,” docks into a laptop computer. It, too, has Google DNA, since it’s powered by Android, though it will be available only with AT&T.

I haven’t seen or used either product. But as much as I love the iPad, I can’t say it’s flawless. The screen has a lot of glare, it collects fingerprints, and I’m still struggling to type emails on the over-sensitive touch screen interface. Having once written off
Amazon’s (
AMZN ) Kindle, I find I’m now lugging around a Kindle (for book reading), an iPad (for newspapers, magazines and lots of other wonderful apps), and a laptop (for e-mail and writing.) It’s getting to be a pretty heavy bag, not to mention inconvenient at airport security.

All of this has made me nervous as an Apple investor. As with any long-term holding, I’m always trying to assess threats from competitors, which in this case, seem all too real. Nor am I convinced Apple enjoys a natural monopoly, which may be one reason chief executive Steve Jobs has been so protective of Apple’s technology. This is in contrast to Google, which can justify spreading its technology around since it does have a natural monopoly in search. I love Apple’s products, but the company basically is a hardware company, and hardware companies are vulnerable to competition (see
IBM (
IBM ) ,
Dell (
DELL ) and
Hewlett-Packard (
HPQ ) .) So I realized the gains on my Apple options, which are expiring this month.

I haven’t given up on Apple. I still own shares and another set of call options that expire in January 2012. But the market averages recently hit one of my selling thresholds, and I feel comfortable taking some profits.

The promising new products from Motorola Mobility Holdings could make it a good candidate for some of the proceeds. The stock is up roughly 20% since it began trading on a when-issued basis in December. Prospective investors may want to tune in to the company’s investor relations call scheduled for Jan. 26 for an update from CEO Sanjay Jha on the new company’s performance and outlook.

And I remain a strong believer in Google, which I own and have recommended. Come to think of it, given the acclaim for its Android and Honeycomb operating systems, maybe Google should have been named Best of Show.

Bruce Berkowitz spends his days like a lot of other fund managers: reading economic reports, chatting about investment ideas with his chief research officer and meeting with companies he’s thinking of adding to the portfolio. But his ho-hum routine is producing something many managers can’t seem to match these days—he beats Standard & Poor’s 500-stock index almost every year, in good markets and bad. Over the past decade, Berkowitz’s $17 billion
Fairholme fund (
FAIRX ) has returned about 12 percent a year, on average, at a time when the index has been essentially flat. “He’s the one value-fund manager who comes closest to Warren Buffett,” says Michael Breen, associate director of fund research at Morningstar.

*
Video: SmartMoney, Redesigned
Editor in Chief Jonathan Dahl on the latest changes to the content and design of SmartMoney Magazine.

More From the February issue:

*10 Things Facebook Won’t Say
*
America’s Best Fund Managers
*
Blind Faith in Socially Responsible Funds
*
Perfect Portfolio

Too bad more managers aren’t in the same league. Mutual funds have been under attack lately, and for good reason. More than a quarter of actively managed stock funds trailed the indexes they’re measured against by five percentage points or more in the first nine months of 2010, according to a study by J.P. Morgan. That was the worst performance since 1998, and it helps explain why investors have been stashing their money in alternatives like bond funds and exchange-traded funds. The flip side is even scarier: Just 7 percent of actively managed funds were beating their benchmarks by five percentage points or more. Why the underperformance? Analysts point out that most active managers—who handpick stocks instead of mimicking a market index—need to beat the market by at least two percentage points a year to cover their management fees and trading costs. The uncertain economy also led many managers to hold plenty of cash in 2010—a strategy that backfired when the market marched higher. It was “an awful year for active managers,” concludes Thomas J. Lee, a J.P. Morgan analyst who authored the study on how active managers are falling behind.

How do you find the ones who seem to come out ahead no matter how difficult the market or the economy? One answer, it seems, is that experience matters. While it’s tough to match the tenure or the investment record of Warren Buffett, the managers who have beaten their indexes by wide margins tend to be seasoned pros who have stuck to their investment strategies year in and year out. The managers of this year’s winning funds have been at the helm 50 percent longer than the average fund manager. And that gives them the confidence to make some bold bets, whether it’s owning fallen financial giants like
American International Group (
AIG ) (see Berkowitz, Bruce) or digging into emerging markets (Fries, William, of Thornburg International Value). Although they’re not necessarily running the cheapest funds in their category, managers with strong long-term records have “more than earned their fees,” says Tim Parker, president of Hudson Capital Management in Ridgewood, N.J.

Each year, SmartMoney whittles the list of 6,800 mutual funds available in the U.S. to a handful of standouts. To find the top funds in four categories, we start by taking the managers’ experience into account and throw out funds with sky-high expenses. Using Morningstar data, we picked funds that outperformed their peers in the roller-coaster market of the past five years. Some investors have taken note: Two winners, Fairholme and Thornburg International Value, each raked in more than $3 billion in the first nine months of 2010—not bad at a time when investors yanked tens of billions out of all equity funds.

With stock indices at 2-year highs, even the much-beleaguered financials have rallied, spurred most recently by
Bank of America’s (
BAC ) $2.8 billion settlement with
Freddie Mac and Fannie Mae . A few weeks ago I highlighted my
favorite financials , namely the large-cap Asian firms like
Mizuho Financial (
MFG ) ,
Mitsubishi UFJ (
MTU ) and
Nomura Holding (
NMR ) , which are all up between 5% and 14% since Dec. 13.

Although megabanks like
Citigroup (
C ) and
JP Morgan (
JPM ) get the headlines, there are actually more than 7,000 banks in the U.S. – many of which are publicly traded. For investors that are looking for exposure to financials, but want to avoid
bailed-out megabanks , one alternative is to select a basket of the
strongest small and microcap banks – and hold on for the ride.

Small and Mighty?

American River Bankshares (
AMRB ) — $60 mil

Bank of Kentucky Financial (
BKYF ) — $113 mil

Boston Private Financial (
BPFH ) — $530 mil

California First National Bancorp (
CFNB ) — $149 mil

Center Bankcorp (
CNBC ) — $135 mil

Community Financial (
CFFC ) — $14 mil

1st Century Bancshares (
FCTY ) — $38 mil

LSB Financial (
LSBI ) — $23 mil

Malvern Federal Bancorp (
MLVF ) — $46 mil

New England Bancshares (
NEBS ) — $52 mil

Pacific Mercantile Bancorp (
PMBC ) — $42 mil

Severn Bancorp (
SVBI ) — $34 mil

Southern Community Financial (
SCMF ) — $23 mil

TF Financial (
THRD ) — $60 mil

Tower Financial Coporation (
TOFC ) — $37 mil

United Community Bancorp (
UCBA ) — $57 mil

VIST Financial (
VIST ) — $51 mil

West Coast Bancorp (
WCBO ) — $298 mil

Because of these companies’ diminutive size, larger investors simply can’t own them. Bill Miller’s Legg Mason Value Trust might be overweight financials, but at nearly $4 billion in assets under management, the fund could never bother with $50 million-in-assets
New England Bancshares (
NEBS ) . In order to take a
meaningful position , he’d have to buy the entire bank.

Most of these names trade only a few thousand shares a day, and as a result can be
volatile . While more than 30 analysts cover Bank of America alone, few follow stocks with less than $50 million in market cap.

For this reason, investors within an interest in tiny banks should use a portfolio approach and buy at least half a dozen of their favorites. What usually plays out in such cases, in a variation of the
80/20 rule : The majority of holdings either drop or remain flat, while a few will more than make up the difference.

A similar approach worked quite well after the
dot-com washout nearly a decade ago. Even though many companies never recovered from the tech wreck, those that did soared in subsequent years.
Amazon (
AMZN ) is up over 800% since November 2002, when I wrote a column called “The Bubble Boys are Back.”
Priceline (
PCLN ) is up over 3,000%.

That said, it’s not a buy-and-forget approach. Investors should adhere to time-tested techniques like
cutting losses and
letting winners run . Over every age and within every asset class – these techniques will never go out of style.

Jonathan Hoenig is managing member at
Capitalistpig Hedge Fund LLC . At the time of writing, Hoenig’s fund held shares of companies mentioned.