This Apple Bull Says Trim Your Position (NASDAQ:AAPL)


    I have been an Apple bull for years, but I’m starting to appreciate the case for trimming the long position at current levels.

    P/E is higher than it was in the mega-growth period of 2007-2010. PEG, in fact, is about three times as rich as it was 10 to 12 years ago.

    My fears go beyond valuations, as anticipated catalysts are about to materialize and, soon, become « old news. »

    Stock portfolios have likely become too heavily allocated to Apple. This may be the right time to shift exposure.

    Let me be clear: I’m an Apple (AAPL) bull and have been one for years. For the reasons that I list below, I believe that the stock deserves to be part of any investor’s diversified equities portfolio.

    However, I think that one’s take on any particular stock need not be either « back up the truck » or « run for the hills. » I, for instance, have a more nuanced perspective on Apple. While the stock will likely continue to climb over a multi-year period, I also believe that now may be the perfect time to assess whether a portfolio might be overallocated to this name.

    I could go into the detail of why buying and holding Apple shares might make sense today. Some of the reasons that I have used previously to support my bullishness include things like:

    Let me add one layer to the discussion by looking at historical price action. Since Apple’s 1980 IPO, investors that bought shares at any month-end point and held on to them for exactly five years, regardless of price levels or valuations, earned more than 10% annually (i.e. market-beating returns) about two thirds of the time.

    In only 7% of the cases did buy-and-hold investors produce five-year losses of -10% per year or worse. These rare instances coincided with Apple’s near bankruptcy years in the 1990s, a thought that would hardly cross Apple shareholders’ minds today. See five-year return distribution histogram below.

    Apple shares have been up a whopping 150% in the past year, even through a period of global pandemic and in the face of a worldwide recession that could be deep and painful. The last time that the stock climbed this much within a 12-month period was in 2010. Remember that, back then, (1) the economy had just started to recover from the 2008-2009 recession and (2) Apple was living through the golden years of growth from its two new product categories, the iPhone and the iPad.

    From a trailing P/E perspective, Apple’s valuation around June 2020 was as high as it had been 10 years ago (see first graph below). Following the company’s fiscal third quarter earnings smasher, however, the multiple spiked to nearly 40x today. These levels have not been seen since 2007, the pre-Great Recession year that also marked the historic debut of the iPhone.

    When I put P/E into perspective against earnings growth, the valuation picture looks even more worrisome. See second graph below, and ignore the distracting spikes driven largely by momentary swings in EPS. PEG today sits at above 3.0x, which is not a 2020 peak. However, growth-adjusted P/E is now about three times richer than the multiple ever was in either 2007 or 2010.

    My fear of holding too much Apple stock at these levels goes beyond valuations. I believe that shares have benefited lately from a number of upcoming catalysts that, I believe, are about to materialize. If and when they do, I suspect that Apple investors will need to find brand new reasons to own shares, or they may choose to cash in their chips and look for catalysts elsewhere.

    Due to recent share price strength, a distortion seems to have happened: Stock portfolios have likely become too heavily allocated to Apple. One of the best examples that comes to mind is the Dow Jones Industrial Average (DIA).

    Let me emphasize the term « industrial » in the index’s name. Despite the misleading branding, Apple (a technology and consumer discretionary company) accounts for over 12% of the Dow 30 portfolio – not much less than all other technology names combined. This number compares to an allocation of only 4.5% in 2015, when Apple was first added to the Dow.

    In my All-Equities SRG portfolio, AAPL still represents a large slice of the pie – one of the top three holdings, in fact. However, I made the move earlier this past week to reduce my exposure to the Cupertino company a bit while the stock is still well ahead. I suggest other investors assess whether they should do the same with their portfolios.

    AAPL is one piece of my All-Equities Storm-Resistant Growth portfolio. Other mega-cap names have helped to produce outsized gains, which have been better than the S&P 500 by a mile (see graph below, pink line).

    To learn more about the storm-resistant growth approach to investing, I invite you to join our community. Click here and take advantage of the 14-day free trial today. After that, don’t forget to join the Live Chat so we can share a few thoughts.

    Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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