I often get questions from readers about what to do with their Apple stock (AAPL) – Get the Apple Inc. report.. Recently, an investor expressed concern about the actions taking place further from here. He wanted to know if it made sense to protect his position at an average cost of $173.
If I had a crystal ball, I could tell that shareholder exactly what to do, with conviction. Since that’s not the case, I can at least help him think about the matter.
(Learn more about Apple Maven: Apple Stock: Wall Street is excited about new products)
The average cost basis
The first argument I will make is this: When making an investment decision, cost basis shouldn’t matter as much as many investors think. Think about it: the direction of Apple’s stock price in the future is independent of how much someone has paid for stock in the past.
However, I will make a counter-argument. Establishing an exit point before you even buy the stock is wise, in my opinion. So, for loss-mitigation purposes, it might make sense for an investor to get rid of a stock after it hits a pre-determined selling price.
In other words: Selling Apple stock at $155 may be the right move for some investors, but not for others. This is more a matter of investment strategy than stock analysis.
Think first about goals and risk tolerance
Even those without a clear exit strategy in mind should always look in the mirror before doing any work on Apple stock itself, for example, valuations or company fundamentals.
My point is that the decision to hold AAPL should first be based on each investor’s individual investment objectives and risk tolerance.
Generally speaking, money that might be needed in the short term (this is a subjective concept, but let’s call it a year or less) should be kept safe. Holding AAPL or any other stock could be a bad move if the investment horizon is less than a few years, ideally longer.
The second issue to address is risk tolerance. Even investors with a longer time horizon of several years may still feel uncomfortable about having too much exposure to equities.
The chart below shows that since the launch of the original iPhone, even a top performing stock like AAPL has produced annual volatility of 31%, twice that of the broader market. In other words: a 2% down day should be considered a completely normal occurrence for Apple shares (a little less than once per trading week, on average).
Additionally, Apple stock corrected as much as 57% during the Great Recession of 2008, even more going back to the 1990s. Ask yourself: Is this type of pullback acceptable to you?
Figure 2: Portfolio returns: Apple and Vanguard 500 Index.
Now turn to AAPL itself
Suppose an investor is for the long haul and their risk tolerance is consistent with the idea of owning AAPL. Should the stock be sold at current levels?
I think it’s pretty easy to argue both sides of the argument here. From a bullish point of view, Apple’s business is running at full speed.
I would argue that demand for Apple’s products and services hasn’t been this high since the launch of the original iPhone – or maybe ever.
The 5G-equipped iPhone seems to have been a huge success. Smartphone revenue soared 39% in fiscal 2021. Of all the segments, Mac grew its sales the least last year, at 23% — and even that number is impressive, given a 11% growth in fiscal year 2020.
Due to scale and pricing power, Apple’s margins have gradually improved. Cash flow is about as robust as ever. The company continues to buy back shares aggressively.
Then there is the stock price argument. AAPL is currently down 15%. As I explained a year ago, buying Apple stock after a 15% decline has historically produced annual returns 18 percentage points higher than when the stock trades closer to peak prices. .
Figure 3: AAPL’s average one-year return, by strategy.
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But having said the above, I can also understand the bearish case. For starters, the macroeconomic and geopolitical landscape is currently as bad as it gets.
Inflation is at its highest for several decades. Interest rates are expected to rise in 2022. For these reasons and the disruption caused by the Russia-Ukraine crisis, the risk of a global economic downturn has increased significantly. Stagflation is a possibility.
Despite all these challenges, it’s still safe to say that Apple is far from a bargain. Shares are trading at a 2022 P/E of 25x, even though 2023 EPS growth is valued only 6%.
For comparison, Amazon (AMZN) stock is trading at a 60x richer P/E, but with much healthier earnings growth projections of 49% in 2023. This means that Amazon’s PEG (P/E adjusted for growth) of 1.2 times is significantly more attractive than Apple’s of 3.9 times.
Takeaway meals
In the end, should someone sell Apple stock at $155 before things get even uglier? The answer depends on each investor, their financial goals and risk tolerance.
From a stock analysis perspective, AAPL still looks like a great long-term investment. But enough headwinds exist to suggest the trip could be turbulent in the near term.
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Apple stock is trading at 2022 lows and the stock price is back to September 2021 levels. Would you be more likely to buy this dip or drop a few shares to avoid even deeper losses? important?
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not do not influence editorial content. Thank you for supporting The Apple Maven)
