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Just recently, I explained why it has made more sense historically to own, not trade, Apple’s stock. Those who hang on to shares for several years have been rewarded with strong returns. On the other hand, those who have tried to time entries and exits in the short term have seen wild swings in share price and substantial risk of losses.

I remain an Apple bull for the long run. However, in the face of an outstanding rally so far in 2020, I prefer to add an asterisk to my bullishness. My official view on the stock today is the following:

Reasons to be cautious about Apple

Keep in mind that, when Apple stock’s valuations reached peaks comparable to today’s levels, in early 2008 and late 2009, shares climbed at a fast pace over the following five years. Therefore, only because Apple looks expensive today does not mean that the stock cannot provide investors with excellent returns going forward.

But keep the following in mind as reasons to consider trimming an Apple position:

  • While Apple has been up about 70% for the year so far, the S&P 500 has climbed only 8%. Assume a 10% allocation to Apple at the start of 2020: if left untouched, this hypothetical portfolio would now be roughly 15% invested in Apple. Risk concentration has gone up fast, and some rebalancing may be prudent.
  • The list of catalysts supporting bullishness has not been this long in a while: (1) the upcoming 5G “super cycle”, (2) heavier revenue mix towards the higher-margin and more predictable services segment, (3) growth opportunities in wearables, (4) even a stock split that seems to have boosted share price momentum lately. However, there is a famous saying in investing: “buy the rumor, sell the news”. For example, Apple is about to unveil its 5G-ready iPhone. Once it does, the 5G super cycle ceases to be a highly anticipated event and turns into reality. At that point, investors may be compelled to look for catalysts elsewhere.
  • There have been enough bearish developments that could have derailed Apple’s rally – but didn’t. For example, the App Store has come under attack by Epic Games and its “allies”. Also, important markets like Greater China continue to be a challenge for Apple, based on recent numbers of smartphone shipments in the country. It is possible that, without much warning, investors may start to pay attention to the less encouraging news and choose to lock in some of their profits.
  • If history can serve as a guide, Apple shares have performed best in the third calendar quarter of the year, and worst in the fourth. We are now only a month away from the quarter transition point. See chart below.

Bearish takeaways from an Apple bull

With Apple’s 4-to-1 stock split, the Dow Jones index will soon slash its exposure to Apple by three-fourths. While the move may seem a bit extreme (it is purely mechanical, to be clear, not a “high confidence” de-risking), it illustrates what a prudent approach to portfolio management may look like. Once a particular stock pulls away from the rest of the pack, it probably makes sense to lock in some profit and redistribute the exposure across other holdings in the portfolio.

Using the Dow 30 reallocation as a lesson learned, I believe active investors may be well served by trimming, not liquidating, their Apple position if it now represents too high a slice of their portfolio.

Read more from the Apple Maven:

Next iPhone Event: Apple Finally Joins The 5G Party

Next iPhone Event: News On The Service Side? (Video)

Next iPhone Event: Don’t Forget The Apple Watch (Video)

(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)