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Apple Stock: Dump At $155 Before It Gets Ugly?

A reader has asked: should Apple stock be sold now to prevent even sharper losses? Here’s how I think investors should think about this question.

I often get questions from readers about what they should do with their Apple stock  (AAPL) - Get Apple Inc. Report. Recently, one investor expressed his concern about shares unwinding further from here. He wanted to know if protecting his position at a $173 average cost basis made sense.

If I had a crystal ball, I could tell this shareholder exactly what to do, with conviction. Since I don’t, at least I can help him think through the question.

Figure 1: Apple Stock: Dump At $155 Before It Gets Ugly?

Figure 1: Apple Stock: Dump At $155 Before It Gets Ugly?

(Read more from the Apple Maven: Apple Stock: Wall Street Is Psyched About New Products)

The average cost basis

The first argument that I will make is the following: when making an investment decision, cost basis should not matter as much as many investors think. Think about it: the direction of Apple stock price in the future is independent of how much someone paid for shares in the past.

I will make one counter-argument, however. Establishing an exit point even before buying the stock is wise, in my view. So, for loss mitigation purposes, it could make sense for an investor to dump a stock after it reaches a predetermined sell price.

In other words: selling Apple stock at $155 may be the right decision to some investors, but not to others. This is more a question of investment strategy than one of equity analysis.

Think of goals and risk tolerance first

Even those who do not have a clear exit strategy in mind should still look at the mirror before doing any work on Apple stock itself — e.g., valuations or the fundamentals of the business.

What I mean is that the decision to hold AAPL should be grounded first on each investor’s individual investment goals and risk tolerance.

Generally speaking, money that might be needed in the short term (this is a subjective concept, but let’s call it one year or less) should be kept safely. Holding AAPL or any other stock could be a bad decision if the investment horizon is any less than a couple years, ideally longer.

The second question to address is risk tolerance. Even investors with a longer time horizon of many years may still feel uneasy about being too exposed to stocks.

The table below shows that, since the launch of the original iPhone, even a high-performing stock like AAPL has produced annual volatility of 31% that has been twice as large as the broad market’s. That is: a 2% down day should be considered a very normal occurrence for Apple shares (a bit less than once every trading week, on average).

Also, Apple stock corrected as much as 57% in the 2008 Great Recession — even more so if we go back to the 1990s. Ask yourself: is this kind of drawdown acceptable to you?

Figure 2: Portfolio returns: Apple and Vanguard 500 Index.

Figure 2: Portfolio returns: Apple and Vanguard 500 Index.

Now, turn to AAPL itself

Let’s assume that an investor is in for the long haul, and that his or her risk tolerance is compatible with the idea of owning AAPL. Should the stock be sold at current levels?

I think it is fairly easy to defend both sides of the argument here. From a bullish perspective, Apple’s business has been firing on all cylinders.

I would argue that demand for Apple’s products and services has not 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 revenues climbed a whopping 39% in fiscal 2021. Of all segments, Mac grew sales the least last year, at 23% — and even that number is impressive, considering growth of 11% in fiscal 2020.

Due to scale and pricing power, Apple’s margins have been improving progressively. 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 in a 15% drawdown. As I explained a year ago, buying Apple stock after a 15% pullback has historically produced annual returns that are 18 percentage points better than doing so when the stock trades closer to peak prices.

Figure 3: Average one-year return on AAPL, by strategy.

Figure 3: Average one-year return on AAPL, by strategy.

But having said the above, I can also understand the bearish case. For starters, the macroeconomic and geopolitical landscape is currently about as bad as it gets.

Inflation is at a multi-decade high. Interest rates are expected to rise in 2022. For these reasons plus the disruptions caused by the Russia-Ukraine crisis, the risk of global economic deceleration has risen substantially. Stagflation is a possibility.

Despite all these challenges, one can still argue that Apple is far from being a bargain. Shares trade at a 2022 P/E of 25 times, even though 2023 EPS growth is estimated at only 6%.

For comparison, Amazon stock (AMZN) trades at a richer P/E of 60 times, but with much healthier earnings growth projections of 49% in 2023. This means that Amazon’s PEG (growth-adjusted P/E) of 1.2 times is substantially more attractive than Apple’s 3.9 times.

The key takeaways

In the end, should someone sell Apple stock at $155 before things start to look even uglier? The answer depends on each investor, their financial goals and risk tolerance.

From an equity analysis perspective, AAPL still looks like a great investment for the long haul. But enough headwinds exist to suggest that the journey could be turbulent in the short term.

Twitter speaks

Apple stock is trading at its lowest levels of 2022, and the share price has returned to September 2021 levels. Would you be more likely to buy this dip or shed some shares to prevent even sharper losses?

(Disclaimers: this is not investment advice. 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)