Apple Stock Nears All-Time Highs: What Next?

Apple stock could reach peak price very soon, after spending nearly six months in a drawdown. Here is what investors should keep in mind.
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For some, it seemed like an eternity. After rising over 80% in 2019 and again in 2020, Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report got stuck in the mud in 2021. For nearly six months now, shares have stayed “underwater” (i.e. below the all-time high), at times dipping as much as 19% from the peak.

As the shortened post-holiday week kicks off, however, the Cupertino company’s stock approached historical highs once again, after a rally that the Apple Maven saw coming. With AAPL now worth over $140 per share, here are two important things that investors should keep in mind.

Figure 1: Apple store in Shanghai.

Figure 1: Apple store in Shanghai.

(Read more from the Apple Maven: Apple Stock: What To Expect Of The iPhone In Fiscal Q3)

A peak does not mean sell…

“What goes up must come back down”, or “trees don’t grow to the sky”. These are common rationalizations for selling a stock once it reaches a peak. But selling tops in hopes of buying pullbacks can be a bad investment decision, especially in the case of high-quality stocks like AAPL.

Assuming that (1) Apple is a good company that will continue to grow earnings and cash flow in the future and (2) the stock is not priced at bubble valuations, investors should expect shares to reach several peaks as they head higher over time. To illustrate, consider these two different strategies:

  1. Buy and hold AAPL without concern for all-time highs and pullbacks.
  2. Sell AAPL after reaching all-time highs, buy shares only after 5% pullbacks.

Intuitively to some, buying low and selling high (the second strategy) is a better approach than blindly holding a stock indefinitely. But the chart below shows that this has not been the case historically.

Over the past decade, selling peaks in AAPL would have led to substantially lower returns than simply holding it: annualized return of 18% for the active investor vs. 29% for the passive investor. The better strategy would have worked despite the stock having reached peak prices nearly 250 times.

Figure 2: Return from AAPL since 2011: two strategies.

Figure 2: Return from AAPL since 2011: two strategies.

There are a couple of reasons why not selling all-time highs has worked out. First, ditching AAPL at peaks prevents investors from “riding beta”: that is, allowing their portfolio to mirror the long-term success of the company.

Second, selling peaks means that investors are often on the sidelines – nearly 30% of the time over the past ten years using strategy #2 above, to be more precise. Being invested is better than not being invested, since cash under the mattress does not produce any return.

(Read more from the Apple Maven: Apple Stock: A Tough First Half Of 2021 In Review)

… but set expectations accordingly

Having said the above, it is important for investors to understand what to expect of Apple stock going forward. I have previously explained that buying AAPL on deep drawdowns tends to produce better one-year returns than buying the stock at peak levels. See chart below.

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

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

The two sections of this article may seem contradictory. Afterall, should investors keep their Apple shares near peak prices to “ride the beta”, or sell their Apple shares because the expected gains should be lower?

In my view, holding the stock makes most sense for a long term investor, who should not fear that shares reaching an all-time highs might signal an imminent correction. At the same time, I do not find it reasonable for investors to expect historically high returns on their investment off peak prices.

Twitter speaks

Apple stock is flirting with all-time highs once again, six months after reaching the most recent peak. What do you think happens next?

Is the price right?

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(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)