If you have owned Apple (NASDAQ: AAPL) stocks over the past five years, your position has probably become a large percentage of your portfolio. Shares have risen an incredible 330% during that time, S&P500Over the same period, the company has gained 94%. This could put some investors in an uncomfortable position and cause them to consider reducing their position to reduce the risk of being too overweight in any one security.
Is now a good time for investors with an “overweight” position in the stock to sell some shares?
Times have changed
Sure, the dogged holding of Apple stock over the long term may be why some shareholders have done so well in recent years. But the past is not always a guide to the future. For example, one big difference between Apple stock today and five years ago is its valuation. Five years ago, the stock only had a price-to-earnings ratio of 18. Today, the stock has a price-to-earnings ratio of about 34.
Another way the company’s situation in 2019 was significantly different from today was its net cash as a percentage of the company’s market capitalization. Apple’s net cash of $102 billion at the end of the third quarter of fiscal 2019 represented nearly 11% of its market capitalization at the time. This significant position gave Apple excess cash over and above its regular cash flows to repurchase massive amounts of shares relative to share count. Net cash today is $52 billion, or less than 2% of Apple’s multi-trillion dollar market capitalization.
There is a mismatch between valuation and growth
Perhaps the biggest problem facing Apple stock today is the huge discrepancy between the company’s growth profile and the stock’s valuation. A price-to-earnings ratio in the 30s suggests that investors expect strong growth in Apple’s underlying business in the coming years. Yet Apple’s revenue grew just 5% in its fiscal third quarter. Of course, the market consensus seems to be that integrating artificial intelligence into the company’s products will boost sales, but there’s no guarantee that will happen. And even if it does, it’s probably already priced into the stock price.
Time to trim?
While it may not be wise for Apple shareholders to sell all of their shares, it probably makes sense to sell some — perhaps enough to make the position in an investor’s portfolio equal to some more conservatively valued stocks. With Apple’s price-to-earnings ratio currently more than 40% higher than the S&P 500 market index’s P/E ratio of 24, the stock’s risk-reward profile is simply not as compelling as it has been in years past.
Of course, investors should carefully consider their own financial situation before making a decision about what to do with their Apple shares. However, for investors who are overweight in the stock, it may be worth taking some profits and re-deploying the money for better opportunities.
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Daniel Sparks and his clients do not own any stocks mentioned. The Motley Fool owns shares of Apple and recommends the company. The Motley Fool has a disclosure policy.
Apple Stock: Should Investors Take Some Profits? was originally published by The Motley Fool
