Some Wall Street strategists say it’s time to pare your holdings of Apple Inc. (AAPL), but that advice really only applies to tactical traders. If you own AAPL stock on a long-term basis, there’s no need to do anything but keep dollar-cost averaging in.
Analysts as Morgan Stanley (MS) remain bullish on the long-term prospects for AAPL stock, but in the shorter term, they see the possibility of a stall-out or pullback as the market digests some truly heroic gains.
In a note to clients, Morgan Stanley analysts say that although the plan on buying several Apple Watches, the stock has almost doubled over the last three years and continually trades near all-time highs. As a result, Morgan Stanley is trimming its own position in AAPL stock, from 4% to 3%.
Apple stock has indeed put up some market-crushing gains over the last three years, and in the interim too. In addition to returning about 120% in the last three years (vs. a total return of about 75% for the S&P 500), AAPL stock is up 44% for the year-to-date. That beats the broader market by 33 percentage points.
With a percentage-point change to holdings, Morgan Stanley’s move in AAPL stock is purely tactical, based on what it expects from shares in the next few months. It also comes against a backdrop of Morgan Stanley downgrading its view of the entire tech sector for 2015, to “market weight” (hold, essentially) from “overweight” (buy).
Fair enough. After all, the tech sector is up a torrid 25% so far this year.
AAPL Stock a Buy-on-the-Dip Bargain
Sure, it wouldn’t be unusual for tech stocks or AAPL stock to follow such strong gains this year with more muted success in 2015. But even if AAPL stock delivers only market-weight performance, there’s no need for long-term investors to churn their portfolios, racking up commissions and possibly taxable events too.
Even if AAPL stock underperforms in next year, the cheap valuation ensures outperformance over the long haul. AAPL stock trades for less than 14 times forward earnings. That’s cheaper then the S&P 500, despite having a stronger growth rate. Indeed, the Street sees Apple growing earnings at a clip of almost 12% a year. (The broader market is forecast to grow a bit more than 9% a year.)
Ordinarily, such a long-term growth rate would be rewarded with a bigger premium than just 14 times earnings, but AAPL stock gets marked down for at least a couple of reasons: It’s the largest company in the world by market cap, and it has to prove itself in the absence of Steve Jobs.
Based on valuation alone, AAPL stock is a buy on any dip. If it stumbles in the shorter term, so much the better. But with the success of the iPhone 6 established and the holiday shopping season upon us, a really big stumble doesn’t look too likely soon.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
