After Moving Higher, Apple May Stop Bearing Fruit While It Corrects

Apple (NASDAQ:AAPL) seems unstoppable. The tech giant continues to march higher as sales of iPhones, wearables, and Apple products, in general, continue to sell well during the holiday season.

After Moving Higher, Apple May Stop Bearing Fruit While It Corrects

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However, its valuation has begun to approach levels from which it has historically fallen. Moreover, the stock has steadily moved higher for about a year with only brief interruptions. Although Apple remains an excellent long-term choice, investors should prepare for a pullback.

It seems the more I urge investors to stop buying more stock in Apple,  the more the equity rises. Now, it trades close to the $280 per share range. Also, proving that the first trillion is always the hardest, it has beaten Microsoft (NASDAQ:MSFT) to become the first company to achieve a $1.25 trillion market cap.

As a result, one can easily find analysts who do not hesitate to sing the company’s praises. Readers’ Choice says it will “ride high” on the 5G iPhone. Vince Martin does not see enough headwinds to stop Apple. Brad Moon believes wearables will make up for the iPhone’s declining revenue, bolstering the equity.

Even I admit that in many ways, Apple does not get the respect it deserves. For one, it has tended not to attract the high multiples of its peers. Its average price-to-earnings (PE) ratio over the last five years comes in at 15.75. Now, its forward PE comes in at about 18.8. That does not compare favorably to archrival Microsoft, whose comeback has taken its five-year average PE ratio to over 34.8.

Moreover, Moody’s (NYSE:MCO) has not seen fit to upgrade its credit rating to AAA status despite the company holding $205.9 billion in cash as of the end of its previous quarter.

Conversely, Johnson & Johnson (NYSE:JNJ) keeps its AAA status despite facing billions of dollars in settlements related to its involvement in the opioid crisis. Moreover, J&J holds $17.95 billion in cash, less than one-tenth as much as Apple.

Can the Uptrend Continue?

However, seemingly everyone is bullish on Apple at the moment, and that gives me pause. Investment gurus such as Jim Rogers warn investors to sell when everyone else thinks a stock can do no wrong. Admittedly, I got burned recently when I urged investors to stop buying Apple. Despite my past calls, I cannot help thinking that I have merely made my call early rather than inaccurately.

Recall that Apple tends to pull back when the PE ratio approaches 20. Measuring by the current PE of more than 23.5, we have significantly surpassed that point.

Also, at a forward PE of 18.8, we have moved close to that point from the perspective of future earnings. With 9.9% earnings growth expected for this year, I see little reason to believe we will see any long-term multiple expansion.

That said, I think both 5G and wearables will serve Apple well over time. The company remains a long-term winner, and I do not urge anyone (other than possibly short-term traders) to sell this stock. However, by historical averages, it appears ready to top out. Despite my premature calls of the past, I still cannot recommend a buy at this time.

Concluding Thoughts

Historically high multiples and a near-continuous uptrend over the last year may point to a short-term pullback in Apple. Admittedly, the company’s stock continues to move higher, defying my expectations for the stock. With 5G coming, iPhones have sold well, and wearables look poised to become a notable cash cow for Apple.

However, the stock has risen consistently for about one year. Now, the PE ratio is approaching historical highs for Apple, even on a forward basis. Despite a $1.25 trillion market cap, Apple should continue to bring significant gains to its shareholders long-term. However, I would wait until after a near-term correction to add to positions.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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