3 Signs to Watch Before Selling Apple

Apple (Nasdaq: AAPL  ) is in a good place right now. The market's eating up iPhone 5 smartphones this weekend, and the stock broke through $700 for the first time this past week. For perspective, Apple shares closed at $406.68 on the eve of the iPhone 4S's debut 11 months ago. The stock closed 72% higher on the eve of the iPhone 5's rollout.

Concerns that Tim Cook wouldn't be able to live up to Steve Jobs have, for now at least, been silenced.

It's probably not realistic to expect another 72% pop in Apple's stock between now and the time next year's new iPhone comes out. That would make Apple a $1.1 trillion company. Yes, the tech giant is the odds-on favorite to become this country's first $1 trillion company, but all in the coming fiscal year?

Either way, sooner or later, there will come a time to sell Apple. Let's go over the five things to watch that would signal that it may finally be too late to buy into the class act of Cupertino.

1. Sell when analysts start lowering their price targets
Wall Street's generally infatuated with Apple, making it the most valuable company on the planet. How did this happen? It's not as if Apple has been a barnburner over the past year. In rare form, Apple has actually come up short on the bottom line in two of the past four quarters.

However, when Apple is good, it's really good, and analysts know the safe bet is to raise their price targets.

Deutsche Bank became just the latest analyst firm to juice up its expectations, having upped its price target on Apple from $775 to $850 on Friday. The move is hardly a surprise, with the iPhone 5 setting new sales records.

The coast is clear on this one, but be careful when Wall Street begins leading clients back down.

2. Sell when the stock price outruns the fundamentals
Apple is still cheap by traditional valuation standards. Despite a decade of blowout capital appreciation, Apple is fetching just 13 times earnings for the fiscal year that begins next month.

However, Apple was cheaper a year ago. The stock has soared better than 70% over the past year, but revenue and earnings have climbed only 44% and 60% higher, respectively. Even the bullish pros see Apple's heady growth slowing considerably in the year ahead, aiming for 20% profit growth on a 24% revenue increase for fiscal 2013.

Yes, analysts have historically bumped their outlooks higher as fiscal years play out, but make sure Apple's stock doesn't get too far ahead of its growth rate. There is certainly room for earnings multiple expansion, and that's why the stock is still cheap today. However, it's all about justifying gains in the future.

3. Sell when Apple's market share starts to suffer
Google
(Nasdaq: GOOG  ) Android devices continue to be the smartphone platform of choice, but Apple has still gained market share over the past year.

That's important. The iPhone is Apple's biggest product these days, and the last thing investors want to see is consumers who opt for cheaper smartphones.

Think that can't happen? Research In Motion's (Nasdaq: RIMM  ) BlackBerry seemed invincible, and Palm before that. These days, things are so bleak for RIM that analysts are betting on a 40% plunge in quarterly revenue when it reports on Wednesday.

Microsoft (Nasdaq: MSFT  ) , meanwhile, is throwing billions at getting Windows Phone going. Nokia (NYSE: NOK  ) has been Mr. Softy's workhorse, but HTC turned heads on Wednesday by introducing a pair of Windows Phone smartphones that it will roll out in November. If Microsoft can sway most of the PC companies that have carved a cozy living off Windows as a desktop or laptop operating system to back the software giant's smartphone push, things may get interesting.

Apple doesn't have anything to worry about there -- for now. The iPhone 5 had more than twice as many preorders in its first day of availability than last year's iPhone 4S. Apple will be putting out a press release shortly, probably gushing about record retail sales over the weekend.

However, investors need to keep all of the potential negative catalysts in mind. Apple is cheap -- and a spectacular buy at even today's lofty prices -- for a company that's growing at a healthy clip. If that ever starts to change, it could be a long way down.

Continue enjoying the ride, but never lose sight of where the exits are located.

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The Motley Fool owns shares of Apple, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google, creating a synthetic covered call position in Microsoft, and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2012, at 10:22 PM, bsimpsen wrote:

    There are other signs which, by themselves mean little, but collectively may have some indicative value.

    Apple's recent Genius ads were a bizarre and unpopular departure from their usual script. Rather than showing what their products can do, they insulted their own customers.

    There is the rumor that their new retail chief attempted to pare expenses even if it meant sacrificing the customer experience.

    There's the EPEAT fumble, which resulted in a public apology from Bob Mansfield.

    Apple has thrived through past fumbles, such as the G4 Cube and Antennagate, so there isn't yet reason to worry. But one would be remiss to ignore these fumbles.

    Another of Steve Jobs' companies with a deep executive bench, Pixar, has been stumbling more of late. I believe that may have more to do with Disney acquiring them, and the inevitable dilution that resulted (even though Jobs created mechanisms, both legal and organizational to prevent or delay it).

    I've no idea what effect Jobs absence will have on Apple long term, but I am ever watchful.

  • Report this Comment On September 24, 2012, at 2:17 AM, clbjblk wrote:

    I like the article and the looking ahead of what an when to sell that is an extremely important open position that ego's get going good job as the master would say. But four walls is a significant play over taking turns to look out the one window when no one can else see in and you know they want to look in. So every know and then you let them look in when they think you don't know that is what they want you to see. Used to love to see the Vegas magic shows now you see it and now you don't right before your eyes and we always thought the cia and the kgb where good, well there was only 1 J R EDGAR and he was not the one with the vacum cleaner but he never left no dirt behind at least they have not been released by the Govt. yet and even if they where they would be wrote his way and he knew that, anyway back to the four walls with one window, that should be the point there are really three windows, and only should we say fruit and we all know what kind of fruit that is and I would bet it is a ca fruit , that is a controlled atmosphere fruit that can only get ripe when the window opens or you can never take it to the store, end of this story with another to start which is not to far off with a whole new beginning! Remember someone once told them not to bite the Apple as the snake slithered away.

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