Apple (AAPL 0.38%) has become somewhat famous for its massive share repurchases, spending $85 billion over the past year buying back its stock.
Who am I to judge? You can do that when your business generates $100 billion in cash profits every year. Apple does it to lower the number of its outstanding shares and increase the value of its stock, benefiting shareholders.
But just because Apple is buying its stock doesn't mean you should. It's a great business, but the stock might not be ripe for the picking. Here are three reasons to pass on it.
1. The valuation is more bitter than sweet
You won't hear an argument for Apple being a bad business. It's one of the most powerful companies on Earth, and the real problem is that everyone knows it.
A turbulent stock market has everyone flocking to dependable stocks like Apple, pushing the valuation increasingly higher. You can see below that the price-to-earnings ratio (P/E) is approaching 30, more than 50% higher than its average over the past 10 years.
AAPL PE Ratio data by YCharts.
Apple wants to reduce its share count, so it'll plow money into share repurchases with sheer force. Individual investors should use a bit more tact and think twice. It could be a disaster for investors buying now if Apple reverted to its long-term averages.
2. Growth is slowing
Not to add salt to the wound, but Apple is having a harder time growing as a company worth nearly $3 trillion. It just reported its operating results for the quarter ending April 1 and posted flat year-over-year earnings per share (EPS). For the long term, analysts have gradually toned down their expectations, now looking for 10% annual earnings growth, on par with the S&P 500's historical average.
AAPL EPS LT Growth Estimates data by YCharts.
Apple will probably hit an eventual growth spurt when a major iPhone upgrade comes out, but it becomes increasingly harder as you get bigger. It puts more pressure on management to deliver growth because the stock trades at a higher valuation. Remember that valuations reflect market expectations, and falling short could mean a brutally quick haircut.
3. Better opportunities elsewhere
Few companies are as good as Apple, but there are plenty of better investment opportunities right now.
Suppose you buy Apple today and hold it for the next five years. Assuming 10% annual earnings growth, the company would generate roughly $10 per share in 2028. If the stock were to trade at its long-term average P/E of 20 at that point, your five-year investment would return a total of just 15% (a tad more, including Apple's 0.5% dividend yield).
In other words, there isn't much more juice to squeeze unless something unexpected happens. So what should investors do? Consider putting Apple on your watch list for now, and move on to better opportunities.
They are out there. Think long term and diversify your stock portfolio; the market's wonkiness will offer you some deals that make you money if you are patient and wait for the right opportunity.
