It's hard to argue with Warren Buffett's track record. A sign that his investing prowess has not diminished can be found by looking at Berkshire Hathaway's most recent big win. And that's none other than Apple (AAPL +0.33%).
This "Magnificent Seven" stock has skyrocketed 384% in just the last five years, a gain that crushes the Nasdaq Composite index's 125% gain. Some shareholders might automatically think that the iPhone maker remains a worthy investment candidate.
I tend to disagree with this perspective. On the contrary, I believe it would be a smart idea to sell Apple stock before 2024. Here's why.
An unfavorable investing setup
Before considering if a stock makes for a solid long-term investment, investors need to understand the setup. In other words, it's important to try and figure out where the stock's returns could come from in the future. If we view Apple's shares through this lens, I think we'll struggle to find valid reasons to believe the stock can outperform the market over the long term, which should be the key goal of active investing.
For starters, this is a mature company. Apple's days of rapid sales growth might be a thing of the past. In its fiscal 2023 (which ended Sept. 30), revenue declined by 2.8%. All but one of the other "Magnificent Seven" companies posted double-digit percentage revenue growth in their latest quarters. Tesla was the sole exception -- its sales increased by 9% in Q3.
The iPhone still provides greater than 50% of Apple's revenue. Leaning on a product that might be close to saturation in its major markets doesn't create ideal conditions for huge gains. Unless Apple introduces a game-changing product that can significantly move the financial needle, it would be best for investors to temper their growth expectations for the company.
And based on its current price-to-earnings ratio of 31.8, this is not a cheap stock. Its average ratio over the last 10 years was 20.7. Seen in that light, rational investors probably wouldn't question the assumption that shares are overvalued right now. This doesn't really set investors up well for strong returns going forward.
NASDAQ: AAPL
Key Data Points
Buffett is staying put
Astute readers may counter my arguments by pointing out the simple fact that Buffett and Berkshire Hathaway remain major shareholders. The conglomerate currently owns 5.9% of the iPhone maker's outstanding shares, a position valued at $178 billion. And I don't think Buffett has any intention of selling anytime soon.
There could be many reasons for this. Berkshire Hathaway receives a sizable dividend payout every quarter from its Apple position. And with the tech giant buying back ridiculous amounts of its shares, Berkshire's equity stake keeps rising.
The tax burden might also be an issue. Should the conglomerate exit its position, it would be required to pay a hefty sum to the IRS, something that can be deferred through the power of compounding.
Based on Berkshire Hathaway's huge cash balance of $157 billion (as of Sept. 30), Buffett is already having difficulty finding attractive places to put big chunks of capital to work. If he decided to exit the Apple position, that would more than double the size of the cash stockpile.
Another possible reason why Buffett is staying a shareholder is that he simply believes Apple still makes for a smart investment, even at today's size and steep valuation. Apple may just be a forever stock for him.
For the individual investor, though, it's critical to think independently. Don't get me wrong: Apple is arguably the most successful story in the history of corporate America. However, based on the facts, it's hard for me to believe it will achieve outsized returns in the years ahead.
And that's precisely why I think it would be smart to sell the stock before 2024.
