Apple has grown into an uncomfortably large position.
I tend to follow Warren Buffett’s investing approach of holding stocks forever. I rarely sell, and if I do, it’s a losing position that I don’t believe will ever recover. I let my winners run so I don’t miss out on future returns.
Apple (AAPL -1.04%) is one of my biggest winners. I’ve held shares of the tech giant for over a decade. It has grown into my largest holding by a wide margin (it’s nearly 50% bigger than my second-largest holding). My outsized exposure to Apple stock has made me consider trimming my position. Here’s why I’m contemplating a partial sale and my potential exit strategy.
Time to trim?
I have a very diversified investment portfolio. Because of that, even though Apple is my top holding by a wide margin, it’s currently only about 3.5% of my total portfolio’s value. However, the tech giant comprises about 30% of my Roth IRA’s value, which is three times higher than my second-largest holding in that account.
On the one hand, having a high exposure to Apple is very Buffett-like. His company, Berkshire Hathaway, currently counts Apple as its largest holding, at 42.9% of its investment portfolio. However, even Buffett has been trimming his Apple position (his company sold 13% of its stake last quarter and 1% in the fourth quarter of last year).
While Buffett hinted that he has been selling Apple for tax purposes (in case capital gains taxes rise following the election), taxes aren’t an issue in my case. Instead, I’m more concerned about Apple’s rising valuation and slowing growth. Apple currently trades at more than 30 times forward earnings, which is on the high side of its recent historical ranges:
AAPL data by YCharts. PE Ratio = price-to-earnings ratio.
That puts Apple’s valuation higher than the S&P 500 (22 times forward price to earnings, or P/E) and the Nasdaq-100 (28.5 times).
Trading at a premium valuation wouldn’t be a concern if Apple were growing fast. However, its revenue declined in its 2023 fiscal year (down 3%) while earnings per share was up only modestly (0.3%). Those trends have continued through the first two quarters of fiscal 2024.
While Apple’s growth has slowed considerably, an acceleration could be ahead. The company recently made a big splash in the AI market by revealing Apple Intelligence, which could accelerate iPhone sales and its financial results.
Cashing in ahead of a potential sale
Apple’s stock price and valuation have soared since it launched Apple Intelligence. Because of that, I’m considering selling some of my shares to cash in on the enthusiasm.
However, I don’t want to sell right now because AI mania could send shares much higher. Instead, I’ve decided to start writing covered calls on a portion of my position. This options trading strategy has two benefits:
- Income: Selling call options will generate options premium income that I can invest in other stocks.
- Potentially higher sales price: I selected an options strike price about 20% above Apple’s recent trading price, which gives me more upside potential.
If Apple stock surges above the option’s strike price at expiration, I can let my shares get called away and lock in a higher profit than if I simply sold them at the current price. Meanwhile, if shares are close to or below the strike price at expiration, I can either roll my options forward or write new ones for additional income.
Writing call options on some of my Apple stock is a potential win-win strategy. I can earn a little additional income while waiting to sell my shares at a much higher price. While this approach does cap my upside on these shares to the strike price (plus options premium), I will retain unlimited upside on the Apple shares I don’t cover with calls.
A patient approach to trimming
Apple is a fantastic company that I plan to own for many more years. However, it has grown into my top holding (and an outsized percentage of my Roth IRA). Because of that, I’m thinking of trimming it back, given its elevated valuation. I’m doing that by writing call options on some of my shares. This more patient strategy could yield a higher sales price or at least some additional income from a stock trading at an elevated valuation.
Matt DiLallo has positions in Apple and Berkshire Hathaway and has the following options: short August 2024 $250 calls on Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
