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4 Signs that It's Time to Sell Apple Stock

Both the company and the shares have continued their amazing run since the death of Steve Jobs. Watch for these factors that could take the shine off Apple in the future.

Shares of Apple (symbol AAPL) skyrocketed after the company’s Christmas-quarter results made it clear that demand for Apple’s products didn’t diminish following the death last October of founder Steve Jobs. But with the stock jumping 36% so far this year, and with Apple’s market value surpassing $500 billion, you might be wondering whether this run can last.

Analysts contend that it can. In fact, the stock, which closed at $552.00 on March 12 and still sells at a reasonable 13 times estimated year-ahead earnings, could keep climbing unless one or more of four warning signs emerge. Although none of them is in evidence today, here are some things to watch for.

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Empty pipeline: Apple’s stock is fueled by the release of new and refreshed products that fly off the shelves, says Shaw Wu, an analyst with Sterne, Agee & Leach, an Alabama-based investment firm. Apple launched the third iteration of its iPad on March 7 and is expected to unveil the next-generation iPhone in the fall. Expect a stronger push into television, too. In other words, the Cupertino, Cal., company has plenty to keep registers ringing for the foreseeable future. Don’t worry until the product pipeline is empty.

Quality crash: Consumers are willing to pay extra to buy Apple gizmos because they are well-made and easy to use. But if the products were to start disappointing consumers, sales growth would decelerate; sales might even fall. That would give Apple’s rivals a chance to nab market share, says James Ragan, an analyst with Crowell, Weedon in Los Angeles. Though critics panned the antennas of an earlier iPhone model and labeled the 4s version “disappointing,” consumers have considered each product better than the last and have shown their approval by upgrading. If sales slip in the wake of quality complaints, reevaluate.

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Price exceeds growth: Apple stock is selling for six times more today than it was at this time in 2007. But the company’s profits are six and a half times higher, says Wu. A company that generates $100 billion of revenues annually can’t double every year, obviously, but analysts expect Apple’s earnings to grow at a nearly 20% clip over the next several years. With its price-earnings ratio well below that number, the stock is still cheap. Take a second look when the P/E exceeds earnings growth.

Sales in China fall: China is Apple’s next big frontier. The company already sells iPhones there -- in fact, its products are so popular that prospective buyers get in fistfights just to keep their place in line. Apple is now in talks to sell the iPhone through China’s biggest wireless firm. If Apple strikes a deal, says Wu, expect another burst of revenue growth. If the deal falls through or something happens to quell consumer demand in China, Apple’s growth might slow, and that might be a signal to sell.

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