Insiders Are Dumping Apple; Should You?

 | Feb 14, 2017 | 11:00 AM EST
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(This commentary originally appeared on Real Money Pro at 8:30 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)

Apple (AAPL) , the world's largest company, garnered a lot of attention last week as it neared its old all-time high of $134.54.

Bespoke Investment Group research went as far as charting the number of trading days separating AAPL's historic new pinnacles. 

It seemed that almost everyone was rooting for the iPhone giant to ring up a new record. What group was not waiting around to see AAPL make a new high?

Company officers and directors, including CEO Tim Cook, have been busy dumping shares. Just last week, seven insider sales, totaling 275,338 shares, were reported -- for proceeds north of $35 million.

Insiders have been exiting Apple shares all year long, continuing a trend dating back to 2016. The list shown below is strictly since January, 2017, although the bar graph dates back one year. documented lots of insider sales without any trace of open-market purchases.

What do these company-connected holders know about Apple's stock that average shareholders might be missing?

Long-term owners of AAPL are well aware that the shares have experienced significant performance droughts in past years. Those who didn't sell Apple at 2007's high (red-starred below) suffered a 61% drawdown to its March 2009 nadir. They waited 29 months to get even on what was then a non-dividend-paying stock.

Fast growing earnings and initiation of quarterly cash payments led to investor overenthusiasm late in 2012. AAPL topped out above $100, with a trailing price to earnings ratio of 16.0x. Selling then would have been a good move. Just months later, Apple was available for $55. AAPL was available as low as $92 during 2015, and sub-$90 in the spring of 2016.

Almost two years ago, AAPL ran briefly to north of $134 and 15.6x full-year 2015's profits. Even after its recent surge, those who didn't sell then are still slightly nursing small paper losses today, 22 months later.

Could those long periods of underperformance have been predicted? Absolutely.

Since 2010, Apple has carried an average P/E of 12.9x. Its typical yield, since payouts began, has been 2.04%. AAPL's five "best entry points" of the past decade (green-starred) each came at significant discounts to the stock's average multiple. Yields offered higher-than-normal levels. Clearly those moments were value buyers' delights.

Conversely, all three "sold have sold" valuations represented higher-than-average P/Es. Both of the most recent peaks provided sub-par yields.

What did Apple look like, valuation-wise, as of last Friday? The shares commanded 14.7x AAPL's consensus full-year 2017 estimate of $8.95 a share. That's a 14% premium to normal. The current yield of 1.73% is more than 15% below the stock's average.

A regression to more typical P/E would support a "fair value" of just $115 to $116. Barring future increases, it would take a dip to south of $117 to get back to a 2.04% yield.

AAPL is not grossly overpriced, but it could easily go sideways or even slide by $10 to $16 a share over the coming six-to-12 months.

Unless you harbor a fairly long time horizon, risk appears greater than potential reward.

No wonder insiders have been unloading.

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