Apple (AAPL) has delivered incredible returns for shareholders thus far this year, with a 60% return year-to-date, nearly tripling the performance of the Nasdaq Composite (QQQ). The catalyst for this performance has been continued double-digit growth in Products and Services, with a record quarter for Services of $13.2 billion.

This is even though Apple suffered from store closures across many geographies in the quarter, which weighed on Apple Watch sales, which consumers typically prefer to try before buying.

Regardless of this minor headwind, sales came in at $59.7 billion in fiscal Q3, up 11% year-over-year for the strongest quarter in sales growth since Q4 2018 (11% growth). However, while the fundamental story for Apple is rosier than ever, I believe a lot is priced in at current levels, with the stock trading at one of its highest multiples in history. Let’s take a closer look at the value proposition below:

(Source: YCharts.com, Author’s Chart)

Beginning with Apple’s annual earnings per share, the company’s growth has been nothing short of exceptional for a trillion-dollar company. Based on current estimates, annual EPS is expected to grow by 9%~ year-over-year in FY2020, though the tech juggernaut is up against relatively easy comps with annual EPS down 1% last year.

If we look ahead to FY2021, we should see growth accelerate in a big way, with annual EPS expected to grow by more than 18%, and an earnings growth rate that most large-cap companies have a hard time achieving, let alone one of the top-5 market largest companies in the world.

Given that the best-performing stocks on a 12-month and 24-month forward return basis typically have 17% annual EPS growth or higher, investors should be encouraged that Apple fits this bill as it bodes well for the stock long-term.

(Source: YCharts.com)

Unfortunately, while the growth is exceptional, investors are paying a lot today for that growth. As we can see in the chart above of Apple’s price to sales ratio, the stock only traded above 7x price to sales at one point in the past 30 years, and we’re currently nearly 10% above the prior peak at 7.55x.

Meanwhile, the company’s revenue growth rate is actually lower than where we stood in late 2007 when AAPL hit this valuation, suggesting that investors are paying a higher valuation for lower growth (11% revenue growth vs. 39% in 2007). This is not ideal, as there is no margin of safety baked into the stock whatsoever here.

While there’s no reason to believe that this time will play out the same as last time as Apple had to contend with a secular bear market for the S&P-500, it’s worth noting that AAPL fell 60% from its highs over the next two years, as the stock was priced for perfection while the market was quite fragile.

(Source: YCharts.com, Author’s Chart)

The bulls will likely suggest that valuation is meaningless, and you don’t sell the best company in the world just because of valuation. This is certainly a fair point and one to consider, but the 20-year chart above would suggest differently.

While Apple is an excellent company with some of the best products globally, this does not preclude the stock from suffering massive drawdowns. As the above chart shows, the time to be the worst careful with one’s Apple shares is when the stock is more than 50% above its monthly moving average (teal line), as the stock is prone to violent corrections.

If we dig into the above chart, we can see that Apple is currently more than 75% above its monthly moving average, and it has only been this far extended twice in the past 15 years. If we look at the past instances of significant extension above this monthly moving average, we can see that the average extension was 64%.

In five of these occurrences, this extension marked a medium-term top, with only one leading to a 2-week 29% shake-out that eventually traded higher.

If we take a look at the corrections following these extensions, the average correct was 38% over the following 12 months, a significant drawdown for a portfolio that was overweight AAPL stock. Finally, if we look at the only case that was more than 75% above the monthly moving average, it was the 2007 example, when both valuation and technicals were a headwind.

So, what’s the best course of action here? 

History doesn’t always repeat itself, but I believe that one would be wise to sell at least ½ of one’s position here above $465.00 and not dare to chase the stock at current levels. Even if we were to see the smallest pullback on record after this large an extension, Apple would trade down to $340.00 in the next 12 months at some point. To justify the reward to risk here, one would need a 29% gain to $606.00 for a balanced reward to risk of 1:1.

Therefore, unless one truly believes that Apple will be trading above $606.00 in the next 12 months, the risk is stacked heavily against them.

(Source: TC2000.com)

Often, the best time to sell is when no one wants to, and when things look their best. When it comes to Apple here, everyone wants to own, the stock split is leading many to rush to get in ahead, so they don’t have to chase it, and this is the worst move possible at $470.00, in my opinion.

While I don’t always catch tops or bottoms, and I’ve certainly been early before, I prefer to sell when the majority is bullish and when a stock firing on all cylinders as it will likely be difficult to beat those comparisons going forward. As for Apple, this looks to be the point to start ringing the register as being long here carries the highest risk in over a decade.

Therefore, for investors looking to buy, the best move is to be patient, as it is very likely Apple will trade under $400.00 before this time next year.

For those holding the stock, it’s a good time to underweight the position as it sits above $465.00, as the stock rarely does well when the orange caution bars above start flashing. For now, I have no position in AAPL, but I may look to short the stock if we head above $482.00 before October.

Disclosure: I am short SPY as a hedge vs. positions in DOCU, AMZN, NFLX, ZG, NVDA and BILL

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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AAPL shares were trading at $469.56 per share on Thursday afternoon, up $6.73 (+1.45%). Year-to-date, AAPL has gained 61.01%, versus a 5.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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