Credit: Shutterstock photoIn case you missed it, Apple (AAPL) will release earnings after the bell today. If there is such a thing as a regular reader of my ramblings here, that person will be aware of two things: Firstly, I am bullish on AAPL anywhere around or below $100 and secondly I have a strategy, or rather a focal point, for trading into earnings. Both of those things lead me to believe that, from a trading perspective, buying AAPL before today’s release is a smart play on a risk/reward basis.
Apple’s value at these levels is obviously more of a long term thing than a trading opportunity, but it is still worth highlighting. What the market is adjusting to right now is the transition of Apple from a pure growth stock to more of a value based security. Back in 2012, when I wrote that Apple was overvalued as it approached a pre-split $700 it was simply based on the view that expectations had got out of hand. After a series of massive beats of estimates analysts had begun to compete for the most outrageous forecast for Apple’s earnings. Despite that the forward P/E of AAPL remained at the kind of elevated levels normal for a growth stock. Something had to give.
Right now we are at almost the exact opposite point. All the talk over the last couple of months has been that iPhone sales will be disappointing and the Apple analysts have been competing for the most sensationally depressing forecast for revenues and profits. Despite that AAPL, still trades at a forward P/E below 10, or around half of the average for the broader market. It is as if the market is still looking for growth stock performance from what is now a value story.
If there was an expectation of a serious decline in revenue and profit, then maybe that would make sense in some ways, but that isn’t the case. Instead, similar to the worries about Chinese growth, what people are stressing out about is a slower rate of growth, not an actual decline. In my book, that is still growth, but that tends to get lost in the sensationalism surrounding the conversation. The consensus estimates for this afternoon are for earnings of $3.23 per share on $76.6 billion of revenue, as compared to $3.06 on $74.99 billion in the same quarter last year.
Okay, you say, but if iPhone sales are collapsing, then that growth is surely coming to an end. Once again, though, it is a slower rate of growth, not an actual contraction that has people worried. The iPhone 6S has not caused the rush to upgrade that other iterations of the phone have in the past, but in a quarter that was marked by restraint from consumers globally any increase in sales can be regarded as good.
Ultimately, though, what controls the immediate reaction of a stock to earnings data is the expectations of the market going in. On that basis, buying AAPL today makes sense. The negative tone of commentary and lower than usual expectations mean that even a moderate beat of expectations could easily produce an outsized reaction. A disappointment, however, will be just “as expected” which should limit the downside.
This combination of long term value and short term positioning that favors a long position makes buying AAPL into this afternoon’s earning a worthwhile trade. Whether you use it as a short term position or just as an opportunity to buy cheap stock in one of the most successful companies ever is up to you, but either way the potential outweighs the downside, making it a viable trade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
