Wednesday, April 20, 2011

The Apple Shuffle - 3-4% 2 Day Play

Apple’s Q2 earnings are expected to be announced after market hours today. This article is a simplistic approach to identifying an opportunity to earn a 3-4% return in one day. Earnings are one of the most closely followed financial indicators found in a company’s income statement. This statement is especially true for Apple, a company whose share price fluctuates with announcements of white iPhones, Verizon contracts, and Steve Jobs’ blood pressure.

If history shows us anything, we can expect between a 3 and 4 % climb in Apple’s stock price as a result of tonight’s earnings announcement. The graph below represents a portion of the data I used to analyze Apple’s share price during the earnings announcements over the past 5 years. Measuring the closing price the day before and after the earnings announcement, I computed the average return. Entry points, shares purchases, and commissions are obviously variables which influence your overall return. Assuming your investment is large enough to minimize commissions and you entered at a good price, the odds are in your favor based on these historical results:
• 3.28% Average One Day Return for past 20 earnings.
• 3.56% Average One Day Return for past 10 earnings.
• 3.91% Average One Day Return for past 5 Q1 earnings.

What happens if history doesn’t follow this pattern or you find a bad entry or exit point? Don’t sweat it, just hold your position in Apple. I won’t tell you the story you’ve heard from everyone and their mother that Apple is going to reach 400, then 500, then infinity and beyond. But I will share some newer data for those who wish to hold onto Apple past the 3-4% one day return.

The Product Segmentation Data in the graph below details a 93% 2 year revenue growth rate for the iPhone. This statistic is prior to the iPhone’s addition to the Verizon network. This past January, the iPhone became available for Verizon customers, resulting in pre-ordering and subsequently backlogs. Interestingly enough, this cycle will likely re-occur in the summer when the iPhone 4G is released. Verizon’s smartphone penetration is only at 26%. Additionally, smartphones make up 49% of Verizon’s phone sales. These percentages are sure to rise as Blackberry, Droid, and other smart phone users convert and new smart phone customers choose the iPhone.

Apple released the original iPad in April 2010, and 3 million units were sold in the first 80 days. Apple sold 14.8 million iPads worldwide in 2010, producing nearly $5 billion in revenue and representing 75% of tablet PC sales during the year. The iPad 2 was introduced and went on sale last month. By that time, more than 15 million of the original iPads had been sold, which is more than all other tablet PCs combined. The iPad 2 already has a 4-5 week waiting period and stores are as crowded as a Best Buy on Black Friday with customers trying to get their hands on an iPad 2. Additionally, it was recently announced that Apple filed suit against Samsung over their Galaxy line for copyright infringement of Apple’s iPhones and iPads, signifying Apple is committed to protecting their intellectual property from competitors looking to blatantly steal Apple’s ideas and market share.

It is hard to find someone who would argue with the purchase of Apple, whether it be for the 3-4% opportunity available now or the long term possibilities. Analyst recommendations currently show 49 Buys, 5 Holds, and 0 Sells. With over $15B in free cash flow in 2009, the whole line of apple products are sure to see upgrades as is customary with Apple products and we may be introduced to another groundbreaking tech device. The market and tech sector have been falling recently with the turmoil in the Middle East and disaster in Japan. But with recent housing and employment numbers showing signs of life, I believe this to be a strategic time to buy. Apple is around $333, about 30 points off their February high.

- Geoff

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