Apple Earnings Preview: Lessons From the Past

Includes: AAPL, BAC, GE, GOOG, IBM
by: Jason Schwarz

Will Apple (NASDAQ:AAPL) surge after today’s earnings report? Will it plunge as investors take profits? Ah, you’ve got to enjoy the unpredictability of earnings season. The only thing we know for sure is that the last two days of earnings reports have not been kind to stocks such as Google (NASDAQ:GOOG), General Electric (NYSE:GE), Bank of America (NYSE:BAC), and IBM.

Apple’s 2010 stock performance is tracking a similar course to 2007, back when the initial iPhone went on sale. I refer to this kind of stock action as a ‘catalyst trade’. For the first time since the recession began, Apple stock is responding to specific catalyst events. After the earnings report we’ve got the iPad 3G US release, we’ve got international iPad pre orders, we’ve got the international iPad launch, we’ve got the iPhone HD release, we’ve got the iAd platform introduction, then we’ll have the iPod refresh with LaLa implementation, then we’ve got the holidays...The pace of innovation at Apple is unparalleled. This 2010 stock action is on pace to hit $300 based on these fundamentals, but what about the short run? How is Apple going to react to this report?

Investors must be careful not to fall into the trappings of greed. The allure of a $30 after-hours rise makes some take unneeded risk. A key piece of information from 2007 shows that the one major Apple correction happened following the first earnings report following the iPhone launch. Today’s report just happens to be the first report following the iPad launch. Could history repeat itself? Considering that the Dow is up 1000 points and Apple is up $50 over the last two months would suggest that the stock is due for a breather. Rarely do you get an earnings surge after you’ve had such a steep rise. I’m advising that whatever strategy you decide upon you have cash available to take advantage of a selloff if it does occur. I wouldn’t add any exposure before the report but I will be ready to add a significant allocation of option LEAPS in the days and weeks that follow. I’m content to let my long term core position in Apple ride and that’s it.

As an investor I look for low expectations and low stock prices before an earnings report. Apple has neither. I anticipate they will do all they can to lower expectations in tomorrow’s guidance. We’ll see if investors take the bait.

Disclosure: Long AAPL