Dissecting the anatomy of a trade is a sophisticated process that requires full disclosure. Most investors fail to dig beneath the surface thereby missing the real opportunities. This Apple (AAPL) action on the heels of the Consumer Reports iPhone 4 downgrade is a dream scenario for hedge funds ahead of the July 20th earnings report. There is no better money making opportunity than the Apple slingshot. Apple’s pristine balance sheet, exponential growth opportunity, and innovative future product pipeline give hedge funds confidence that this stock will always bounce back after being beaten down. As a result they use any and all resources to beat it down when they can.
Monday was the Consumer Reports release so what do the Hedge Funds do on Tuesday? They feed the media with stories of a recall, ‘PR experts say an iPhone 4 recall is inevitable.‘ Beyond this kind of hysteria, the truth is that under a worst case scenario Apple would recall the few million iPhone 4s that have been sold and the problem would be solved. The scope of such a recall for a company with approximately $45 billion in cash is inconsequential. A second alternative to this reception problem would be to re route antenna efficiency by way of a software update. This solution is most likely. The third alternative would be to include a free bumper cover with each iPhone 4 purchase. As a side note, Apple might be making more money from the $29 bumper than Google (GOOG) makes from its Android OS but that’s for another article on another day.
The hedge funds know an iPhone 4 solution is coming but that doesn’t stop them from taking full advantage of the trading action. Everyone selling today is already plotting their re-entry on Thursday, Friday, or Monday ahead of earnings.
If the iPhone 4 was really a flop it would be because consumers genuinely did not like the product and I would tell you to exit the stock because the string of Apple innovation had run its course. That is not the case here. The iPhone 4 is off to the best sales start of any smartphone in history, Apple can’t keep it in stock, and 80 more countries are eagerly anticipating the international launch this fall. Investors should be buying this slingshot dip as the bounce will be fast and furious when it arrives.
Disclosure: Long aapl