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There has been a wide debate out there over Apple (AAPL) recently, and I for one have been a part of it. The debate has been broken down into two parts, valuation and balance sheet. The valuation debate has been a constant tug of war from those who think Apple's P/E ratio is much too low and it can only go up from here, as opposed to those who think that it could still contract as Apple matures even further. The balance sheet debate is over that large pile of cash and investments the company holds. Is now the time for a dividend or a buyback, perhaps even a stock split?

This article is not going to debate any of those issues. Instead, I'm going to look at a historical part of Apple, the pre-earnings rally. Over the last two and three year period, Apple has rallied 75% of the time in the month before earnings. We are basically at that time period now. In the past two years, Apple has rallied 6 out of 8 times in that month, and 9 of 12 times in the past three years. In fact, Apple has rallied before its earnings 5 times in a row and 6 out of 7 even. Here's how the numbers look over the past three years.

Performance Down Up
Times 3 9
Average Return -5.47% 9.74%

The overall average for the twelve periods is 5.86%. A decent return for a one month period. Apple also has beaten the market over that time. The NASDAQ's average for those twelve periods is just 3.47%, so you're getting an extra 2.4% over the market. Apple has returned more than the NASDAQ in 9 of those 12 periods. When it beats, it beats big, but when it loses, it loses more. In those 9 beats, Apple has returned 4.43% more than the market, while in the 3 losses, it has lost 5.54% more than the market. Still, Apple wins three fourths of the time.

Why do I like to mention this pre-earnings rally? The first reason is because we are basically a month away from Apple's next earnings report. We don't have an exact date yet, but in 2011 they reported on January 18th.

The second reason is that Apple has become the standard for the "buy the rumor, sell the news" phrase. While Apple has rallied into earnings in six of the past eight quarters, it has actually declined in the month after earnings seven of the past eight times. The one gain was after their Q1 earnings report last January, and resulted in a 2.91% gain. However, the seven losses have averaged 3.72%. So the trade seems to be hold Apple up to their earnings report, then sell it and wait for a chance to re-buy at a lower level. For those of you wondering how that performance compares to the NASDAQ, it is a coin flip. Apple outperformed the NASDAQ in four of those eight times with an average outperformance of 5.54%. In the four times where the NASDAQ did better, Apple underperformed by 4.02%.

Now, we all know that past history is no guarantee of future performance. But we also know that everyone seems to hype up Apple into earnings, and when we see analysts coming out with more buy recommendations and earnings estimate increases, everyone loves to buy the stock. Apple estimates for this quarter jumped after the last earnings report, as many believe last quarter's lower-than-expected results were due to many holding back on iPhone purchases. Now that the new version is out, we expect sales to be great this quarter.

According to Yahoo! Finance's earnings page, street analysts expected about $9 for this quarter before last quarter's earnings report. After they fully digested that report, the estimate was for about $9.70. We've come up another dime since then, now standing at $9.79. This would be a 50% increase over last year's quarter, while revenues are expected to be up about 42%. I'm fairly confident that Apple will beat on the top line, although I'm not sure how they will do on the bottom line. It all depends on how margins were affected by the new iPhone release, and how much Kindle Fire sales have taken down iPad sales.

The point of this article is not just about history, but to also educate you on the trading of Apple's earnings. Last quarter, we saw Apple shares rally nearly $70 in the two weeks before earnings (remember, the market bottomed exactly two weeks before earnings), and the hype got so large that the stock fell when the report wasn't as great as many had expected. However, if you looked at the company's guidance, it wasn't that bad of a report.

Apple shares are down 10% since that report, but I have a feeling that they are going to rally into the next report, the exact date still to be determined. We may eventually get the Santa rally people are hoping for, and fund managers may want to window dress and show their clients that they are holding Apple into the new year. Again, expect to hear a lot of buzz in the week or so before earnings, as everyone, including myself, will try to be the one who has the perfect estimate. I would not be surprised to see this stock back at $425 or so when it reports earnings in mid to late January. Be advised though, if the rally is too fast and the hype is too much, you may want to sell just before they report.

Source: Apple Gears Up For Its Pre-Earnings Rally