Should You Buy Apple Pre-Earnings?

| About: Apple Inc. (AAPL)

Shares of Apple (AAPL) hit their lowest point in a month on Monday, and after two days of selling, the stock has lost more than $42 a share. We are just seven full trading days away from Apple reporting its much anticipated fiscal second quarter earnings. With the recent drop in Apple, shares are now about $64, or 10%, off of their 52-week high. As you can see from the chart below, Apple has lost a chunk of its gains that have come since their last quarterly report.

(Source: Yahoo! Finance)

So now we are just seven days before earnings, and with the recent drop, it is time to examine Apple again. The big question is, do you buy now, or wait until after earnings? Well, let's look at some recent pre-earnings movements, and then I'll give you my personal opinion.

I went back and analyzed Apple's movements around its last ten quarterly earnings reports. The first thing I looked at was the stock's change in the seven trading days prior to reporting. The results are in the following table.

7 Days Before Change
FY 2012 Q1 -0.23%
FY 2011 Q4 14.18%
FY 2011 Q3 4.76%
FY 2011 Q2 3.51%
FY 2011 Q1 2.07%
FY 2010 Q4 9.95%
FY 2010 Q3 -2.98%
FY 2010 Q2 1.16%
FY 2010 Q1 -3.60%
FY 2009 Q4 0.31%

As you can see, there were seven up days and three down days, which resulted in a total average of a 2.91% gain for the seven days prior to earnings. Now, the seven up days averaged a 5.14% gain, and the three down days averaged a 2.27% loss. Of course, prior performance is no indication of future results, but seven out of ten up days is pretty good.

Also, the fact that the up days result in a higher gain than the losses on the down days provides some relief in case you are wrong. If Apple gained that 5.14% from here, it would basically put us back at $610. Of course, the way Apple has traded recently, we could get there in a day. If Apple were to lose that 2.27% down average number, that would put us at $567. You might wish to play the long side here.

Now, I also wanted to see the results of Apple post-earnings, so I analyzed the seven trading days following their earnings. You can see the results in the following table, which were kind of similar.

7 Days After Change
FY 2012 Q1 8.26%
FY 2011 Q4 -4.16%
FY 2011 Q3 3.97%
FY 2011 Q2 1.13%
FY 2011 Q1 0.75%
FY 2010 Q4 -3.20%
FY 2010 Q3 2.47%
FY 2010 Q2 9.83%
FY 2010 Q1 -1.89%
FY 2009 Q4 1.34%

In the seven days following an earnings report, Apple was up 7 of the 10 times. The overall average price change was a 1.85% gain. In terms of the seven up days, the average gain was 3.96%, and the average loss in the three down movements was 3.08%. Again, this data favors the long side, but is no indication of what Apple will do post earnings.

So now let's get into my opinion. Apple has surely come down off its highs, and that does present a buying opportunity to a point. Apple is expected to report another monster quarter, with 47% revenue growth and more than 50% earnings per share growth. For a non-holiday quarter, and a quarter of just 13 weeks (the prior one was 14), these numbers will be tremendous. Apple did release the new iPad late in the quarter, and the iPhone 4S went on sale in Mainland China during the quarter, so those should both help.

I'm expecting another great report, and I last said that I was figuring a $37 to $38 billion revenue number and more than $10 in earnings per share. Those were my conservative estimates. When I do my more formal earnings preview later this week or early next week, my actual estimates will probably be a bit higher.

I don't expect a huge run up into earnings, as I assume that a lot of money will be on the sidelines waiting to see that report. If it is another blockbuster, the rally will continue post earnings. So I don't see us getting back to $640 or even $650 before earnings, but I definitely could see a rally into the $600 to $625 range.

Depending on Apple's movements early today, I may in fact enter a position of my own in the name, especially if we open lower. If I can get Apple at $575, $570, or even lower, I will not stand by and miss the opportunity.

Why am I confident in Apple? Well, they seem to be the hottest name out there right now, and they also are the best. They also seem to know what people want from them, which is something not every company can say.

Let's just look at Google (GOOG) for a quick second. Google blew out its earnings per share estimate, which I expect Apple will do as well. However, Google's revenue numbers came in just a hair below estimates. I don't see that happening with Apple. Coming off a completely lousy prior quarter, Google did not exactly win over a lot of hearts with that number. That is completely opposed to Apple, which after a "miss" for the fourth quarter, announced one of the best quarters in corporate history.

Also, Apple shareholders were asking for some cash back, in the form of a dividend, or buyback, just something. Apple gave them a dividend. Like I said before, it wasn't a true buyback because they won't be reducing the number of outstanding shares. What did Google do? They announced some sort of complex stock split that confused investors and got some very mad. Apple is making people happy now, while Google isn't.

So what to do with Apple pre-earnings? Well, history around the last 10 reports points to positive moves, and we all expect Apple to announce a great quarter. I'd like to see Apple put in a short term bottom this morning, and if we do open lower I will pick up some shares myself. Apple is trading at just 13 times this year's (fiscal year) earnings, and that multiple seems very inexpensive when compared to some other names, one of which is Google, which trades at 14 times this year's earnings, and doesn't seem to offer the same growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.