The market is an interesting machine, one in which patterns are often repeated but are then realized very quickly. If you are lucky, you can capitalize on patterns or trend several times over, but once the market realizes the trend, it gets smart and the trend ceases to exist. With this in mind, Apple (AAPL) has a history of strong run-ups leading to a big product announcement and then selling on the news. This happened last year with the iPhone 4S and with just about all of Apple's announcements. The market's biggest topic will be how to play the announcement. An investor must consider the possibility that the market has gotten smart; that Apple will rally upward following the announcement and if any other stocks will follow the same trend, and how should investors play it?
Following last year's iPhone 4S announcement, the stock traded lower, but then within a week it was trading at all-time highs. Earlier this week, the stock reached an all-time high but has since fallen nearly 3% leading into the much anticipated event, which is expected to result in the largest product launch ever. Therefore, with a modest valuation, it makes sense that Apple would be trading at all-time highs, but if Apple stays true to its "trend" then it should trade lower following the announcement. However, because the market is smart, and adapts very quickly, I suspect that shares of Apple will rally after the announcement and that its stock has already priced in the typical "sell on the news" crash following a product release. Of course this is just a hunch, it cannot be proven, but it does appear as though the market sold in anticipation of "sell the news" and that now it could be presenting a great opportunity.
Let's say that Apple shares fall after the announcement by $10. At this point, the stock is already $23 off its high, which adds to my belief that the sell-off is already priced into the stock. If it falls it would be significantly undervalued considering the massive sales that will take place in the weeks that follow. Therefore, with a big boost in sales following today's presentation, and the fact that the stock is already oversold, it seems to me that the stock would trade higher, but if not, then its dip won't last long. We already know that Apple has sold off in the past following big product announcements, but we also know that the announcement of the iPhone 5, and possibly an iPad mini, is a great event that will lead to large sales and excitement among investors.
When it's all said and done, does it really matter what happens to Apple following the announcement? I believe it will rally, but even if the stock falls analysts are still projecting incredible sales that will lead its stock trading higher. Some have suggested sales in excess of 10 million units in the first three weeks, some analysts suggest even higher sales and some believe that it could have a sizable impact on GDP. Therefore, indicating to investors that the stock will trade higher in the immediate future, you have to wonder if the risk of not buying in fear of a slight drop is worth losing the potential for much larger gains. As a result, I believe that it doesn't really matter how the stock performs after the announcement, because it has a history of hitting new highs in the weeks that follow a product launch, and AAPL is far from its highs which means significantly more upside than downside, regardless of the immediate performance.
There is in fact other ways to play the product announcements of Apple, and that is buying stock in the companies that benefit from the iPhone. The most popular choices have been Broadcom (BRCM), Cirrus Logic (CRUS), and OmniVision (OVTI) which all rallied following the announcement of the iPhone 4S, with OVTI and CRUS gaining over 30% in the two weeks that followed. Most definitely there will be many who attempt to play these companies once more and it's possible that these selections could be good short-term plays on the news.
Rather than playing companies such as OVTI or CRUS I believe there are two other investments which could prove significant gains in the months that follow the announcement of the iPhone 5. The first is Zagg (ZAGG), and before you jump to the bottom of the page with negative comments keep in mind that ZAGG's performance is directly tied to the iPhone and that much of its strategy surrounds Apple products. The company has endured some tough times as of late and has paid for it with a loss in value, with its CEO resigning and also selling his shares just before the announcement. I think its recent weakness makes the stock an intriguing play, as retailers such as Best Buy (BBY) have pushed Zagg products, in the past on consumers who buy Apple products. I know personally because I always buy a ZAGG product when I purchase an Apple product, as do many others. Therefore, despite questions surrounding the company it may be a stock to watch following the release of the iPhone 5, as consumers may want to protect and make their favorite toy more unique.
The second company that I find most interesting is Sprint (S). Sprint's success and failures are directly tied to Apple. Back before last year, Sprint could not compete with AT&T (T) or Verizon (VZ) because it did not have the competitive edge. But with unlimited data, combined with the iPhone, Sprint's been brought back from the dead, and has announced very impressive subscriber growth since last year. The iPhone 5 could provide a significant boost to investor optimism and Sprint could be the stock that benefits most from the launch. But keep in mind, due to the price of the iPhone, for the telecom companies, it will initially affect the earnings of Sprint, while allowing for very large gains in revenue. Last year we saw this for all three major telecom companies, so although Apple helps in growing Sprint larger it also puts some immediate financial strains on the company.
Over the next week investors are going to play stocks that they feel are going to perform well as a result of the iPhone 5 sales. There are many ways to play the release but none better than Apple itself. Apple has a tendency of beating even the most bullish of expectations during a product launch and with this launch being so highly anticipated it should result in very large gains as consumers have waited for months to purchase this product. After the announcement there is a really good chance that AAPL trends considerably higher, especially if the market has already priced in the profit taking from the announcement and has tried to beat it by selling AAPL during the last two days, which as a result presents significant upside to investors who use the opportunity to buy shares cheap and aren't concerned with its one-day trend.