Jacob Steinberg's  Instablog

Jacob Steinberg
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I mainly focus on two sectors: technology and auto industry. I am long only and I like to take a conservative approach where I sell covered calls on the shares I hold in order to reduce my risks. Some of the stocks I follow closest are Nokia, Microsoft, Ford and Apple. I believe that being able... More
  • Attempting To Time Apple Will Result In Profit Loss; Just Buy And Hold It 0 comments
    Apr 26, 2012 2:27 PM | about stocks: AAPL

    Many times, investors try to time the market in order to maximize their returns. Usually market-timers are short term investors who hope to get greater returns by focusing on cumulative returns over time. They invest in days when they think the market and the stock price will be up, and they sell their holdings when they feel like the stock price will go down. Many of these investors use earnings periods as good times to invest. Would this work for Apple (NASDAQ:AAPL)? We will see.

    In the last 5 years, Apple beat earnings estimates more than 95% of the time. This leads many short-term investors to play with Apple stocks during earnings period. Their plan is to buy the stock prior to earnings, hold it for a couple weeks and sell it for profits. On paper, this sounds like a great plan but it doesn't always work in reality. This is due to fact that Apple's stock price doesn't always reflect the earnings report. Many times, the stock price may remain flat or even go down after a great earnings report. Then this idea led some investors to switch their strategy. This time, these investors would buy Apple stocks 2 weeks before the earnings report, hold it and sell it on the day of earnings. This strategy was designed to take advantage of anticipation of earnings rather than earnings themselves.

    In order to test which strategy would work best, I looked at the daily performance data of Apple stocks. I grouped days into 3 categories: (1) pre-earnings, (2) post-earnings and (3) outside of earnings period. Pre-earnings would cover the 10 trading days prior to earnings report in each quarter, whereas post-earnings would cover the 10 trading periods after the earnings report. Any other day belongs in the third category. In a given year, there are 40 days of pre-earnings period, 40 days of post-earnings period and 164 days of trading outside of earnings periods.

    The results were interesting. On average, each pre-earnings period day results in a gain of 0.19%, whereas each post-earnings period day results in a gain of 0.33% for Apple. Each day outside of an earnings period resulted in an average gain of 0.11%. Given the number of days in each period, pre-earnings period would result in an annual gain of 7.52%, post-earnings period would result in an annual gain of 13.24% and the days outside of an earnings period would result in an annual gain of 17.98%. The total annual return for Apple is 38.75% in the last 5 years. What this means is, those that invest in Apple only during earnings season will see some profits; however those that buy and hold Apple will profit more than double as much as those that invest in Apple only during earnings periods. It is nearly impossible to time Apple as there is not a clear pattern as to when the stock will result in best returns outside of earnings periods. Also, keep in mind that there are higher taxes and commissions associated with short term trading.

    A Word on Valuation

    Apple continues to have a great valuation. The company's forward P/E ratio falls below 10 when its cash holdings are included in the calculations. Apple's tremendous growth and low P/E ratio puts it in a unique spot where the company is an aggressive growth stock and value stock at the same time. There are many articles in Seeking Alpha arguing this point, and this article was written specifically in favor of using the buy and hold strategy for Apple, so I will not talk much about this.

    In conclusion, those wanting to invest in Apple should just buy the stock and hold it for as long as they can instead of trying to time it, as the latter method is not an effective way to maximize profits for Apple.

    Disclosure: I am long AAPL.

    Stocks: AAPL
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