Morning Word 1/24/13: $AAPL Investor’s New Normal

by Dan January 24, 2013 8:55 am • Commentary

Morning Word 1/24/13: Last night’s Q1 results and forward guidance from AAPL was far from what bulls on the stock had hoped for.  While the company tried to simplify how they guide the street, rather than issuing guidance that was “conservative”, vs now issuing guidance “that they expect to report within”.  Well that clears up the 10 years of sandbagging their outlook, encouraging overzealous Wall Street analysts to dream up aggressive estimates.

Investors went into last night’s print with the hope that management would dispel much of the negative sentiment surrounding demand, production issues, innovation & visibility and frankly got very little that would help turn the tide, regardless of the poor results.  Where the stock settles, who knows, but as we have said in this space on numerous occasions, just as stocks have the tendency to overshoot on the upside, they can and will do so on the downside.

Yesterday, in the Word (below) I wrote, “The new normal for AAPL investors will be looking forward to geographic expansion and dividend increases and share-buybacks, rather than counting how many people are lined up and for how long outside Apple stores for the next iPhone or iPad.”  To state the obvious, this is not the company that many investors had bought into over the last few years, exhibiting eye-popping growth on almost every metric with the stock going parabolic as the company grew earnings over 75% a year for the last 3 years.  Given AAPL’s massive deceleration, and new “credible” eps guidance, analysts have now begun to take whacks at 2013, with consensus now calling for only single digit earnings growth, which if this happens will be the first time since 2003.

SO for those un-involved in the stock (I am not long, but own a weekly Call Butterfly), what do you pay for a company that is growing earnings at modest pace, is expected to have close to $190 billion in sales this year, has a dividend yield of 2.25%, has $137 billion in cash on their balance sheet and no debt, and margins, albeit declining, 2x that of their next competitor?  Well the stock was cheap at $700 by most metrics and continues to be cheap down here, trading well below a market multiple.  Unfortunately for investors looking for product catalysts in the near future, they will have to settle for speculation into next month’s shareholder meeting how the rate of increase of their dividend and if and when they will institute a meaningful share buyback.  IN the future their product launches may take on the relevance of FB’s graph search thingy last week, the bloom is off the rose so to speak, the stock is now a show me story.

While I am not happy that my Butterfly will be rendered worthless by today’s move, I am happy about how we traded, taking half off yesterday for a double thus virtually having no risk into the earnings event.  I am tempted to play for a bounce if I feel the stock has reached an all out capitulation  but at this point that probably looks below $450.


Morning Word 1/23/13:   Ok people, we are gonna get a little AAPL’tastic today, but we promise we will get to some other stocks as soon as we get tonight’s Q1 earnings out of the way.  We have spent a good bit of time on the stock over the last week and half, starting with our webinar last Monday (here), my post on Friday detailing the Jan25th 525/550/575 Call Butterfly that I bought to play for a bounce post the print (here), and finally this morning’s official preview (here).

I guess I want to make one final point about how I think the stock could trade following tonight’s results, while I am playing for a pop from a trading perspective, I am not by any means expecting a sustained rally.   The new normal for AAPL investors will be looking forward to geographic expansion and dividend increases and share-buybacks, rather than counting how many people are lined up and for how long outside Apple stores for the next iPhone or iPad.  Many readers think I am wrong on the idea that the company’s days of dramatically outperforming on the innovation front are over, but only time will tell.  

So why am I playing for a bounce following the results?  Very simply, the sentiment got too negative too fast, and expectations for Q1 and Q2 (showing first earnings declines since 2003) may be achievable and possibly even low.  If AAPL can beat and dispel most of the rumors about either iPhone demand or production issues in the qtr, and guide in-line or a tad higher than the street, then I think the stock rallies back towards resistance at $550, but runs into problems btwn $550 and $575.

Looking back at the price action in an out of the company’s 2012 fiscal Q2 last April could possibly be instructive.  From the start of the year to early April AAPL had gone on a parabolic run, up almost 60%, and becoming the largest market cap company in the world.  Just near the highs though, rumors of weak iPhone demand in the qtr started to hit the stock and it sold off almost 14% from the all time high heading into the print.   AAPL crushed the number, and the stock had its largest one day rally following an earnings event since 2006 (up 8.87% circled on chart below).

[caption id="attachment_21848" align="aligncenter" width="490"]AAPL chart Jan 2012 to June 20123 from Bloomberg AAPL chart Jan 2012 to June 20123 from Bloomberg[/caption]

The rub is obviously the stock spent the next month and a half declining nearly 15% to make a new 4 month low.   If I am right and the stock does bounce, I would fully expect those who have been selling en-masse for months to use the strength to continue to sell.

While I am playing for a bounce, I am fully aware that playing the earnings amounts to a coin flip and this is very likely to be somewhat of a binary event.  The implied move at ~7% maybe a bit rich, but I could easily see the stock up or down 5%, and to be fair your guess as is good as mine on direction.

Returning readers of the site know that we have a process, where we weigh nearly a dozen qualitative and quantitative inputs that assist us in arriving at a view on a stock into an event. But when it comes down to the moment of truth, and we are ready to trade, sentiment usually plays a large roll in how we chose to express that view.  While I am not willing to BUY AAPL stock here, I am willing to play for a very near term sentiment reversal with defined risk, with an options structure that offers a unique risk reward profile. I think I have found that, and while the BEAR in me would love to try to squeeze out what could be the last 30-50 bucks on a sell off on a miss, I think the path of least resistance could be up, but maybe not for long.