Apple's 6-Month Sand Trap

Sell-side analysts seem to be preparing people for half a year without catalysts. How should you be positioned?

Apr 4, 2014 at 5:00PM

Apple(NASDAQ:AAPL) will report earnings on April 23 after the market close. Analysts are cautious ahead of the report, apparently universally bullish on the tech giant over the long term but mixed short term. Even China Mobile's (NYSE:CHL) iPhone sales were a bit light. Is this the time to look for buying opportunities, sell covered calls, or spend more time on the golf course?

iPhone 6 likely pushed out
Right now there seems to be a shortage of catalysts to bring new investors into the stock, and people are becoming concerned about numbers and guidance. If you believe the recent press, the iPhone 6 is most likely going to launch in September, leaving us with two quarters to wait before revenue will be recognized. This leaves us in a catalyst drought for the March and June quarters.

Sell side is hedging
Sell-side analysts are responding to this issue, but there have been no bold moves. Over the last week, several analysts have published reports, trimmed estimates, or cautioned that the verbal guidance on the earnings call might not live up to expectations. Consider the following analyst comments:

"We are concerned that June-qtr guide could be below expectations as we see an air pocket from a demand perspective."
-- Amit Daryanani from RBC 

"We struggle to see how Apple's BOM on the iPhone 6 will not be materially higher ... pressure iPhone gross margins by ~400-500 bp, negatively impacting Apple's EPS by 10%"
-- Toni Sacconaghi from Bernstein Research.

China Mobile was a bit light
China Mobile said it sold 1.3 million 4G handsets in February and most of them were iPhones. The number was below what people were expecting. One analyst, Credit Suisse's Kulbinder Garcha, commented that, "The lackluster launch of the iPhone at China Mobile is yet another reminder that the high-end (>$400 factory ASP) market has matured." Garcha is an outlier and one of the few bears on Apple, with a price target of $500.

Small headlines won't move numbers
Apple has had positive, albeit smaller, catalysts including releasing the iPad air for TD-LTE, which will be compatible with China Mobile's TD-SCDMA as well. The big announcements wont come until later in the year, though. Apple is a consumer-driven company that sees seasonal demand around the back-to-school and the holiday shopping seasons. If its major product releases are also expected at the time, volatility could develop between now and then. Six months can be a long time to wait for something to happen.

Stay the course or sell calls?
If it fits your investment philosophy, you could sit back and wait for buying opportunities as short-term traders beat each other up. Long-term investors can take comfort in the 2.3% dividend. If a person wanted to fine tune returns, writing an out of the money-covered call could be suitable. As I'm writing this, July calls with a $575 strike are bid at $11 which would offer another 2% to your return. However, if the sell-side analysts are right, the best place for Apple investors over the next  six months might just be on the golf course.

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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