Shorts Beware: Apple Is No Longer a "Sell the News" Candidate

Positive news hasn't always been positive for Apple shareholders. That changed in the last year.

May 31, 2014 at 2:00PM

Despite being one of the most prominent companies in the S&P500, Apple (NASDAQ:AAPL) has long been a company that trades off after a positive announcement. How many times have you heard a product announcement makes your IT antennae itch with anticipation, only to then see the bottom drop out of the stock price? However, Apple isn't the same company today that it was a year ago and there are several reasons we should expect shares of Apple to show more stability looking forward.

4 fundamental reasons for increased share price stability

  1. Margins holding
  2. International expansion into China and further penetration of established markets
  3. Lower expectations
  4. Use of the balance sheet to support the share price

Game-changing product introductions isn't on the list, and it doesn't need to be.

Shares are beginning to close the valuation gap with the market
Despite the widespread concern that margins would drop as competition heated up several quarters of proven stability is calming investors concerns.  Over the last week, shares of Apple are up 4.5% compared with the S&P's 1.8% rise, and while this may be partly due to hopes of new product announcements like the iPhone 6 or iWatch, it isn't reflected in valuation. Shares of Apple are trading only at a trailing price/earnings multiple of 15, compared with the S&P, which is trading at 18 times trailing earnings, according to The Wall Street Journal.  The important point is that a gap still exists but it is closing.

Expectations seem low for WWDC
Normally, one week before the annual World Wide Developer Conference, we are inundated with speculation about new products like watches, set-top boxes, motion-sensitive earbuds, etc. It seems like in years past, anything short of a talking cappuccino machine made the cut for headlines. Apple has grown up. Maybe it's a little more boring, but stability of cash flow is a good thing.

The lack of this boom-and-bust cycle makes me believe that even if WWDC announcements don't wow investors with innovative product announcements, the share price isn't set for a large retracement.

Is the dividend yield lower for Apple? Nope. Apple's yield is 2.1% compared to the S&P's 1.97%. Earnings growth? According to Factset, earnings growth for 490 of the 500 S&P companies amounted to a blended average of 2.1%, compared to 7.1% for Apple.

Since investors are being paid to hold rather than trade Apple shares, there is no longer a reason for this valuation gap to exist.  Additionally, shorts now have to worry about increased capital allocation to buybacks and dividends after earnings upside.  There is much greater risk in shorting the stock.

Then there's the stock split
The University of Chicago published a follow-on study titled "Long‐Run Common Stock Returns Following Stock Splits and Reverse Splits," which shows "that the market does not incorporate the full effect of the stock split announcement in the month of the announcement. The average 1- and 3- year abnormal returns after the announcement month are 7.05% and 11.87% respectively."

If this is correct, the full value of Apple's stock split announcement is not incorporated into the share price, and investors could receive a follow-on benefit after the split occurs.

Sentiment around Apple's share price is always difficult to handicap on a short-term basis, but many factors seem to be on the side of long-term investors. Absent any extremely negative news or a substantial price increase from the $625 level, don't expect a sell-the-news reaction to WWDC.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recent recruited a secret-development "dream team" to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

David Eller has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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