Despite being one of the most prominent companies in the S&P500, Apple (AAPL 0.38%) 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
- Margins holding
- International expansion into China and further penetration of established markets
- Lower expectations
- 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.
