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

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.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2014, at 5:58 PM, henrystar wrote:

    AAPL is a rocket to the Moon.

  • Report this Comment On May 31, 2014, at 6:08 PM, applefan1 wrote:

    Well, i just read that Icahn is under investigation for insider trading, since he has a LOT of APPL stock in his portfolio, if there is something to these allegations, wouldn't he have to sell off his portfolio? What would that do to APPL?

    I am CAUTIOUS as HELL right now.

    I've been a long time fan of Apple and their products, but since they bought Beats and this latest news about Icahn, this scares me. I don't think Apple should have bought Beats for a variety of reasons.

    1. Their headphones aren't that great even at the price that they are. they make a profit, but I wouldn't buy them, there are better quality products for similar or a little more expensive for those that don't mind doing a little research.

    2. Beats Music isn't what I consider a ground breaking app. I tired it. I'll stick to buying CDs, high res digital downloads from places like HD Tracks for now on. I like quality and don't mind paying a little more for it. Ri

    3. I don't have confidence in the subscription service if headed up by Iovine, Dre or Cue because neither of them have PROVEN track record in the subscription service market. In fact, no one really has. Not even Spotify and THEY still haven't proven they can sustain at least a 5% to 10% Net Profit to Gross Revenue.

    4. I don't like Dre due to the culture he represents. I don't believe for one second that the disgusting rap culture sends any positive messages and I don't think he really represents Apple Culture and he (IMO) is just a celebrity that the musically ignorant kids look up to, but I don't think he has anything of substance to offer Apple. He's a rap producer, not a technologist.

    5.I'm just concerned that there have been 3 long time Apple employees say they are "retiring" and I think it's a little suspicious at this time because it just looks like a domino effect during the same time that Dre released the video and the Beats buyout saga. To me, Cook messed up and its just a long series of damage control. Too bad, I had higher hopes for Cook, but I guess his own music ignorance was spearheaded by greed for iTunes success and social responsibility went right out the window. For shame. Sad day.

    Either way, I'm looking forward to the new line up of products Apple has, but again, I'm not 100% confident in whether they are really going to see a huge increase in year to year growth rate. Time will tell. I would just heed caution to the wind on the icahn issue, that's SCARY to think about what will happen to the stock price.

  • Report this Comment On May 31, 2014, at 9:32 PM, foinatorol wrote:

    lol applicant short?

  • Report this Comment On May 31, 2014, at 10:51 PM, BellevueGuy wrote:

    The split and buybacks will help to stabilize the stock price. In the past, there was to much volatility due to institutional moves.

    I think holding Apple stock for the long term is a grand slam. The personnel changes are good, as Apple needs fresh blood, and a fresh perspective is always needed in any corporation. I'm surprised that Cue is still around after 24 years! You sometimes have to bring in new people to get a fresh view of the terrain--everybody is expendable, and nobody is an expert on anything. If you believe otherwise, you are foolish.

    I don't get the Dr. Dre thing either, but sometimes you have to buy the whole package. I'm not sure Dre will hang around very long--he's the first rapper billionaire--he'll take his money and run some day.

  • Report this Comment On June 01, 2014, at 3:23 AM, yogaman101a wrote:

    applefan1: (odd comments for such a username, but anyway)

    Icahn owns much less than AAPL's buy-back program has authorized, and even less than a couple trading days worth of shares. Squeaky though Carl Icahn may be, at AAPL, he's still a pipsqueak.

    More good news: Forbes reports that institutions, which together own 62% of AAPL shares (545 million) are actually under-invested in AAPL relative to the S&P. Currently AAPL shares represent 2% of institutions' holdings vs. 3.2% of the S&P. If institutions move AAPL holdings toward the historical mean, they'll need 60% more shares, about 33 days at the current average daily volume, totaling 98% of all shares outstanding if AAPL's buy-backs stopped today.

    That's not realistic, but notice that the volume has been increasing lately. It certainly seems that larger investors are buying.

    Please try not to fixate on Dr Dre. He's half or less of Beats. Beats total cost was a fraction of Apple's quarterly profits. It's can't turn out as badly as Google buying Motorola.

    So relax. Count your dividends (assuming you're long the stock as a fan would be), watch the stock price rise as the institutions rush back in, and sit back for the "best product pipeline in 25 years".

    If your improving financial health doesn't calm your mental state, maybe go have one less cup of coffee.

    Cheers,

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