Attempting to time the market is a waste of time. There are just too many unknowns that can make a stock go up or down. That said, while there's no way to know whether Apple (AAPL -0.81%) stock will "pop" or sell-off after earnings are released on July 22, that doesn't mean it isn't a solid buy headed into the report.
Apple CEO Tim Cook speaking at last year's iPhone launch. Image source: Apple.
It's all about the risk/reward profile
Successful long-term buy-and-hold investors hold on to the fact that a stock's price, the majority of the time, will eventually follow business value. On that note, one of the best ways to invest in the stock market is to try to buy only sustainable and proven businesses that appear undervalued -- or at least reasonably priced.
An undervalued, sustainable, solid business means that there is little chance for things to go awry, and that the market could eventually begin to show greater appreciation for the underlying value of the business. In short, this scenario limits risk while providing upside potential, offering a good risk/reward profile.
Headed into Apple's third-quarter earnings report, the tech giant's stock seems to fit this description. Even though analysts predict Apple's earnings will grow at about 11.7% per year during the next five years, the stock trades at a conservative P/E ratio of just 15.9. And, as a proven leader in its respective markets, this is the sort of stock that could outperform expectations.
Here's another way to look at how cheap Apple stock is. Consider Apple's price-to-free cash flow ratio of just 13. Free cash flow is the metric that levels the playing field for different companies. It's what companies can use to build shareholder value through activities like repurchasing shares, paying out dividends, or saving for future capital expenditures.
AAPL Price to Free Cash Flow (TTM) data by YCharts.
While Google is still expected to grow its business at a faster rate than Apple, even slow-growing Intel boasts a meaningful premium to free cash flow compared to Apple. Further, there's no meaningful evidence that Apple's current levels of revenue, or its pricing power, are going to face any headwinds. In other words, Apple's current levels of free cash flow are likely sustainable over the long haul. And Apple's loaded pipeline of products for release in the near future should provide some near-term catalysts for Apple to meaningfully grow free cash flow per share in the next few years.
No wonder analysts are increasingly bullish on the stock. And putting icing on the cake, Morgan Stanley just dubbed Apple one of its fifteen "Vintage Values." This group of stocks, Morgan Stanley says (via Barron's), have a likelihood of realizing "superior risk-adjusted returns between now and July 2015."
The keyword here is risk-adjusted. Investors buying Apple stock today shouldn't expect to make a 50% return in one year. But with the stock's intrinsic value arguably around $120 per share, Apple stock does boast a sweet risk/reward profile.
I'd say investors are better off snapping up Apple shares before the earnings report, just in case shares "pop," and investors miss this buying opportunity. What if shares decline after earnings? Maybe consider boosting your position.
