After logging disappointing earnings on November 1st last year, Apple’s upcoming report should hypothetically look much better – even if it’s not all that great. Tim Cook already told investors that iPhone sales are slumping in China in a candid memo (that blamed everyone but himself), causing shares to plummet just a few weeks ago.
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And because of AAPL’s heavily-sold status, Morgan Stanley is telling investors it’s time to buy, even with earnings approaching on January 29th. Furthermore, they say it’s a good idea to hold AAPL shares through earnings.
Analyst Katy Huberty from the investment bank said in a note on Friday, “We believe the recent pullback is an attractive entry point given upcoming services launches and shares already pricing in extremely cautious iPhone replacement cycle and average selling price headwinds.”
Over the last three months alone, Apple stock has dropped over 30%, largely driven by a revenue guidance reduction of 8% back on January 2nd in Tim Cook’s letter to investors. He placed the blame squarely on China and President Trump’s tariffs, causing prices to plummet 15% on the day. It seemed like investors were angry about both Cook’s inability to take responsibility for the sales slump as well as the reduced iPhone estimates themselves.
Huberty remarked, “March quarter guidance will provide a base for forecasts during the remainder of the year… Apple likely needs to deliver a better than feared revenue outlook for shares to recover further in the very near-term.”
It’s not exactly a revelation that Apple needs to report “good numbers” in order for the stock to rise, but Huberty believes there’s reason to be optimistic after taking the pulse of the market:
“Based on investor conversations, we believe the stock could trade up on revenue and gross margin guidance range of $58 billion and 38 percent at the mid-point, respectively, while guidance meaningfully below these levels would fuel the bear case.”
And while that’s all great to hear, the fact remains that buying stock (or even worse, options) within a few days of earnings and actually holding it through earnings is an extremely risky proposition – even if you know investors are feeling good about the stock beforehand.
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Unless you’re privy to insider information (which by the way, is illegal), it’s extremely hard to predict how investors will interpret an earnings report or company guidance. What might be exciting to you and me could be seen as a negative by thousands of other traders, and that alone makes buying stock (or options) near earnings practically gambling.
If you’re going to have any success trading, it’s far better to use the movement after earnings to determine which way a stock is headed and what kind of strategy you’re going to employ.
And while it’s true that Morgan Stanley’s advice to buy Apple has a chance to make you some money, listening to them would be like buying a lottery ticket because the convenience store owner had a “good feeling” about the numbers.
Huberty believes that their “investor conversations” are indicating that an Apple surge is coming, but as we learned in the last presidential election, polling data is not always accurate. Do you want to bet your portfolio on that?
I certainly wouldn’t.