One of my favorite trading techniques is to buy a volatile stock a few days before the company’s earnings report, then sell it before that company actually reports. Traders generally like to speculate that a specific stock will beat analysts estimates, and that can push prices higher. Still, no one – not even professional analysts – know exactly how a company is going to perform in a given quarter.
Apple, Inc. (NASDAQ:AAPL) is due to report their earnings after the stock market close on Tuesday July 20, 2010, and they’re one of the exceptions to the “I-don’t-know-if-they’re-going-to-beat-estimates” rule. Apple always seems to beat estimates. In fact, they’ve done it for the past 29 quarters in a row since April of 2003! The release of the iPhone 4 and ongoing iPad sales will definitely help bolster their earnings, too. All’s rosy, right?
Not really, Apple’s stock is down 6 percent over the past month. There’s a dark cloud hanging over the company’s head with the release of a Consumer Reports blog post that cites an antennae “design flaw” in the phone. The magazine recommends consumers avoid the new iPhone due to reception problems when users cover the devices lower left corner with their hand.
Now, there are grumblings of a recall that could cost the company $1.5 billion. I’m not so sure it would cost Apple that much; particularly since a cover for the phone eliminates the reception problem, but it’s clear that the markets have been punishing the company.
In effect, I believe they’re pricing in the cost of a recall. That means that when the news hits, the stock probably won’t drop as far as a casual investor might believe. In fact, I argue that the stock will shoot up when Apple finally decides to answer for themselves — particularly if they offer a low-cost solution to the problem BEFORE they release their earnings report next week. If past performance is any indication of future results (haha), Apple WILL beat analyst earnings this quarter especially since their phone came out on June 24 and some sales should be reflected in the upcoming report. That’ll be good news for investors who buy this dip.
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