Can Apple's gains last?

Investors were thanking their lucky stars on Thursday as Apple (AAPL) jumped 8.2 percent Thursday after a trifecta of good news the night before: Better-than-expected earnings, a seven-for-one stock split and a $30 billion expansion of the company's stock buyback program.

Given the selling pressure big tech stocks have been under since early March, with the Nasdaq down more than 5 percent from its early March highs, the sector was starved for good news. And boy, did it get it.

Apple's second-quarter earnings of $11.6 billion was well above the $10.2 billion analysts had expected. Revenues of $45.6 billion also were well ahead of the $43.7 billion street estimate. Gross margins expanded to 39.3 percent, versus 37.5 percent a year ago And iPhone shipments swelled to 43.7 million, from 37.4 million last year, well above what analysts had forecast.

Despite this cavalcade of good news, however, some skepticism is warranted.

For one, the overall vibe around Apple -- which is still trying to recapture the magic lost from the death of former CEO and co-founder Steve Jobs -- is of a company focused more on financial engineering than on technological innovation. We haven't seen any major new product launches under the new management team.

Instead, the company is appeasing growth-hungry shareholders through stock buybacks funded by new debt (which started in early 2013 and essentially top-ticked the rise in corporate bonds at the time). We're not seeing new product categories, but rather incremental evolution of existing products: A plastic, colorful iPhone and a smaller, less expensive iPad. And competition is becoming fierce: Samsung is leading the big-screen smartphone movement and got the drop on the smartwatch buzz, while Amazon (AMZN) is reportedly moving forward with the launch of a smartphone with a glasses-free 3D display.

Never mind that iPad shipments during the quarter were shockingly weak, down to 16.4 million, from 19.5 million in the year-ago period, and well below the 21 million analysts were expecting. Or that Apple is burning through its cash reserves for the first time since the financial crisis. Or that the company is relying heavily on Chinese sales to drive growth, a market that remains very price-sensitive and could threaten margins. Or that it's rolling up on a number of major product launches with an uncertain outlook. Indeed, there are reports that the launch of the larger 5.5 inch iPhone 6 will be delayed until 2015 due to battery issues.

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History also suggests the enthusiasm for Apple shares will prove short-lived. The company has announced three other stock splits over the last 30 years (April 1987, April 2000 and February 2005). In the three months that followed each of the splits, the stock was up 14.5 percent (but then collapsed), down 9 percent and down -14.4 percent, respectively.

As noted by the team at SentimenTrader, Apple also gapped up more than 5 percent with the Standard & Poor's 500 within 1 percent of a new 52-week high. Two weeks later, the S&P 500 was up only three out of nine prior times this has happened before, with an average return of -1.3 percent. The negative bias continued for three months afterwards.

Today, I recommended my Edge Pro clients respond to the move by buying put option positions -- which profit when Apple's share price drops -- in anticipation of a pullback.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.