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Should Investors Take Profits in Apple Stock Ahead of AAPL’s Earnings?

Despite its robust long-term potential, it might be time to take profits in AAPL stock prior to its earnings

Apple (NASDAQ:AAPL) is likely to continue to be one of the most-watched and volatile stocks this month. Year-to-date, AAPL stock is up 26%.

apple stock aapl stock
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Although I  firmly believe that Apple stock will perform well  in the long-term , on a short-term basis, it may be a good idea to take profits in Apple stock before the company’s earnings call on Apr. 30.  On that day, AAPL will report its results for its fiscal second quarter that ended in March 2019.

Over the long haul, robust fundamental numbers are what make a company worth investing in. Yet over the short-term, investor sentiment and price momentum affect the stock price of a company as closely watched as Apple stock is. As a result, you may want to consider waiting to buy Apple stock until after it has reported its results. Here  are the reasons for my belief:

The Short-Term Risks Facing AAPL Stock

Is the positive news already priced into Apple stock?: In addition to its required quarterly earnings releases, Apple usually holds three to four annual events. The most recent one took place on Mar. 25 when it introduced a range of products and services, such as Apple TV+, Apple News+, the newly revised Apple TV app, and a credit card in partnership with Goldman Sachs (NYSE:GS). Despite these potential sources of new revenue, following the event, Apple stock initially declined.

After this event which left investors unimpressed and did not provide much info on fundamental numbers, the company’s earnings report has become even more important. Investors might have already priced in positive results, as in the first week of April, Apple stock rallied, along with the rest of the stock market.

When AAPL reports its earnings at the end of April, investors will be looking closely at the company’s  fundamental numbers, including its total revenue and its iPhone revenue, which accounts for over half of its total revenue. AAPL’s year-over-year iPhone revenue declined 15% in Q1. Now Q2 numbers are likely to affect investors’ sentiment towards Apple stock and drive the share price for several weeks.

Wall Street will also analyze the revenue from Apple’s Services, which has grown over 50% in two years, making it the second-largest business behind the iPhone.

The owners of Apple stock who remain committed to AAPL realize the importance of its Services business, which includes the App Store, Apple Pay, iTunes, AppleCare and Apple Music, to the company’s bottom line in the near-term and the longer term.

These value-added services help consumers get more benefit and enjoyment from their Apple products. AAPL has been working hard to convince more of its customers to sign up for  its various services. That trend should continue. Driving more revenue and profit from Services will provide the next growth catalyst,  enabling Apple stock to rise. Therefore, if Services revenue comes in below expectations,  Apple stock could be pushed downwards.

Shorter-Term Technical Analysis: Despite the big selloff of Apple stock in the last quarter of 2018, AAPL stock has increased by almost 14% over the past 12 months.

I expect Apple stock to reach a 6-month high in April, followed by a 6-month low in late May or early June. Therefore, for the rest of April, I expect AAPL stock to trade in a range, between  $185 and $205.

On the upside, I expect resistance first at $197.5 and then at $202.5. And if Apple’s results are disappointing , Apple stock could easily go down to the low $170’s or even the high $150’s .

Apple’s momentum indicators suggest that Apple stock is currently in overbought territory. Although these indicators can stay overbought for quite a long time, I believe short-term-profit-taking is around the corner, and I expect the nearer-term trading in Apple stock to be choppy at best.

If you believe in the bull case for AAPL stock, and if you do not currently hold any shares, you might consider waiting for a better time to go long, such as around the mid-$180’s.

If you have been able to ride the impressive rally since early January, then you may want to take some of your profits. You may consider placing a stop loss at 3%-5% below the current price of Apple stock, to protect your profits to date.

If you are an experienced investor in the options market, you may also consider protecting your portfolio with a covered call. For example, you could consider buying 100 shares of AAPL at $197 and at the same time selling an AAPL May 17 $195 call option. This approach offers downside protection in case of volatility and a decline in AAPL stock. It also enables investors to participate in a potential up move between now and the expiry of the option.

The Long-term Strength of Apple Stock

Leadership Position: With a market cap of $942 million, Apple stock has the second highest weighting in the S&P 500, after Microsoft (NASDAQ:MSFT).

In other words, since AAPL has such a high market cap, it would be safe to assume that Apple stock is unlikely to get held down by the market for too long, as Wall Street tends to regard large- market-cap companies as good, stable long-term investments.

Along with the leadership position comes the Apple brand, the most valuable in the world, for which consumers are happy to pay a premium.  Strong brands increase companies’ ability to enter new markets and raise prices. Apple’s strong  brand  will continue to attract current and new customers to its products and services.

Finally, Apple’s trailing-price-earnings ratio stands at 16.5, a number that is not high when compared to several other tech giants. And shareholders also enjoy dividends with a current yield of 1.5%. Given these strong fundamentals, Apple stock will be able to recover from downturns rather quickly.

Apple’s Cash: The company also has an incredible amount of cash on hand, almost $255 billion, most of which is overseas. However, Wall Street now wants AAPL to show that it still has the vision and the desire to allocate this cash towards a profitable goal that will generate further cash flow. And I believe Apple’s management will please shareholders and announce a way to put that cash to use that will drive the company forward in the next decade. Among the rumors are that AAPL  will acquire Netflix (NASDAQ:NFLX) or  Epic Systems, a private company that specializes in healthcare software.

Resolution to the U.S.-China trade wars: Almost 20% of Apple’s revenues come from sales in China. Thus the trade dispute has negatively affected the price of Apple stock .

However, at this point any China-related adverse news is already baked into the stock price. Furthermore, if the U.S.-China trade dispute is about to be resolved, then AAPL stock will likely rapidly gain  5%-8%.

The Bottom Line on AAPL Stock

The outlook of Apple stock is strong, and the company has a clean balance sheet; therefore it remains a long-term play on growth. However, now that earnings season is upon us, the daily performance of  Apple stock will depend on macroeconomic news as well as the action of big day traders until the company reports its results on Apr. 30. Thus, Apple stock might be weak in the near-term.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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