Apple Inc.: A Case Study On the Importance of Expectations

As most of you have probably heard by now, tech mogul Apple Inc. (AAPL) reported third-quarter earnings that fell short of analysts’ estimates, sending the shares lower as a result. But, as SmartMoney columnist Jack Hough notes, “Normally, a 54% profit jump would be impressive even for a promising start-up in a booming economy.” Furthermore, the author points out that although AAPL’s iPhone sales missed Wall Street’s mark, they rose a year-over-year 21% — pointing to healthy demand, and underscoring the Schaeffer’s philosophy that sentiment should never be overlooked.

And, now more than ever, AAPL investors are also learning why too-high expectations can come back to haunt a stock, despite arguably solid fundamentals and a longer-term uptrend. In fact, speaking like a true contrarian, Hough warns prospective AAPL buyers not to rush in anytime soon. “Analysts are sure to revisit their remaining forecasts in coming weeks and a few might even issue downgrades,” he cautions, which could send the security even lower.

Contrarian Takeaway:

If there ever were a poster child for a Wall Street darling, AAPL just might be it. According to Zacks, a whopping 35 analysts consider the stock a “strong buy,” with another three doling out “buy” ratings. For comparison, just three brokerage firms rate the equity a “hold,” and not one considers it a “sell” or worse. Should the analyst crowd downwardly revise their opinions in the wake of AAPL’s earnings miss, a bullish exodus could exacerbate the stock’s slide.

Elsewhere on the Street, options traders have also upped the bullish ante on AAPL. The stock sports a 10-day call/put volume ratio of 2.23 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open more than two AAPL calls for every put during the past couple of weeks. What’s more, this ratio registers in the 95th annual percentile, implying that speculators have rarely initiated bullish bets over bearish at a faster clip during the past year.

Echoing that trend, the security’s Schaeffer’s put/call open interest ratio (SOIR) rests at 0.74, indicating that calls comfortably outnumber puts among options slated to expire within three months. Plus, this ratio stands just nine percentage points shy of a 52-week low, suggesting near-term options players are much more call-heavy than usual on AAPL. An unwinding of optimism in the options pits could also amplify the selling pressure on the equity.

Andrea Kramer (akramer@sir-inc.com)

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