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How to Trade Apple Stock Before the July 22 Earnings Report

NEW YORK (TheStreet) -- It was nice to start the week with shares of Apple (AAPL - Get Report) up $1.23. That's another $1.23 of separation from our momentum sell point at $94.50, which means our overweight Economic Timing portfolio allocation is justified. (Shares were gaining more ground early in Tuesday's session, up 6 cents at $96.49.

It seems there are one or two analysts every day who upgrade their price target on the stock to $110. Monday it was Morgan Stanley and Barclays.

The more the merrier. With Wall Street fixated on $110, perception is destined to become reality as Apple's iPhone 6 rolls out this fall.

Why Apple Shares Remain a Bargain Despite Reaching New Highs

Why Apple Has Become a Bellwether for 2014

The important question to ask at this juncture is whether we should sell ahead of the July 22 earnings report. The most relevant historical data to use to answer the question are the four recent earnings reports since Apple began its rally in April 2013. Here's the analysis:

  1. On July 24, 2013 Apple shares rose $3 to $61.44 and then rose another $10 by Aug. 19.
  2. On Oct. 29, 2013 Apple shares dropped $1.85 to $72.54 and recovered to $74 by Nov. 14.
  3. On Jan. 28, 2014 Apple shares dropped $6.20 to $71.53 and recovered to $77 by Feb. 13.
  4. On April 24, 2014 Apple shares rose $6.10 to $80.66 and then rose another $10 by May 29.

Of these previous four earnings reports AAPL recovered or surpassed its pre-earnings high within three weeks of the event. In two of the four events, Apple generated gains of more than $10 one month after the earnings report.

The risk/reward calculation presents a favorable scenario. What we're noticing is that the dividend payout that arrives approximately two weeks after the report has had a major impact on Apple's price action in the aftermath of earnings.

Tim Cook's decision to boost the dividend has created demand for shares where there used to be a postearnings void. For this particular July 22, 2014 report, we are especially bullish because of the August dividend, the September iPhone 6 launch and the October iWatch new product category.

Therefore, we will be trading this particular earnings report differently. We won't sell before the earnings report as we have done in the past unless the stock drops below our momentum point.

We're treating this report as a noncatalyst knowing it will quickly get swallowed up by much larger catalysts.

At the time of publication, Schwarz was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Now let's look at TheStreet Ratings' take on this stock.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.4%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.42%.

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