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If you have been investing for any length of time, you have probably heard the saying: buy on rumor and sell on fact. This old saying basically means that the price of a stock will tend to run up prior to a quarterly announcement and then drop immediately afterward. This drop can be gradual or fairly drastic. In the best of cases, the stock will actually increase after the “facts” are widely known.

Earlier this week, Apple Inc. [stckqut]AAPL[/stckqut] announced their revenue for the latest quarter. By most accounts it was a great quarter having surpassed their revenue attainment for any quarter since the company’s founding. However, the stock dropped immediately on the day after the announcement! This is because the analysts that follow Apple thought that the company would do better on some of its products, than it actually did. The analysts were slightly incorrect in their predictions and therefore the stock dropped several percentage points after what many people would think was a great quarter.

This is a perfect example of buying on the rumor of great revenue in all products and selling after the facts of the revenue are well know. It is quite likely that Apple’s stock will cover this short-term loss but the change in direction of the price could have hurt your portfolio.  Also, this is just one recent example and other companies have seen their stock price drop even farther on good news that is not good enough.

So how do you protect yourself from these sudden drops?

  1. You should know the date of the quarterly updates for your major holdings. If you see the stock moving up immediately before the announcement, you may want to take some of your earnings off the table and lock in your profits. You can always jump back into the stock if the price continues to move up.
  2. You should setup your account to automatically get you out of a stock if it has a major price move. This should be standard practice for all of your holdings as it will protect you in the event that news breaks that adversely affects your holding or the market in general. Your broker should have a way of allowing you to do a conditional trade. A conditional trade should be set up like this: Sell 100 shares of AAPL as a market order if the price of AAPL drops over 7% in a single day. This order is different than a trailing loss order as it is only looking for a rapid drop in a single day rather than just a gradual decline over the course of time. You could have a trailing loss order of 10% but the conditional order will get you out faster if the stock is moving very rapidly due to bad news.
  3. If you are watching the quarterly announcement of your holding, you can easily check what the after hours trading is doing based on the news. If you see the stock has dropped, then you can let your conditional order save you. If you think the reaction is incorrect and you want to weather the short-term loss, you can log into your account in the evening, cancel your conditional order, and then replace the conditional order at about noon the following day after the market has stabilized. Most bad news will take place in the first hour of trading if it is just going to be a quick correction. If the price is still rapidly dropping at noon then you may want to exit the stock as well, as the news is probably worse than you thought.

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Company name Apple Inc.
Stock ticker AAPL
Live stock price [stckqut]AAPL[/stckqut]
P/E compared to competitors Good
MANAGEMENT EXECUTION
Employee productivity Good
Sales growth Good
EPS growth Good
P/E growth Poor
EBIT growth Good
ANALYSIS
Confident Investor Rating Good
Target stock price (TWCA growth scenario) $379.3
Target stock price (averages with growth) $353.07
Target stock price (averages with no growth) $350.95
Target stock price (manual assumptions) $336.77

Confident Investor comments: At this price and at this time, I think that a Confident Investor can confidently invest in this stock.

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If you sit on Twitter long enough (especially Stocktwits) you will see a message like this: “I think XXXX company is great because their new widget is awesome and it is going to shake up the industry.” So the question is out there, should you invest in the company based on this amazing new product?

Probably not!

  1. One cool product does not make a great company. It takes many products over a series of years to make a company that you can be confident will be a long-term hold. Great companies consistently offer good products to their customers and create ways to keep and attract customers over a long cycle.
  2. While there is some bounce on new good news, typically this is just a bounce. It doesn’t last. If you are a day-trader then you may want to take advantage of these “news bounces” but if you want to hold a security for some time, you need more than just a single new cool product.
  3. You are probably late.  Most companies have the majority of their stock held by institutional investors. If this new product was that significant then they have already factored this news into their holdings. Major investment firms do not wake up in the morning, read Engadget, and then decide to buy a company. If this new product was that significant then they were slowly accumulating the stock in advance of the introduction and they were doing it by listening to the company’s statements of direction in their annual meetings, quarterly calls, and analyst updates.
  4. You are swimming against the tide. As I pointed out in 3, most of the stock of many companies is with institutional investors. They aren’t going to buy the inflated price from a product bubble, they will wait until the excitement is over to continue to accumulate. That means the only people you are going to sell your stock to are the fools that also listened to the new product fervor and are late to the game (so they have made a 2nd mistake by being late).
  5. You may be wrong! How many great products have been introduced that simply didn’t live up to the hype? Even great companies will sometimes release a dud product.

Let me give you a great example.  Arguably, the iPhone from Apple is the most significant cell phone ever released to the market. It only operates on the AT&T [stckqut]ATT[/stckqut] network so a few weeks before the introduction of the iPhone in June of 2007, you could have surmised that AT&T stock was going to boom.  Didn’t happen, on May 31, 2007 the stock closed at $24.82. Yesterday, the stock closed at $26.26 – not even 10% growth. Yes, I know that AT&T put out some dividends in that time but those didn’t increase in size either – on April 27, 2007 AT&T gave out a dividend of $.412 and on April 28, 2010 they did a dividend of $.398 (all prices per Yahoo Finance).

On the flip side, Apple [stckqut]AAPL[/stckqut] had a significant rise in stock price but Apple makes a lot of great products and their customers love the company. Apple is a Good Company on my ranking scale, AT&T is not.

Market timing is fine for buying stocks but you should limit yourself to momentum indicators and overbought indicators on Good Companies (see the Watch List on the right side of this site). Don’t try to market time based on product introduction hype.

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I have reviewed Apple [stckqut]AAPL[/stckqut] on this site before.  I rank it as a Good Company that you should consider for your portfolio.

Currently, the Internet is buzzing with guessing about the number of iPad’s that were sold in the first day of orders. The best estimate that I see is about 120,000 units. While this is an impressive number of units, it DOES NOT mean you should buy or sell the stock of Apple!

You should only invest in companies that have a history of doing well. They need to be consistently listening to their customers, developing products that their customers want to pay for, and selling those products at a profit. The fact that Apple is a Good Company is indicative of this long trend. You should buy the stock because they consistently deliver – not because they came out with a cool product.

Disclaimer: Since I trade in and out of stocks depending on the activity of the market, I may or may not own Apple Computer at the time that you read this but since they are a Good Company, I am definitely considering being a stock holder. If you want to know more about my trading practices and how it relates to this site, please read my disclosure page.

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I picked this up over at iPhoneFreak. It is good to know that one of the major new products that Apple (one of our Good Companies) has a decent profit margin.

A recent report from BroadPoint AmTech analyst Brian Marshal suggests that Apple is going to be making more than $200 for every iPad they are able to sell. The range of profit appears to range from $208 on the $499 model and up to $446 on the $829 model.

“According to a bill of materials (BOM) analysis by Brian Marshall of BroadPoint AmTech, the cost of goods inside Apple’s 16GB Wi-Fi-only iPad totals $270.50. That figure includes a $10 line item dedicated to manufacturing, but doesn’t include another $20 set aside for under-warranty service costs. Adding the latter makes Marshall’s bottom-line total $290.50.”

Also interesting to note, but not surprising is that the display was the most expensive part on the list, coming in at $100. That however can be off-set by the lower price of the Apple A4 chip which was noted as being just $15. Other prices include the 16GB of memory and the aluminum casing both of which were $25 each.

This means the profit margin for the 16GB Wi-Fi only iPad is roughly 42.9%.

In terms of the 16GB Wi-Fi + 3G model, based on the same estimates that model is only costing Apple an extra $16 to make which means they will be making a higher profit on the +3G models. On the 16GB Wi-Fi + 3G model it was noted that the profit margin jumped up to 52%.

I caution you that just because the profit margin on this one product is good, it doesn’t mean the company will maintain as a good company to invest your money. The actions or inactions of its managers are the real drivers of solid performance.