Why Apple Inc. (AAPL) Earnings Outperformance is Far From Guaranteed

Wells Fargo thinks Apple Inc. (AAPL) will outperform into earnings -- but options traders aren't so sure

by Alex Eppstein

Published on Jul 19, 2016 at 11:03 AM

Apple Inc. (NASDAQ:AAPL) has underwhelmed on the charts, provoking skepticism from the options crowd. Nonetheless, with AAPL earnings one week from tonight, Wells Fargo waxed optimistic on the stock, offering up some reasons why it should outperform into the event -- just like these two Dow stocks. For example, Wells Fargo said expectations on AAPL remain low, mentioning guidance for the December quarter, specifically. In spite of this, the brokerage firm still reduced its valuation range to $115-$125 from $120-$130.

That said, even the bottom of that range represents 15% upside to AAPL's current perch at $100. It's also worth keeping in mind that this key triple-digit level has acted as resistance repeatedly in 2016, and now corresponds to the falling 120-day moving average, which rejected the shares as recently as last month. In other words, AAPL may be tangling with double-barreled technical resistance.

As alluded to, options traders have been wagering on a pullback for the tech stock. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AAPL's 50-day put/call volume ratio of 0.73 ranks just 4 percentage points from an annual peak. In other words, traders have been buying to open puts over calls at an accelerated clip in recent months.

On the flip side, negativity's been unwinding among short sellers. During the last two reporting periods, short interest plummeted 46%, and just 1% of the stock's float is sold short. However, if AAPL is again rejected by $100, a resumption in short selling could exacerbate pressure.

Also, Apple Inc. (NASDAQ:AAPL) remains at risk for potential downgrades and price-target cuts, especially if the company underwhelms in the earnings confessional. After all, 26 of 31 analysts rate the stock a "buy" or better, and its average 12-month price target of $122.78 resides in territory not explored since early November.

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