Thinking of flipping Apple stock around WWDC? Think again

Gene Munster at PiperJaffray has done a very interesting analysis of Apple's stock price around major announcements, including the World Wide Developers Conferences (WWDC). He had expected to disprove the old saw of "buying on the rumor and selling on the news" as an investment strategy, but got a surprise:

"But instead, we found that historically it has been beneficial to own shares of Apple heading into and out of launch events," the analyst explained. "Apple consistently delivers, and investors respond positively."

Specifically, by using the closing price the day before events as a base, Munster found that shares of Apple have risen an average of 1 percent the day of an event, and rise 3 percent in the week after the event. Using the closing price the week before events as a base, shares of Apple have risen 6 percent on average between the week before and the week after an event, he said.

Sounds like a good plan for next month's WWDC on June 11-15, right? Well, actually, his data makes that a dicier proposition than you might guess. WWDCs seem to be the exception to the stock rise rule, with AAPL stock actually declining 12% and 4% during WWDCs in 2005 and 2006 respectively (see the graphic above). Hmmm. Never mind.

But there's another factor this year too. WWDC is likely to be all about Mac OS X 10.5 Leopard. But we also know that the iPhone launch is on target for June as well. Won't that boost the price too?

Well, let's put some numbers around that. Let's pretend that Hon Hai has been running iPhone production around the clock. They could have a million iPhones in warehouses, ready to be sold as soon as the iPhone hits the street in late June and just in time to close out Apple fiscal Q3. Would that have an impact?

Sorry, even with a million iPhones sold in June, which we are most emphatically not predicting, the effect is small. While the sales figure would be over half a billion dollars (roughly about $529 million, given a 70-30 split between the lower priced iPhone and the higher capacity one), that half a billion gets spread out over 24 months, as we noted in our April Analyzing Apple report. So for the Q3 results, we'd only see 1/24th of the $529 million sales value or $22 million added to Apple's revenue statement. So while the PR effect will be big, the actual business value in Q3 will be tiny.

Bottom line: we don't expect to see a huge spike in Apple share prices across WWDC. The stock has appreciated more than 20% since the earnings release on April 25, 2007, and that means that there are a lot of investors with some hefty gains on the books going into summer. I do think the positive press around both WWDC and the iPhone launch will bring buyers into the market, but I also think that our target price of $112 -- a price to earnings ratio of 30 times 2007 earnings -- remains right. But expect a lot of volatility, both up and down, in June with some upside above our goal if the Leopard announcements are particularly revolutionary, as we expect they are.

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