1 Terrible Reason to Lock in Your Gains
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just before Apple (NASDAQ: AAPL) reported earnings last week, the Wall Street Journal gave play to an astounding bit of short-term thinking on the wisdom of holding the company's stock. It was based in part on an analysis, conducted by investment bank PiperJaffray, that keyed in to the daily movement in Apple’s share price over the past 25 quarters. The article pointed out that Apple’s stock has averaged a gain of about 3% on the day after posting earnings. But, the article warns, investors should be cautious about those gains because that 3% bump was usually “fleeting,” and often disappeared over the days and weeks that followed. The conclusion was this:
“if history is any indication investors would be wise to lock in any short-term pop."
I’m no historian but I seem to remember the past 25 quarters as having been pretty good to Apple shareholders. In fact, I was under the impression that the past few years of Apple’s earnings have been among the best reported in the history of business. Still, in case my memory was fuzzy, I went back to the tape.
Investor for a day
And sure enough, at a glance the stock price analysis appears to hold water. Over most quarters, if you sold your Apple shares the morning after the company reported positive earnings you often profited from the bounce while avoiding the dips that tended to follow. For example, if you held Apple shares only over the night after the company released earnings on July 19 of last year, you benefited from a 5% gain by the next morning and avoided the 8% drop that followed over the next two weeks. The same can be said for the night of July 20, 2010, where you would have been rewarded for your cleverness with a 5% overnight return, and shielded from the 2% drop over the next 14 days. Assuming, for simplicity’s sake, zero transaction fees and no taxes, in these cases you walked away better off by 7-13%. Congratulations on locking in that short-term pop.
But what did investors who followed that strategy give up in exchange? For starters, returns of 53% and 129% would have accrued to investors that didn’t sell the morning after their company reported blow-out earnings for those two quarters but held on instead. And all told, for the 6 years or so that comprise the 25 quarters in PiperJaffray’s analysis, Apple’s stock would have returned nearly 900% to any investor that simply held his shares. Better still, that investor would have owned a piece of a company whose net sales surged from $19 billion to $108 billion, and whose $10 annual dividend now represents a yield-on-cost of about 17% of what shares were trading at just 6 years ago. Cashing in on those short-term pops isn't looking so wise, in retrospect.
While that amazing climb wasn’t a straight shot, the truth is that the only way for Apple investors to suffer “fleeting” gains during a run like that was if they jumped in and out of the stock over extremely small time frames, perhaps on advice from an investment bank or a widely read financial newspaper. There are plenty of good reasons for selling a winning investment, but "locking in" daily gains has got to be among the worst.
That’s the real history lesson worth drawing from Apple’s recent past. And it applies just as well to other businesses, like Priceline (NASDAQ: PCLN) and Under Armour (NYSE: UA), that have had strong, multi-year runs with minor pull backs along the way. Investors who locked in the 9% daily gain after Priceline beat earnings estimates by 36 cents on November 8, 2010 haven’t benefited from the 58% run since then. Ditto for the Under Armour shareholders who cashed out on April 28, 2010 after the company reported surprisingly strong growth in U.S. apparel. These investors notched a quick 3% gain, but would be looking at a 53% winner if they’d just sat on their hands. As boring and old-fashioned as it sounds, buy-and-hold investing can power outstanding returns. Attempting to play earnings reports by the day, on the other hand, is a recipe for sub-par performance.
SigmaSwan owns shares of Apple, as he has for over 16 quarters. The Motley Fool owns shares of Apple, Priceline.com, and Under Armour. Motley Fool newsletter services recommend Apple, Priceline.com, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.