Why I Sold Apple Ahead of Earnings

 | Jan 25, 2012 | 7:30 AM EST
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OK, I was wrong. Big time.

I went back and forth about what to do with Apple (AAPL) ahead of its earnings report. Clearly, I made the wrong decision to sell before the company posted its numbers, but that doesn't mean I will abandon the checklist I use to help me know when to sell a stock. The checklist has helped me protect profits over the years and it's also helped me avoid big losses in a stock.

Selling Apple wasn't easy. But, when is the decision to sell a stock ever easy, whether for a profit or a loss? It would've been an easy hold if I had had a healthy cushion in Apple, but that wasn't the case. In the end, I decided that the risk outweighed the reward. Market sentiment is as good as it's been in a while, but recent trading in Apple was shaky at best headed into earnings, including Tuesday's 1.6% decline in higher volume. It had a suspect chart.

I knew the chances were good for a strong quarter, but when Apple reported quarterly results in October, the stock fell 5.6% after the company reported tepid sales growth.

Apple's results this time around far exceeded expectations. Earnings surged 116% from a year ago to $13.87 a share, while sales jumped 74% to $46.33 billion. The Thomson Reuters consensus estimate called for profit of $10.08 a share on sales of $38.9 billion. Apple sold 37 million iPhones, well above the estimated 30 million to 32 million. It also sold 15.4 million iPads, more than double the amount sold in the year-ago quarter and also above estimates of 13 million to 14 million. And, the company sold 5.2 million Macs in the quarter, up 26% from a year ago. Also, management issued strong second-quarter guidance -- interesting from a company that tends to issue conservative guidance.

The recent price and volume trends in Apple ahead of the results played a part in my decision to sell. It wasn't flashing blatant sell signals, but the selling in the stock in recent days was too tough to ignore.

Clearly, the stock was showing relative price strength ahead of earnings, but the stock wasn't exactly under accumulation either. Since hitting a low of $363.32 on Nov. 25, a series of low-volume gains didn't exactly strengthen its technical picture. It's always good to see signs of accumulation when a stock builds the right side of a base, and Apple had none of it. This made me less confident about the prospects for a meaningful breakout.

And what about those three higher-volume declines on Jan. 9, Jan. 20 and Jan. 24? There were some big sellers in the stock on those days. Selling in front of earnings? Hmmm. Low-volume gains followed by higher-volume declines normally don't end well. In this case, it didn't matter, but I will continue to analyze price and volume like I did with Apple to help guide my sell decisions.

I was also wary of a huge price move for the stock. I looked at Apple's monthly chart and saw a 438% move since January 2009. The first question I had was whether a good case could be made that the big money has already been made. The next question was: If growth prospects are so bright, why is the stock only selling at 15x trailing earnings and 11x forward earnings? The last question: If earnings are going to be so good, why haven't institutional investors been buying the stock in recent weeks? All legitimate questions that played into my decision not to hold the stock through earnings.

Does it hurt to see Apple higher by 7.8% to $453.21 in after-hours trading? Of course it does, especially when I sold it at $422. But sell decisions are based on available information. When I weighed the pros and cons of holding the stock the through earnings, the negatives outweighed the positives. That made the decision to sell easier, even though it turned out to be the wrong decision.

And so it goes.

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