Is The SEC Probing Trades In Apple Stock?

Posted by: Arik Hesseldahl on August 31

Dan Dorfman at Huffington Post says the US Securities and Exchange Commission investigating whether or not certain investors benefited from inside information when trading Apple stock.

Citing documents he says he’s seen Dorfman says the SEC is investigating the trading of Apple stock during four distinct time periods, which could indicate multiple violations. The SEC has asked certain brokerages for the names of clients who traded Apple stock during those four periods of time. Dorfman, with the help of Wall Street sources goes on to speculate about what kind of information might be at issue, including leaked looks at unreleased sales results and the health status of CEO Steve Jobs, and any indications concerning when Apple might release information about either.

I called both the SEC and Apple for any comment on Dorfman’s story, and got none from either. But I talked today with Charles Wolf of Needham and Co. in New York who’s watched Apple stock longer than pretty much anyone I know.

If you follow the patterns on Apple’s stock closely enough, you can get a pretty good idea about when to buy it and when to sell it, and you can do this pretty well without the aid of inside information.

For instance: Just look at the forward-looking guidance Apple gives every quarter. Going back to the third quarter of Apple’s fiscal year 2004, Apple’s reported revenue beats Apple’s guidance by an average of 8.4%, Wolf says. As anyone who follows Apple knows, guidance is always conservative on the revenue front, and Apple practically always beats the guided number.

But here’s where it gets interesting: Apple’s guidance on per-share earnings is even more conservative. Over the same time period, Apple’s EPS beats the guidance by nearly 41%.

Then there’s the guidance on gross margins, a key measure of overall profitability. Again, Apple always promises carefully, then over-delivers, and almost always beats guidance by an average of 2.9%.

There’s no secret to figuring this out. Just go back, look at publicly issued guidance on the earnings call, and then look at the following quarter’s earnings report to see the actual results.

But you can also look at how Apple stock moves relative to earnings reports. This is exactly what I did, going back to the beginning of the 2006 calendar year. During that period Apple’s stock has improved by an average of 2.46% on the day after an earnings report. Now there have been some notable exceptions. On the day after Apple’s earnings report on Jan. 22, 2008, Apple’s stock fell by more than $16 or more than 10% on the following day. But on the day after Apple reported results on July 19, 2006, its stock surged by more than $6 or nearly 12%. After taking those two out of consideration, the average improved to 2.75%. During this period, on the day after an earnings report Apple stock has improved 11 times, and dropped four times, just shy of a ratio of 3-to-1.

With a pattern like that, you almost don’t need inside information to make some short-term gains on Apple. But suppose, just suppose, for the sake of discussion that you got an inside source who could give you some extra data during the two-week period between the closing of the quarter’s books, and the public disclosure of those results. It wouldn’t have to be much, but enough to give you a good sense as to whether the next day’s trading would be up or down, you could do very well indeed, either by shorting when the results are relatively negative, or buying when they look good.

But so it is with pretty much any stock, which is why the non-public disclosure of material information by insiders is illegal. Incidentally, Dorfman notes at the end of his story that the SEC is looking into similar questions around the trading of several other stocks, including Biogen Idec, Human Genome Sciences, and Hansen Medical among others. The fact that Apple – as high-profile a stock as there’s been in recent years — happened to be included in this list is the only reason his story is warranting any attention.

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