How To Trade The Apple Supply Chain, According To Bernstein

The big Apple Inc. AAPL makes big ripples when it drops a new product in the market — and those in the company's inner circle see big returns. 

But one research firm said the Apple earnings effect will soon be more discrete and more discriminate, with few winners.

The Rating

Bernstein analysts David Dai and Toni Sacconaghi Jr. maintained a Market Perform rating on Apple with a $175.50 price target. Bernstein reiterated an Overweight rating on Sony Corp (ADR) SNE with a $60 price target.

The Thesis

Incisive investors see a pattern in the iPhone supplier pool: buy the rumor, sell the news. By Bernstein’s assessment, iPhone-related stocks outperform the market index by an average 13 percent ahead of launch, but underperform by 7 percent after.

In the most recent cycle, hype around iPhones 8 and X drove a pre-launch outperformance of 24 percent followed by proportional post-launch declines. The analysts said they consider the selloff, which resulted in the cohort’s 8-percent full-year underperformance of the index, an overcorrection.

“As investors anticipate the next iPhone cycle, we believe now is the best time to bottom fish,” Dai and Sacconaghi said in a Tuesday note.

But decelerated iPhone growth merits selectivity and active management, they warned. The Bernstein analysts expect the basket of suppliers to see generally lower returns, with only the top half of companies with increasing content in iPhones “still able to generate significant alpha every year.”

In their estimation, the winners are Sony, 3-D-sensing companies led by AMS AG and Lumentum Holdings Inc LITE along with acoustic component suppliers like GoerTek Inc. and AAC Technologies Holdings Inc.

Price Action

At the time of publication,Apple was trading relatively flat at $179.01; Sony was down 1.28 percent at $50.25; and Lumentum was down 1.24 percent at $59.80. 

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Photo courtesy of Apple.