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Should You Buy Apple ETFs Before Its Earnings?

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The technology giant Apple (AAPL - Free Report) is set to release its fourth-quarter fiscal 2016 results on October 25 after the market close. Since Apple accounts for over 19% of the total market capitalization of the entire technology sector in the S&P 500 index, it is worth taking a look at the company’s fundamentals ahead of its results.

Investors’ should note that Apple has been on an uptrend since the start of the second half of the year (the fiscal fourth quarter in Apple case), locking in gains of more than 24%. The upside is expected to continue as Apple is poised to beat our earnings estimate as per the Zacks methodology given the positive earnings revision trend, which is generally a precursor to an earnings beat, and attractive fundamentals.

Inside Our Methodology

The stock saw earnings estimate revision of a penny over the past seven days for the fiscal fourth quarter. Analysts raising estimates right before earnings—with the most up-to-date information possible—is a pretty good indicator of some favorable trends for AAPL in this report (read: Will Tech ETFs Continue Their Rally in Q3 Earnings?).

In fact, Apple has a Zacks Rank #2 (Buy) and an Earnings ESP of +1.21%, indicating higher chances of beating estimates this quarter. Betting on stocks that have a combination of a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) usually leads to profits in an investor’s portfolio. Our research shows that the chance of a positive earnings surprise is as high as 70% for the stocks with this combination.

Additionally, Apple’s earnings surprise history is strong with the company delivering a positive earnings surprise of 1.03% on average in three of the past four quarters. Further, Apple boasts a top Value Style Score of A and a solid Momentum Style Score of B though a Growth Style Score of D looks ugly. As a result, an earnings beat could lead to a higher share price.

According to the analysts compiled by Zacks, Apple has an average target price of $124.82 with about 85% of the analysts having a Strong Buy or a Buy rating ahead of its earnings. This indicates a 7% upside to the current price of AAPL.

What’s Hot This Earnings?

Sales of the new iPhone 7 and iPhone 7 plus launched last month have been the major driver in the upcoming earnings report that will push up the stock price. The new iPhones appears to be significantly better than their predecessors. As per the latest data from Consumer Intelligence Research Partners (CIRP), iPhone 7 and 7 Plus was off to a staggering start accounting for 43% of total U.S. iPhone sales in just 17 days while the online tech sites revealed that Apple sold more than 20,000 iPhone 7 and iPhone 7 Plus devices (read: Catch Apple's Rally with These Top-Ranked Tech ETFs).

Additionally, Apple’s revenue is expected to get a boost from the robust upgrades like newer version of Apple Watch.

Another big story to watch in the earnings release will be the company’s penetration into China. Apple has been losing its market share in China, its second-biggest market after the United States. This is because sales in China fell for the second consecutive quarter in the fiscal third quarter (ending June) as the end of explosive growth era in iPhone sales and the saturation of the smartphone market.

ETFs on Radar

Given the above discussion, it is clear that good tidings and an earnings beat might be in store for Apple in the upcoming report. As a result, investors’ could definitely focus on ETFs having the largest allocation to the tech titan. While there are several ETFs in the space having Apple in their top 10 holdings, we have highlighted four funds that have Apple as their top firm (see: all the Technology ETFs here):
 
iShares Dow Jones US Technology ETF IYW – The fund is up over 16% since the start of the second half of the year and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook. Apple makes up for 16.8% of the assets.

Select Sector SPDR Technology ETF XLK – The fund added more than 12% in the same time frame and has a Zacks ETF Rank of 1 with a Medium risk outlook. Apple accounts for 14.1% share.

Vanguard Information Technology ETF VGT – It surged about 16% and has a Zacks ETF Rank of 1 with a Medium risk outlook. Here, AAPL takes 13.1% share (read: Top-Ranked Sector ETFs & Stocks for Q4).

MSCI Information Technology Index ETF FTEC – This ETF has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook and gained 15.5%. Apple has 13.6% allocation.

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