Buy the rumour, sell the fact. When it comes to product launches, that is an ancient but often effective bit of trading wisdom. Apple generally outperforms ahead of iPhone and iPad launches, as the rumour mill cranks up. The same cannot be said for all of its suppliers, but Hon Hai Precision goes one better than Apple: its shares gain on the rumour – and the fact as well.
Following the fortunes of Apple’s Asian supply chain is a tricky game of nurturing contacts, estimating demand and some quick work with a screwdriver stripping down new products to assess various suppliers’ contributions. Hon Hai, or Foxconn, features heavily as Apple’s biggest assembler. So it is logical that it outperforms Taiwan’s benchmark by 5 per cent on average in the two months leading up to a new iPhone, according to Bernstein (this time: 7 per cent) and then a further 6 per cent in the two months following. Apple, meanwhile manages an average outperformance of 11 per cent before the big day (this time: 16 per cent) but remains roughly in line with its own benchmark after that.
But averages are a dicey basis for investing. Hon Hai barely outperformed its benchmark last year after the iPhone 5, but that still meant a 3 per cent fall, even if compared with Apple’s 18 per cent fall, it got off lightly. Two-fifths of Hon Hai’s sales go to Apple, meaning market perceptions of the strong link are unlikely to fade. Witness Pegatron, a rival Taiwanese assembler and a relatively new Apple supplier with operating margins, at 1.5 per cent, even thinner than Hon Hai’s, at 2.8 per cent. Pegatron’s shares have risen a quarter this year as it has won more Apple business, but they are down 6 per cent in the past two months. Perhaps Pegatron will end up trading inversely to Hon Hai around iPhone news? Meanwhile, investing in either still comes down to a wager on future iPhone sales.