The recent vicious two-day tech selloff last Friday and Monday spared few victims. Even previously untouchable Apple Inc. (NASDAQ:AAPL) felt the wrath, dropping nearly 8% from peak to valley over those two days. Turmoil always presents opportunity, however. Traders should take advantage of the weakness in AAPL stock.
A note from Goldman Sachs regarding valuation concerns in the newly dubbed FAAMG stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple, Microsoft Corporation (NASDAQ:MSFT) and Google parent Alphabet Inc (NASDAQ:GOOGL) — got the ball rolling on Friday. Mizuho’s rare downgrade from “Buy” to “Hold” sparked further deterioration Monday.
A closer look reveals that of those FAAMG names, AAPL stock is by far the most reasonably valued. Unlike the four others, Apple trades below 30 times earnings. Apple’s current 17 P/E ratio is also a major discount to the roughly 23x multiple for the S&P 500.
Important also to remember that even after the downgrade, Mizuho still had a $150 price target. So Apple stock is looking cheap on a fundamental and comparative basis.
AAPL also looks good from a technical perspective.
The 9-day Relative Strength Index (RSI) reading certainly indicates that Apple had become extremely oversold. The three prior instances when AAPL stock was this oversold proved to be significant intermediate-term lows. Bollinger Band analysis also pointed to a sell off that was likely overdone.
After briefly piercing the critical $144 support level, shares rebounded to close above that price. This doji candlestick formation is usually indicative of a bullish reversal pattern in the stock.
Apple also pays a fairly healthy dividend. The current annual dividend of $2.62 equates to a yield of 1.7%, just slightly below the 2.2% yield on 10-year Treasuries. Since the company reinstated the dividend in 2012, it has raised it every year. Income investors will likely step into AAPL stock on any further weakness to capture that healthy payout.
So with Apple looking good on a fundamental and technical basis, plus sporting an attractive dividend, the downside may be done.
How to Trade AAPL Stock
Given that implied volatility is still fairly rich at the 41% percentile, a bull put spread is the preferred position.
Buy AAPL Jul $135 puts and sell AAPL Jul $140 puts for a 65-cent net credit.
The short $140 put strike provides a 4.4% downside cushion to the $146.59 closing price of AAPL and is well below the key $144 support area. Return on risk is 14.94%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
