The countdown to Apple’s (NASDAQ:AAPL) earnings has begun – fourteen calendar days – and the pundits are making up stuff, from bad data to false rumors, as fast as they can get their makeup up before going on television. Let’s look at the truth of the company, then the stock. I live in Washington, DC and despite that, I am no stranger to the truth. Wall Street, supposedly the arbiter of truth about companies through their stock price, is now quite delusional about Apple. The stock is selling in the mid $520s; it is worth, when compared to other stocks in the S&P 500, north of $1,200 a share.
I am tempted to write a long piece on the overwhelming fundamentals powering the company or an even longer piece that also includes a history of the performance of the stock and how it is grossly undervalued compared to the market.
But I believe most of you want to know a)is growth slowing and b) has the stock’s run ended.
The company will not be able to increase sales of products and profits in the next three years as they have in the past three. In fiscal year 2012, they sold $65 billion in stuff and services; in FY 2011, $108 billion, last year $157 billion. Consensus estimates for FY 2013 are $191 billion. What you need to know is that is too low. The geniuses on Wall Street arrived at the number by cutting the 2011 growth number – 44% – in half. I focus on growth for the stock moves as much on revenue and revenue forecasts as it does on earnings.
Remove AAPL from the S&P 500 and those outfits are growing sales less than 5% a year and profits less than 3%. Take out bank earnings and growth, much of it due to changes in assumptions and balance sheets, not business in the real world, and the S&P 500 without AAPL is growing in line with inflation at best. Maybe.
Why am I confident about these revenues? The company has benefited from selling superior products at a premium price for a decade. They are the best product and the most powerful brand in two market segments – smart phones and tablets – and they are the premium brand in the laptop and desktop market with margins two to three times their competitors. Doomsayers this is ending. What they do not understand is the first 25%-30% of any market will pay a premium for a superior product. The next 70% are more price sensitive – this is what as known as “S curve” analysis. Apple’s share of the smartphone market – not the cell phone market, the smart phone market – topped out just below 25%. So it is now pursuing additional distribution to maintain share at higher price points and it is rumored to be introducing a low cost iPhone later this year. They have little place in the world cell phone market – less than four percent share depending on how you measure the market. They have enormous room to run with their existing and new cell phone products.
The same is true for tablets. They own the tablet market – and to stay ahead of competitors, they introduced the iPad mini. But that product is not a low cost product – it commands premium pricing – for the market is not close to that 25%-30% level.
And, of course, they have aggressively added features to PCs to sustain the $999 price point in the face of $400-$500 competitors. The strategy is working – while Q4 sales were down 6%, overall sales of PCs were down 11% and sales of low end laptops and netbooks were down 16%. Oh, the average selling price of an Apple computer went up $100 in Q4, every other manufacturer saw average selling price declines.
So growth is there and will be there. I see growth in the range of 25%-27% this year. And none of this prices in the possibility of an Apple TV product in 2013.
AAPL currently trades for 11.79 times trailing earnings. The S&P 500 trades for 14 times trailing earnings. AAPL trades for less than ten times forward earnings. Excluding projected cash on the balance sheet – roughly 30% of the market cap now, 33% looking forward – and the company is selling for 8-9 times 2013 earnings, and 5-6.5 times in 2014.
Does this help you traders out there looking to retire with a great trade on the earnings due out on Jan. 23? No – but if you are willing to trade AAPL for a year, maybe you can retire and stop risking your money making bets on how the lemmings in Wall Street will trade a stock on a given day, depending on the phase of the moon and how much they drank the previous evening. Not to mention pundits desperate for free air time realize they stand a better chance speaking ill of AAPL than speaking well of AAPL, even if the company is one of two zillion they follow.
I own AAPL shares and sell AAPL puts. I am going into earnings interviewing people in Europe about the recession – see how worried I am about my position? The stock is up from $375 and change to $525 and change and people are nervous because the stock has come down from north of $700. I am not nervous. And going into the earnings announcement I suggest you look at two strategies:
- First, buy the stock and sell calls. Premiums are wonderful and if the stock runs, you can buy back the call and sell another one and as it runs you can do it over and over again. If the stock does not move and you sell weekly calls in AAPL you can generate a return north of 20% in a year with no underlying movement in the stock.
- The second option – pardon the pun – is to sell puts. Pick a stupid price – Art Cashin of UBS calls it a silly bid – and generate some cash. The geeks who run Unix workstations to trade see the short term support at $520 and long term support at $440. Sell a $520 February put and you net $2,500 in cash for the contract. That is a 4.81% return in a month, 58% on an annualized basis. Sell a February $440 put for $290 a contract, that is a return of 0.55%, 6.6% on an annualized basis.
And if you own it – pick a call and collect the cash, you can always roll the call or buy the stock back. The one time I was called out I made money, the stock fell on the open the following Monday and I bought it back for less than what I was paid when I was called out.
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