3 Steps to a 15% Covered Call Yield on Apple (AAPL)

Here's how you can make the most of Apple (AAPL)

   

Curious about Apple (AAPL) earnings? You and about 80% of investors, and about 100% of traders.

Want to generate some serious income, well north of the yield on supposedly high-yield stocks?  That again puts you with the vast majority of investors.

Now put the two together – Apple and income. What do you get? A 15% yield – probably more.

Step one – turn off the television screaming at you. Actually, turn to Bloomberg, I think they have an agreement with their guests that prohibits them from screaming.

Step two – if you are a trader, leave, now.

Step three – keep reading.

Using the timeless and ultra sophisticated metrics of the long term buy and hold investor – how much money does the company and is it growing – consider the following:

  • Apple sells at a 50% discount to the S&P 500. On the surface the stock sells a bit shy of ten times next year’s earnings. Take out the cash on its balance sheet – more than $150 a share – and the stock sells for six times earnings. Seems immoral doesn’t it?
  • Apple has almost as much cash as S&P 499 – the rest of the S&P 500.
  • Apple sales are growing four to five times faster than the average S&P 500 company. It is not Microsoft (MSFT) redux – it faces growing markets with very innovative products. Right now they are simply more expensive than many of their competitors, a voluntary choice to maintain margins triple that of many competitors.
  • Speaking of margins – Apple’s profit growth is four to five times faster than the average S&P 500 company.
  • Apple stock faces only upside catalysts – potential dividend increases, potential stock buy backs, potential market share gains, potential new product announcements.

That is the financial perspective. How about in the real world?

  • According to ChangeWave Research (part of the 451 Group), the iPhone is picking up considerable market share. Why? My guess is a) people shopping exclusively on price are done shopping and b) people are tired of waiting for the next generation iPhone, such as my Sunday breakfast buddy Jerry who drove off from breakfast in his new BMW 328 convertible to the Verizon store to get a new iPhone.
  • The iPhone, iPad and Mac still receive the highest quality and customer satisfaction ratings among tech vendors. For example, I am typing this on my new Mac Air. I am kind of cheap,  and when my old laptop surrendered to age, I looked at the alternatives and bought this Air. Took five minutes to buy, five seconds to register. An Apple experience.
  • In the past, Apple has purposely chosen to give up potential share to maintain margins. The cost of everything in China is falling for very large players – not rising – as Chinese companies get desperate for business. Other than memory costs, Apple is looking at a favorable production cost curve and this means a lower cost set of products, and a lower price set of products, in the next three to18 months. The first possibility is a deal with China Mobile (CHL), vendor to more than 625 million (million with an m, not thousands with a t) customers.

 What to Do?

If you want to trade it, go watch some idiot on television screaming at you on television while he or she checks their Blackberry – they may even recommend Blackberry (BBRY) as comic relief.

If you want to generate 15% or more a year in yield, buy the stock and sell calls. If you are the nervous type, wait until after the company announces earnings after the close on Tuesday the 23.

If you are not the nervous type, assume they will meet or beat expectations and there are plenty of upside catalysts remaining in 2013. Sell next week’s or next month’s calls and pick a strike price that generates an annualized profit of at least 18%.  Measure your profit by adding up the cash you generate from selling the calls to the money you make if you are called out. And if you are called out, buy the stock back on the following Monday and do it all over again.

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