Apple (AAPL): Here Come Earnings Warren Buffett Would Love

There are several ways for AAPL bulls to get skin in the game - and you can even profit if AAPL trades flat

   

Apple (NASDAQ:AAPL) announces earnings Wednesday after the close, and the market is waiting with more anticipation than I have seen in a very long time. Apple is the most widely-held stock among institutions, as well as the most followed stock among individuals – and it rose from $375 and change to north of $700 in 2012 and has since fallen to the $500 level.

First, some fundamentals – yes, even traders need to be mindful of fundamentals.

  • Apple is now an extraordinarily undervalued stock. Selling for less than half its fair value, it is now a Warren Buffett-style value stock. At $500, it sells for less than $12 times trailing earnings, less than 10 times one-year forward earnings. Take out its $150 in cash from the market cap and the valuations become comical.
  • Apple is the largest growth stock on the planet – by a wide margin. Worst case, the company will grow 20% to 22% this year; best case, 30% to 34%. And revenue growth and profit growth are typically close to one another. Without Apple, the S&P 500 will grow earnings less than 5% this year, probably less than 3% with revenue growth probably weaker.
  • Apple has enormous headroom, meaning it has such small market shares it can grow in double digits for at least five and possibly 10 more years. Less than 3% of the world cell phone market, less than 3% of the world personal computer market, if you lump tablets, net books and low end laptops together, less than 20% of that market. And it may be on the verge of signing up China Mobile (NYSE:CHL), a company with more than 630 million subscribers.
  • The company is a Buffett-style company in that it prints cash – this is not profitless growth. Apple’s margins are more than twice its competitors.

Now, some trading thoughts.

  • If you are going to take a position in Apple, you have to set a price beforehand. If not, move on, and look at other names. Technicians set $520 as an interim and $440 as floor prices should there be bad news on Wednesday. People, like me, look at fundamentals and longer-term possibilities and I see $640 as a one-year entry point. Then again, I see the stock going to $1,240 in the next one to three years. (I own shares and I have sold puts on the stock).
  • I would not own puts or calls – I would sell them. The premiums are outrageous. If you buy a put or call, yes, your returns could be great, but who knows what the guys and gals on Wall Street want to see? I don’t even think they know.
  • A short-term short put position that you sell to open – let’s say this week’s $460 put – will generate more than $300 in cash. That seems like a small return at 0.65% but sell them every week and your return is 33% annualized.
  • If you want a slug of cash right now and can tie up your capital for a while, you can sell to open (write) the AAPL Jan. 2014 $500 Put for $6,200 a contract, a return of more than 12%. If the stock stays flat for a year, these expire worthless you and keep the entire $6,200 you collected upfront.

What would I do?

The most attractive play, to my mind, is to own the stock and write (sell to open) calls, have rich premiums too. (This is essentially a covered call strategy.) Just a pick a price and a month and be prepared to roll them forward if the stock moves up. For instance, you could sell to open the AAPL Feb. $550 Calls – that assumes a 10% move up in the stock after the announcement – and you net $645 per contract if you are not called out. If you buy the stock here and sell the call, and you are called out, you net $112 a share – a 22.4% return – in a month.

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