Trade Update April 1st, 2013 11am: AAPL had a heck of a month in March after making new 52 week lows and seeing its peak to trough sell off from Sept hit roughly 40%, the stock turned on a dime on speculation that the company would update that cash distribution policy. Investors and traders got very focused on the one year anniversary of their dividend announcement (March 19th) as the timing for the much anticipated news, but with that date come and gone, investors have to grapple with the fact that the next piece of news may be negative, in the form of their Q2 earnings in late April.
After the stock’s ~12% rally off the lows, the stock has taken a decidedly negative turn in the last 5 trading days, now down 7.6% from the recent highs. With the stock now lower than the level that I initiated the Apr/May 460 Call Calendar, but the position profitable due to the more rapid decay of my short April options and a divergence in IV, I am going to close the position for a small gain, rather than wait for a bounce in what could be an uncertain few weeks in the market.
ACTION: AAPL ($435) Sold to close the April / May 460 Call Spread at 7.75 for a .75 gain.
Original Post March 15th, 2013: New Trade $AAPL: Lets See How Much They Like Them $AAPL$$
Here is a summary of what I will be discussing tonight on Options Action on CNBC at 5pm:
AAPL is up 2% today as I write and it is most likely the result of speculation of what the company will announce, possibly as soon as next week, about how they will expand their cash distribution to shareholders. The following chart shows their cash balance as of the end of the calendar fourth quarter, but the balance including the last 2 and half months probably sits slightly above $150 billion.
We have had more than our share of discussions about AAPL in the last week (two of mine below, and Enis’s Chart of the Day from Tuesday here), but in summary, we, as most, have been shocked by the stock’s relative under-performance and horrible sentiment. We feel that their late April fiscal Q2 report could be the catalyst for what could mark the low of the correction with some form of capitulation bottom that causes the stock to break $400 on the downside.
BUT the speculation and the actual plan of what the company chooses to do with their cash hoard could be the impetus for a short-term rally. On Fast Money on Tuesday I suggested that “investors looking to pick bottoms in AAPL could end up with stinky fingers” and I stand by this comment. I think there will be a better entry point than $430 or $440 for a long term investor, but the stock remains trade-able and the options market is just the place to do it.
NEXT WEEK: There are expectations that AAPL management will release a press release and hold a conference call at some point next week (exactly 1 year from last year’s March 19th initial dividend announcement and inline with last year’s procedure of doing so weeks after their shareholder meeting in late Feb) to introduce a new improved cash distribution plan. The potential outcomes range from:
1) Modest – a 20 to 40% increase in the quarterly dividend with an increased buy back
2) Number 1 coupled with an additional special dividend plus share buybacks
3) Aggressive – expectations of a tender for shares, or a massive special dividend with an increased share buyback and maybe a stock split for the cherry on top.
I havn’t mentioned David Einhorn’s desire for the introduction of preferred shares because I think it is unlikely, but any and all of the above would most likely be fairly vol dampening in the near future.
MY TRADE SETUP: Without making a large outright Delta bet that the stock could rally in the near term, I want to take advantage of the potential events and their effects on short dated vol. I am going to stick with my prior calls that AAPL’s road to the bottom will be a process, but I think there is a good chance that the last third of the year the stock starts acting like a healthy stock again with most of the negative fundamental news IN the stock.
MY TRADE: AAPL ($440.50) Bought April / May 460 Call Spread for 7.00
-Sold 1 April 460 Call at 8.00 (30 delta option)
-Bought 1May 460 call for 15.00 (40 delta option)
Break-Even on April Expiration:
-My ideal situation would be for AAPL to move higher towards 460 and then make the difference btwn the May that I own and the April that I am short.
-Max risk is the 7.00 that I paid for the spread.
Trade Rationale: This is a trade that will do best if there is not much movement between now and Apr expiry, or slightly drifts higher due to a return of capital event. Since May captures earnings, the options will hold value much better than Apr as time goes by in the next month. I chose the $460 strike because it is right below the 50 day moving average that the stock has not breached since last Oct and should serve as some near term resistance. One really important point, I do not expect to hold this position, or the May portion of it for AAPL’s earnings that should fall the week after April expiration. I think that could serve as the catalyst for a retest of the previous 52 week lows.
MorningWord 3/15/13: I’ll start this post as I have on many occasions over the last few weeks. AAPL is desperately attempting to put in an intermediate term bottom. Since gapping below $440 on March 1st, the stock has spent most of the first half of the month banging around in a very tight approximate 2.5% range btwn $435 and $425, despite the Nasdaq and the SPX gaining ~3% in that time period.
This morning AAPL is trading near $439, up about 1.2% in the pre-market, despite some earnings and price target reductions:
(Bloomberg) — Apple estimates cut at UBS, Sterne Agee ahead of 2H iPhone refresh.
* Apple estimates cut as supplier checks show evidence of iPhone 5s, lower cost iPhone using composite material casing are likely, Sterne Agee analyst Shaw Wu said in note
* AAPL will likely “hit” lower end of its guidance, bigger iPhone refresh not likely until 2014, Wu said
* AAPL PT cut to $630 vs $715, rated buy
* 2Q iPhone unit est. cut to 32.5m from 35m
* 2Q EPS cut to $10.00 from $10.25, est. $10.17, rev. cut to $41.3b from $42.9b vs est. $42.86b
* FY13 EPS cut to $44.50 from $47.05 vs est. $44.33, rev. cut to $180.5b from $187.4b vs est. $181.5b
* FY14 EPS cut to $52 from $55 vs est. $50.07, rev. cut to $206.8b from $213.6b vs est. $204.59b
* More cautious on near-term demand ahead of new AAPL devices, increased high-end competition, UBS analyst Steven Milunovich said in note
* AAPL PT cut to $560 vs $600, rated buy
* 2Q iPhone unit est. cut to 35.5m from 37m
* 2Q EPS cut to $9.66 from $10.05, est. $10.17, rev. cut
to $42.16b from $43.1b vs est. $42.86b
* FY13 EPS cut to $42.14 from $42.75 vs est. $44.33, rev. cut to $177.4b from $178.9b vs est. $181.5b
* AAPL 51 buys, 10 holds, 3 sells, avg. PT $604: Bloomberg data
And then there was Samsung’s much anticipated Galaxy S4 Launch came and went yesterday, and given some of the early feedback in the tech press and in the Blogosphere, the new smartphone will likely help them maintain their momentum, but it does not appear to be a game-changer, and an outright iPhone “killer”.
As we head into the quarter end is the sentiment on AAPL set to improve?? Maybe for a short period as investors look forward to an enhanced cash distribution from the company, while many traders expect some announcement possibly as early as the first half of next week. On the day of AAPL’s Shareholder meeting, I wrote up a little “primer” on expectations (yes weak, but read below) because it seemed for some reason the market was convinced the company would announce some new initiatives that day. It was my correct understanding then, that there would not be any new plans announced for cash distribution, but we could see a very similar pattern to last year where the company issued a press release for a same day conference call (March 19, 2012) to introduce their dividend plans/buyback plans.
Expectations are all over the place, from a modestly increased dividend and buyback, a large special dividend, a massive tender offer (much like MSFT did in mid 2006), Einhorn’s preferred stock proposal to any combination of the above. Make no mistake, expectations are high, and in many ways this could set up for some disappointment in the near term if the stock rallies ahead of any announcement.
Once the distribution plans are out of the way, the street will once again get focused on what can only be described as their quickly decelerating earnings and revenue growth. AAPL will likely report their fiscal Q2 earnings in the last week of April, and I would expect little optimism from analysts in front of the print, which could set up for what I expect to be a swoosh below $400 at some point in the near future.
So In sum, stock is clearly trying to bottom, many traders are expecting a cash distribution announcement early next week which is better than expected could see a pop above $450 resistance , maybe gets it to its 50 day moving average at ~$468 (which it has not touched since early Oct), but a squeeze to the Feb high of ~$490 seems fairly unlikely in my mind. I have been suggesting the stock has a 3 handle at some point in the first half of 2013, and I stick by that, but sooner than expected and better than expected news in cash distribution could clearly help what has been horrible sentiment and even worse relative performance in AAPL’s shares. I also stand by inclination that AAPL is a great long term buy and hold if the stock is back towards the support level from late 2011 at ~$375.
Original Post Feb 27th, 2013: $AAPL Shareholder Meeting Primer, Really???
Last year AAPL’s price action from Jan 1 to Sept 21 resembled a mania despite the first full year that the company was lead by new CEO Tim Cook. Cook set out quickly to establish that he was the CEO, and not playing by some script left to him from Jobs or Jobs’ Board of Directors.
COOK @ GS FEB 2012 TECH CONFERENCE:
Last year as AAPL’s cash on their balance sheet had just topped $100 billion, distribution to shareholders became a hot topic and where Jobs had previously dismissed calls for dividends and buybacks, Cook made the following comments at Goldman Sach’s Technology Conference on February 15th, 2012 (from Forbes.com):
Now, in terms of our approach on cash, I’ve said since becoming CEO, I’m not religious about this. I’m not religious about holding it or not holding it. And we’re in very active discussions at the board level on what we should do
It’s not new that we’re discussing it. It is being discussed more, now, and in greater detail, and that’s because the balance has risen to the point that you’ve already made. And I think it’s clear to everyone, and I’d be the first to admit, we have more cash than we need to run the business on a daily basis.
COOK @ GS FEB 2013 TECH CONFERENCE:
So similar to this year, Cook addressed their cash distribution plans at Goldman’s conference on Feb 12th, 2013, but offered little detail other than that they will continue to do so and that they were considering activist investor David Einhorn’s preferred share plan. By all accounts it is very unlikely the company will do such a thing.
COOK @ 2012 FEB SHAREHOLDER MEETING:
After much excitement regarding Cook’s comments at GS in Feb 2012, AAPL continued to march forward into their Feb 23rd, 2012 Shareholder Meeting, and at that meeting , Tim Cook ‘s comments on cash were summarized here by Forbes.com:
Cook addressed questions about the company’s almost $100 billion in cash, and said Apple isn’t convinced of the value of a stock split. Repeating comments he’s made in recent weeks that he and the board are “thinking about cash very deeply,” Cook told the packed auditorium that Apple has invested billions in its supply chain, in its retail stores, on expanding its operations and on acquisitions. “We’ve actually spent a lot but we still have a lot,” he said. “And frankly speaking, that is more than we need to run the company.”
On stock splits, he said that the company is constantly evaluating actions that would be in the best interests of shareholders and that the value of a stock split “isn’t so clear.”
Here is the kicker, it wasn’t until AAPL released a press release on March 19th, stating that there were going to hold a conference call that day to discuss their plans for cash distribution which included a $2.65 a share quarterly regular dividend (or 1.8% at the time) and a $10 billion share buyback.
TODAY’S SHAREHOLDER MEETING:
SO with the stock having already split by a third from the Sept 2012 highs, whats likely to happen today?? Nothing in my opinion, or nothing that will catalyze the stock higher. Any major announcement will come after the meeting as last year, aside from some possibly unexciting prposals and annoying questions by shareholders, we are not likely to get anything meaningful.
Could the board already have voted for a stock split, of course and would that announcement return any of the $137 billion cash to holders? NO. SO other than making more shares available to retail holders there is absolutely not economic impact on the company or the stock and therefore if the stock rallied on that as a trader I would think it is a sale. If the stock rallies hard in the next hour, and the news that everyone expects is not forthcoming, I would expect a quick sell off and the stock to likely close at new 52 week lows below $435 at some point this week.
BUT IF THERE IS NEWS AND IT IS BETTER THAN EXPECTED, THE STOCK COULD HAVE FOUND A NEAR-TERM BOTTOM, DESPITE MY THOUGHT THAT WE WILL SEE THE STOCK TRADE $400 AT SOME POINT IN THE FIRST HALF 2013.