MorningWord 10/22/13: We have been trading AAPL from the long side for a few months now, largely because we think investors expectations on the product front and what the company can actually deliver to consumers has reached a bit of equilibrium. While iPhone still generates lines outside of stores, they are abating, and those left waiting are simply Apple fanatics, or placeholders for those looking to put the phones on the black market overseas.
The new iPad’s being introduced at 1pm today will not be “line-worthy” and the good thing for bulls on the stock is that no one really expects them to be. In Sept the stock fell hard after the new iPhones failed to wow the media and investors at their launch event on Sept 10th, but quickly found its footing after the company disclosed that they sold more than 9 million new iPhones in the opening weekend, and has since made a new 10 month high closing in on unchanged levels on the year. To suggest expectations are not high for the STOCK would be a bit of an understatement, but they have less to with products and more to do with what many high profile investors feel is a historic opportunity to create shareholder value through financial engineering.
On Friday’s Options Action and in my trade post of the same day (New Trade $AAPL: iPad and Earning Events, An Options Trader’s Delight), I suggested that the stock was very likely to get back to unchanged on the year ($532) and possibly to the 2013 highs of $555 on the slightest bit of good news on their fiscal Q4 earnings call on Oct 28th. But I would place one caveat, AAPL could see a GOOG like surge as many investors have been underweight the name for most of this year, but the likelihood of seeing the previous highs from Sept 2012 of $705 might not come for years.
AAPL is expected to see its first annual earnings decline in more than 10 years this year. SO how do you get a stock that trades at 12x next years expected earnings of $43.28 to trade back towards the previous highs when most analysts expect margin pressure on what could already be an optimistic 10% growth rate?? Multiple expansion, a re-rating of the stock that trades near a 5 year low on a P/E basis.
If you placed a market multiple of about 15x on AAPL’s expected earnings for fiscal 2014 you get a stock trading at $649, not quite the highs but good enough. This is some of the sort of math that bullish analysts use, many will also strip out the $143 billion in cash and then suggest that 2.34% dividend yield and the existing $60 billion share buyback make the stock a “NO BRAINER”. While it might have been from the mid $400s, it may not be from the mid $500s.
If you are amongst these bulls, we’ve liked the use of calendar spreads, where one picks a point above that could/should act as resistance and then sets the calendar on those calls. That gives you long exposure but without the risk of the stock consolidating and killing your long delta premium.