MorningWord 5/11/16: How to Get Teflong $AAPL $DIS

by Dan May 11, 2016 9:59 am • Commentary

A year ago this week I checked in on a group of four stocks that I dubbed at the time the U.S. Consumer Teflong™ Portfolio. The four companies make products that peeps in my little life bubble just can’t live without; Apple (AAPL), Disney (DIS), Nike (NKE) and Starbucks (SBUX). I thought it would be fun to look back and see what’s happened since then.

At this time last year, AAPL was $127, DIS was $110, NKE was $51 and SBUX was $50. With the market basically flat since then, the performance of these four stocks has been divergent, with AAPL down meaningfully, DIS down 10%, but both NKE and SBUX  up about 15%. The most significant move of this group is the 25% decline in AAPL. That market cap loss is more than NKE and SBUX combined, and equal to DIS’s market cap.

What is consistent among these four stocks is that all have dramatically under-performed the S&P 500 (SPX) since the market’s all time highs in May 2015. The SPX is down about 2.5% since then, while this group is down between 10 and 30% from their 52 week and all time highs made last year.

I don’t bring this up to suggest that the under-performance of this group of prior market leaders is a reason to sell the SPX, but I think its worth highlighting that despite the relative weakness, these stocks (ex-AAPL) still trade at premium earnings multiples to the market and its peers, and still deserve to do so. It’s my view that while the stock’s have lost their 2014/15 mojo, I suspect that their core offerings remain very much intact, and that if the SPX is not making a rounding top (I still think it is), and merely basing for a breakout to new highs, then I think this group of stocks will get up off the mat.

For those who are unsure, as I am, about what the balance of 2016 holds for U.S. stocks, but you believe in brands like the ones listed above, and want to dip your toe in the water, it could make sense to start by selling out of the money puts.

For instance in AAPL, if you would like to buy at some point, but think that recent support could break at $92, and the stock is likely to fill in the gap from 2014, back towards long term support at $80, down about 14% from current levels, then you might consider dipping your toe in by selling puts instead of cost averaging in on the stock. For instance, with the stock just under 93, the October expiration 80 puts are about $2.15. On any break in the stock below this support vol should pick up and obviously those would increase in price based on deltas. That makes for a nice entry where you can establish what acts like a limit buy order while having the wiggle room of a long delta entry without having to pick the exact bottom. If the stock is $80 or below on October expiration you would be put the stock at an effective price of $80 – the price you sold the put. At the current price, that’s down 16% from current levels, which would also be a decline of about 45% from its all time highs, equal to the peak to trough decline from its then 2012 highs to its 2013 lows.  If the stock is above $80, I’d say there is a very high probability as the release of the iPhone 7 in September should buoy the stock in the early Fall, then you would get paid 2.1% to merely have a resting buy order between now and then.

AAPL 5yr chart from Bloomberg
AAPL 5yr chart from Bloomberg

Looking at DIS, the chart I posted yesterday in my quarterly preview (below), is a bit of a problem, as the stock is clearly in a downtrend, at a time when eps estimates are coming down. $100 looks like weak technical support, despite the level being decent valuation support, about 17x expected fiscal 2016 eps, a tad above a market multiple. But if for any reason investors feel DIS should trade closer to the 14 P/E of CBS and TWX, then you have a stock back in the low $90s.

DIS 5 year chart from Bloomberg
DIS 5 year chart from Bloomberg

Looking out to the fall and selling the Oct 90 puts (with the stock near $101) are about $1.80 and on a break below support at $100 vol should pop a little. That’s probably not a bad way to wade in the DIS pond. $80 looks like long term support to my eye. But it might make sense to start with some shorter dated July 95 puts that are $1.10 bid.

It’s long been my view that on a meaningful stock market correction, these stalwart brands will be the first to be considered for those looking for longs with 5 to 10 year time horizons. In the meantime there are ways to dip your toe in turbulent waters using options rather than get off-sides in these names with the market near highs or never get a chance if the market goes even higher.