AAPL: Time to Swing???



Positive. Details hedging options. March 17–2013

He has a follow-up. APPL: Jensen Two.



I almost called my optometrist on Friday when I saw Apple (AAPL) was up for the second day in a row, even in the face of a down market. This has been a rare occurrence this year for this one time market darling. The stock has dropped some 35% since its highs in mid-September. The decline has been slow drip torture for Apple shareholders. Some of the very same analysts that were raising their price targets and upgrading the stock when it was over $700 a share in September have been downgrading the stock and lowering their price targets (Of course only after the stock has fallen some $250 a share) in March when the shares are trading under $450 a share. The contrarian in me instinctively tells me that this should mean the stock could be at a major inflection point.

More importantly, Apple shares got two pieces of good news on Friday. First and foremost, the debut of Samsung’s S IV smartphone met with less than universally stellar reviews. Given the overwhelming negative sentiment on AAPL, this small initial reaction to its main competitor’s new launch was good for better than a 2% gain on Friday despite an overall market sell-off. The second factor that was credited to be behind the stock’s move was positive comments from legendary value investor Bill Miller on CNBC. Miller called the shares deeply undervalued observing the beaten down stock “now trades at a lower forward EV/EBITDA multiple than Safeway, Kroger, and HP”. He also advocated buying the Jan 15 $500 LEAPs call options on the stock, which are trading around $45. A return to the stock’s previous highs six months ago over the next 22 months would net better than a 400% gain. Personally, I prefer and own the Jan 15 $600/$700 bull call spreads for $11.20 which sets up for an 800% return if Apple claws its way back to previous heights.

One thing I think Miller also did was focus investors and give confidence that a major capital allocation decision move will soon be announced by Apple. Much speculation on this has been going on for some time now. The main speculation seems to be around whether this will be a significant increase in the regular dividend and/or issuing special dividend. Given the time frame of its previous dividend announcement last year (03/19/2012) and the extreme buildup of anticipation as well as shareholder agitation (See Einhorn); it is hard to see the company going through March without a major announcement on dividend policy. This should prove to be a major catalyst for the shares. Finally, BTIG analyst Walter Piecyk went against the current and upgraded Apple shares on Thursday. This same analyst made another brave call by downgrading Apple last April when every other major analyst was going in the opposite direction . He turned out to be early but ultimately right then and I think he is right now, but with the hope that his timing will prove to be better this time around.

In addition, the technicals are starting to look more positive on Apple. After bottoming near $420 early in the month, the stock has posted a couple of higher lows and higher highs (See Chart).

(click to enlarge)

Obviously, no one can be sure of a stock’s bottom except in hindsight but the risk/reward profile of Apple is becoming increasingly positive. The stock is cheap on any sort of valuation metric (P/E, PEG, P/CF, etc…) one cares to use. AAPL sells for less than 7x forward earnings once one subtracts its huge cash hoard that is approaching $140B. The stock also yields 2.5%, and that yield looks to get substantially bigger in the near future. The company is expected to grow revenues in the mid-double digits for both FY2013 and FY2014 and the stock sports a minuscule five year projected PEG of under 1 (.53). For value, growth and income investors the stock is providing a great entry level and appears to be at an inflection point as well. Pitches this fat rarely come right down the middle like this in my opinion. Time to swing!


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