Courtesy of Phil’s Stock World
$76,103 – That’s not sales, that’s profit!
Every minute of every day, AAPL is making $76,103 (at $40Bn a year) on the sale of $316,120 worth of products. No company on Earth comes close to that kind of metric and, overall, the stock’s performance clearly indicates that but, if you listen to the mainstream media, you would think AAPL is finished.
We had an in-depth discussion about AAPL in Member Chat this morning and we not only concluded it’s still a buy, but we came up with a spread that has the potential to turn $3,000 into $45,000 between now and Jan 2015 IF AAPL holds $600. Needless to say, it’s nice to have a trade that can return 1,500%, and we rarely get a chance to do them with a blue-chip stock like AAPL.
Here’s the trade idea:
In a perfect world, they will test $600 and really dump out all the weak hands ahead of earnings but it’s kind of iffy. I love that you can sell the 2015 $400 puts for $40 for a net $360 entry and you can pair that with the purchase of the $500/600 bull call spread at $50 so you’re in AAPL for net $10 on the $100 spread that’s 100% in the money and, if you have 3 of those for $3,000 in cash (and about $12,000 in ordinary margin), you can sell 1 Weekly $655 call for $1.50, which is $20 out of the money and if you make 100 sales like that over the next two years, you could collect $15,000 in premium against the $3,000 cash position, and the $30,000 you collect if AAPL is over $600 is just a bonus.
This plan is dependent on AAPL holding $600 and I’d avoid selling calls on earnings weeks, when you are most likely to get burned.
Note in the above chart, that AAPL is still a relative outperformer this year – as shown priced against HPQ, DELL, INTC, IBM, CAT and ISRG – all good companies that have simply failed to keep up.
We also like HPQ at this level, now $14.30 as its REDUCED guidance has it earning $3.62 per share next year after earning $4.05 this year. That’s still 25% back on your money, which sure beats TBills. That’s not even counting the $18Bn in cash HPQ has on hand, which is quite a lot when you consider that its entire market cap is just $28Bn. Small wonder HPQ spent $9Bn buying back its own stock last year, when it was priced 100% higher.
HPQ is a pretty good candidate for a buy/write, where we Buy the stock for $14.30 and Write (SELL) a 2014 $15 put and call (sell short) for $5.50 (combined) and that nets $8.80 on the trade. If HPQ is below $15 in Jan 2014, then another round of shares will be put to us at $15 for an average entry on 2x of $11.90, which is 17% below the current price and, if HPQ is over $15 in 16 months, then we get called away at $15 for a $6.20 profit on cash (75%). Buy/writes are our favorite tools for making long-term entries – see “How to Buy a Stock for a 15-20% Discount.” (To try out Phil’s Stock World with a discount, click here.)
Let’s look at a similar trade idea for INTC. INTC is nicely beaten-down at $22 but may go down to $17.50 before stabilizing so this is a bit early, but we can buy the stock for $22 and sell the 2015 $20 call for $3.70 and the $15 put for $1.50 and that drops the net entry to $16.80, which is 23.6% off the current price, and lower than I think it’s likely to fall. We’re only committing to buying another round at $15, and that’s 32% off the current price, which would give us an average entry of $15.90 – worst case. If called away at $20, our gain is $3.20 of our net cash investment of $16.80 or 19% over 28 months. Not a bad return for betting Intel simply doesn’t fall more than 10% lower than it is now.
This INTC trade idea is nowhere near as exciting as HPQ because it’s considered less risky and we’re being more cautious as we don’t think INTC has bottomed yet. INTC is also kind enough to pay a $0.90 dividend while we wait – adding another 5.3% to our annual return! This is better than T-Bills…
Now, back to the markets. As we can see from our Big Chart, we’re having a bit of a pullback, with the Nasdaq and Russell down 5% from the September highs and the other indices down roughly 2.5% so far.
The Nasdaq made a critical failure yesterday as it fell below its 2.5% line AND its 50 dma at 3,082, while the Russell is right on its 50 dma at 824 and in danger of failing its 2.5% line at 820 as well. The S&P is our most important indicator and it is right on that critical 5% line at 1,440 – our only index not to fail that level. This is our remaining hope so we’ll be watching it VERY closely.
Should the S&P fail – then the Dow has no support down to 13,295. It would make a good short but we’re still hoping we won’t have to to there.
We’re still long-term bullish as nobody notified us that the Fed has withdrawn QE3, and it was just yesterday that China threw another $40Bn into the markets. What’s bumming everyone out this week is worries about earnings (not so bad so far) and all these TERRIBLE pronouncements from the IMF’s meeting in Tokyo on the state of the Global Economy. At PSW, we’ve been saying the Global Economy sucks for months so it’s not surprising. That now seems to be shocking others, who are running for the exits, but not at an alarming pace so far.
In order to climb a wall of worry, we need to first recognize and accept those worries. What we have here is the beginnings of capitulation after a very long period of denial (where bad news was good news into the Fed). This is why we prefer to buy now with a 20% downside cushion – we’re a little early to call it a bottom but the FACT of QE3 means it may not make too low of a trough on the way down. We’re using this earnings season to do a little bargain hunting.
Tell us when something new happens that we should be worried about but, so far, China’s slowdown we’ve been discussing all year, Europe’s mess is 2-years and counting, California Cities in debt crisis also old news, Japan staggering under 220% debt is bad, but just 10% worse than 2 years ago and 7.8% US Unemployment is the best reading since Obama took office and the only thing we have to worry about there is whether Jack Welch’s head will explode if we go down to 7.7% next month.
So far, earnings are coming in better than expected – we’ll see how the week plays out but this correction may be shallow indeed if it turns out we’ve underestimated the recovery in the US and overestimated the impact of China and Europe slowing down.
To try out Phil’s Stock World with a discount, click here.