Options Trade – Apple Inc. (AAPL) Friday, November 23, 2012

Apple Rebound On The Way According To Analysts!

**OPTION TRADE: Buy the AAPL Mar 2013 700.000 call (AAPL130316C00700000) at or under $6.10, good for the day. Place a protective stop limit at $2.50 and a pre-determined sell at $11.50.

by Ian Harvey

November 23, 2012


Apple Inc. (NASDAQ: AAPL) has been taking a bear-market hit in recent weeks but the stock is still the most popular pick among those in the hedge fund industry, as a whopping 146 managers hold the stock. This trumps Google Inc (NASDAQ: GOOG)'s 132 and American International Group, Inc. (NYSE:AIG)'s 110, the next most popular picks. Regarding the Cupertino-based tech giant, one particular analyst was on Bloomberg TV Tuesday morning to discuss his top stock picks in the current market environment, and he said that he sees Apple as one of those oversold value opportunities.

About Apple

Apple was launch on April 1, 1976

Started by Steve Jobs, Steve Wozniak, and Ronald Wayne, Apple has expanded from computers to consumer electronics over the last 30 years, officially changing their name from Apple Computer, Inc. to Apple, Inc. in January 2007.

Among the key offerings from Apple’s product line are: Pro line laptops (MacBook Pro) and desktops (Mac Pro), consumer line laptops (MacBook Air) and desktops (iMac), servers (Xserve), Apple TV, the Mac OS X and Mac OS X Server operating systems, the iPod, the...

Recent Activity

Apple’s share price rose considerably Monday, climbing 7.21 percent during the day’s trading to a closing total of 565.73. The climb comes after the company’s stock hit a six-month low last week, hitting the bottom of a 25 percent drop-off since September when it released the iPhone 5. Analysts expressed the opinion that the gains made on Monday reflected a return to sanity for the stock.

The nearly 40 point gain returns Apple’s share price roughly to where it was at the beginning of November, which is still a far cry from its September high north of 700. Market cap sits at around $532 billion, down from September’s high of nearly $660 billion, but the gains made are significant, with a strong bounce back that has countered sizeable but still markedly smaller losses like the 2.10 percent value it shed during trading on Thursday last week.

Sell-side analysts still expect Apple to grow its earnings by an average of 20.9% a year over the next half-decade, which is above both Google Inc. (NASDAQ:GOOG) (15.7%) and Microsoft Corporation (NASDAQ: MSFT) (9.6%). Even more attractive is Apple's earnings growth valuation, which, at a PEG of 0.57, indicates that a massive revaluation is in store over the long haul. Shares of the company currently trade at a 59% discount in relation to Google and Microsoft when using this metric, and sport a much more attractive trailing P/E (11.9X) than both Google (20.3X) and Microsoft (14.3X).

It's worth noting that when Apple beat the Street's last Q1 estimates with earnings of $13.87 a share, consensus was only $10.04. If Apple is able to notch an EPS in the, let's say $14 range, it would represent the YOY growth and beat that, investors would need to push shares higher. It's worth mentioning that Apple's latest EPS guidance is $11.75 a share, but we haven't seen the full effects that new devices like the Fusion Drive, iPad Mini, and iPhone 5 will have in a holiday season just yet, and these estimates can be revised.

Apple is still essentially the same company on paper that it was in September, at least with regards to growth and its own financial performance. You could say the company faced a sort of “perfect storm” situation with regards to highly visible problems in recent months, including the executive overhaul that saw the departure of iOS head Scott Forstall and recently hired retail chief John Browett, and it also faced the iOS 6 Maps backlash from users and press. Also contributing to the decline according to analysts on Friday were upcoming tax hikes.

The healthy performance of the stock Monday indicates that the market saw this six month low as a good time to buy (what with recent product releases and positive earnings reported for the most recent quarter), especially since the six-month low got as much press as it did. Many analysts still have Apple target share prices well north of $700, despite last week’s less-than-impressive performance.

Future Development

The bullish sentiment can obviously be expected of stock, especially when it’s true potential lies in its talks with Chinese telecom China Mobile Ltd. (NYSE:CHL), which has close to 700 million subscribers, or 70% of China's total phone-equipped population. Up until this point, the iPhone has only been available to subscribers at China Unicom Limited (NYSE:CHU) and China Telecom Corporation Limited (NYSE:CHA), which do not use the SCDMA network format that China Mobile employs.

Apple has historically tailored its smartphones to WCDMA networks, and it remains to be seen exactly which side will break first. A deal with China Mobile is ripe for the picking. One potential hiccup over such an agreement, however, is the carrier's refusal to play by the so-called Steve Jobs Rules," which essentially maintain that partners have historically not received a cut of Apple Inc.’s sales. Rumors have been flying that China Mobile wants a piece of the iTunes action, which may be the main negotiating point between both sides.

Obviously, Apple is undervalued, but it seems clear that the stock is in dire need of a bullish catalyst, and there wouldn't be a better candidate than a China Mobile deal. Apple Inc. releases iTunes 11 with improved Facebook functionality later this month, though it remains to be seen exactly how the newest iteration of the software will affect the company's bottom line.

If Apple Inc. cannot work out a deal with China Mobile in the intermediate term, another event that can boost shares higher is the company's next quarterly financials. Historically speaking, the first quarter has always been Apple's best, and with its recent streak of two straight negative surprises, Wall Street isn't expecting an otherworldly total in Q1 of 2013. On average, EPS estimates sit at $13.54, a 2.4% decline from the same quarter a year earlier.

Analysts Opinions

Analysts have maintained their Outperform rating with a target share price set at 740, there is therefore a 32.4 pct potential upside on the stock from the last quote at 566.44.

This follows the call by Merrill Lynch analyst Scott Craig who this week cut his price target on Apple shares to 780 from 840; though he maintained a Buy rating.

Craig was fairly ambiguous in his assessment as he insisted that he remained “positive despite recent volatility.”

Barclays' Ben Reitzes was among those offering positive remarks on Apple stock Tuesday, arguing that "Given the recent sell-off in shares we believe that there is still room to surprise investors with holiday sales momentum at Apple."

One person who sees a rebound coming is UBS Securities analyst Steven Milunovich. In a note to clients on Wednesday, Mr. Milunovich said that Apple's stock "appears ready for a run."

Simply put, he says "too much choice favours Apple."

Mr. Milunovich has a current 12-month price target of US$780 on Apple. He rates the stock a buy. Apple's stock was last trading at US$50 on the nasdaq on Wednesday morning.

The latest report from analysts at Credit Suisse (CS) says they expect shares of Apple Inc. to outperform in the coming months. The report points out the fact that Apple’s products are highly diversified across the computing market, including PCs, tablets, smartphones and other devices. According to the analysts, this diversity gives Apple Inc. some structural advantages because the company can grow iPhone sales, tablet sales and computer sales. They expect sales of iPhone units will increase by 39 to 48 percent. They also expect sales increases of 52 to 62 percent for Apple tablets and 3 to 8 percent sales increases for Mac computers.

Currently CS analysts are maintaining their $750 target price for the stock. In the past, the stock troughed at 10 times esps. Wall Street analysts are setting an earnings per share estimate of $52.23 for calendar year 2013, which supports a target price closer to $520. However CS analysts believe those estimates are too conservative. Their estimated earnings per share for 2013 is $60.19.

They are maintaining their outperform stance on shares of Apple Inc. because of the company’s solid growth and advantages in sustainable competition. If Wall Street comes closer to the estimates of CS analysts, then the consensus will be around $55.

CS analysts say that currently Apple Inc. shares are inexpensive compared to the growth profile of the stock. Also the $128 of net cash per share makes the stock look attractive to investors at the current price. Apple Inc.’s next report on earnings is expected to be released around Jan. 22, and analysts expect that report will be the catalyst for revising the earnings upward and also appreciating the shares.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the AAPL Mar 2013 700.000 call (AAPL130316C00700000) at or under $6.10, good for the day. Place a protective stop limit at $2.50 and a pre-determined sell at $11.50.

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Options traders win because they are successful.

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