Speculator’s Corner: Is Apple (AAPL) Ready To Rebound?

| April 22, 2013 | 2 Comments

Apple OptionsAs bad as last week was for the broad market, it was far worse for Apple (AAPL).  True, the S&P 500 was down 2% for the week, while the NASDAQ 100 dropped 2.7%. 

But those don’t come close to AAPL’s steep decline of over 9% for the week.

Moreover, the retail/tech giant is down 26% year to date, and a whopping 44% off the 52-week high of nearly $700 per share.  In fact, Apple just gave up its crown of world’s largest public company to Exxon Mobil (XOM).

So why the doom and gloom for the company that could do no wrong?

There are a several factors at play.

First and foremost, the all-powerful iPhone is receiving stiff competition from Google’s (GOOG) Android – especially in the form of Samsung products.  The once clear dominance of the iPhone is being tested by phones such as those in Samsung’s Galaxy line.

Second, Apple hasn’t released a killer product in quite a while.  The iPhone 5 was nothing more than a new iteration of the same old product.  And the iPad Mini wasn’t exactly groundbreaking.

Now, Apple is supposed to be releasing a ‘smart’ watch, which has some features of the iPhone.  However, so far there’s only been mixed excitement over this alleged new product.  And, we have very little idea of the details of the watch.

It doesn’t help that CEO Tim Cook and Apple management have done nothing to counter the negativity of the sellers.  They’ve remained silent throughout the stock’s precipitous drop. 

Finally, the company’s astronomical growth has finally slowed in recent quarters.  Without the “killer app”, there just isn’t the crazy buzz Apple products have had in the past.

Does that mean it’s time to jump ship and bet on Apple’s downside?

I don’t think so.  In fact, I’d say this selling is overdone.

Here’s the deal…

Apple may not have the preposterous growth of past quarters, but the company’s still growing.  Revenues actually increased 17% last quarter.  That’s impressive when you consider revenues are a vast $165 billion per year.

Not to mention, Apple’s EPS is over $44 per share.  That’s a massive amount of profits no matter how you slice it.

And of course, you can’t forget the company’s gargantuan cash holdings.  Apple’s $40 billion in cash is worth more than most publicly traded companies.  It gives management ultimate flexibility in their strategic decision making process.

Look at this way, AAPL’s trading at a very reasonable 8.9x earnings.  And, if you subtract out cash per share, the P/E ratio drops to an even more attractive 7.9x earnings. 

Quite simply, the stock is undervalued.   And it becomes even more pronounced when you consider how influential the company is.

Tomorrow’s earnings will be quite telling.  But, with the huge drop in the stock recently, I imagine most bad news will be built in.  The company would really have to disappoint to spark another bout of selling.

There are a several ways to trade AAPL’s earnings using options. 

For example, if you feel the stock is going to rebound, you could purchase short-term OTM call spreads for a relatively cheap way to bet on upside.

Or, if you’re not sure about the stock’s upside but you think the selling has run its course, you could sell put spreads and collect the juicy premiums.  Of course, that’s a riskier strategy and should only be done by those experienced in trading credit spreads.

One thing’s for sure, the day after earnings is sure to be eventful for AAPL option traders.

Yours In Profit,

Gordon Lewis

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Category: Speculator's Corner

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

Comments (2)

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  1. sam secor says:

    Do you have any ideas for trading weekly options?
    Spreads? how to pick them , and which stocks to pick?
    thanks

    • Gordon Lewis says:

      Sam,

      Not a fan of weekly options for the most part because you’re battling against time decay the moment you purchase the option/spread. For me, it’s too much like day trading and not enough about a thesis.

      Gordon

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