Milwaukee Journal Sentinel Investment Trends column
Jan 13, 2013 (Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) --
Eight months ago, investors were clamoring to buy a slice of Apple.
Today, they're not so sure.
The euphoria Wall Street felt in May, when the iPhone5 had yet to launch and Apple was priced just under $570, helped push the stock above $700 in September.
Shares of Apple Inc. (AAPL, $520.30) have dropped since then, but the Cupertino, Calif., maker of mobile phones, portable music players and personal computers still intrigues investors who wonder if newer versions of the devices in their pockets will be powerful enough to create more earnings surges.
Apple has traded in a 52-week range of $418.66 to $705.07.
"Apple's fair value is probably more than $600, but I think it's going to take more good news than is available to get it back to $700," said Ted Levin, a partner at Grant, Koehler & Levin Ltd., Mequon.
Levin thinks Apple's earnings and sales will continue to grow, but more slowly.
Apple TV -- a digital receiver designed to play content from Apple's iTunes store, Netflix, YouTube and other sources -- has generated excitement, but margins are much lower on this product, he said.
The company had problems with its maps application, which led to a management reshuffling. Production issues have arisen with the new iPhone, and investors worry about Apple's ability to produce its next hot product in a timely way, Levin said.
The biggest risk to Apple may be that purchases of new phones will eventually slow.
"At some point, people aren't going to replace phones as quickly, and Apple will get diminishing returns with each new product," Levin said.
Still, smartphones like the iPhone have become a key part of peoples' lives. Levin observed that consumers so love their smartphones that families of four are willing to pay usage charges above $200 a month -- more than the cost of a car lease.
In May, Grant, Koehler & Levin recommended writing covered calls on Apple, which had risen 66.4% in the previous 12 months to $566.71.
Levin's business partner, Christopher J. Grant, said at the time that growth in the China market would offset a mature U.S. market, that Apple's balance sheet was stellar and its stock was trading at a reasonable valuation. Worried the shares could not keep growing, however, he suggested investors who buy Apple shares also write covered calls on them.
Investors who use covered-call options sell to others the right to buy their shares -- you must own 100 or more -- at a higher price in the future. If the shares reach that higher price, the original investor must sell. Otherwise, they keep the shares.
Grant recommended in May selling call options that would expire this month at a strike price of $600. That would have yielded $49.10 per share on the sale of the call -- an 8.7% return.
Those investors would have lost the opportunity to sell their shares in September at their $700 peak, but timing sell decisions is always difficult, Levin said. Income from the sale of the covered call also would have balanced out the drop in share price.
"The stock went down, but we offset that decline with a covered call," Levin said.
Now the question for investors is whether to sell or hold the shares and write another covered call.
Apple is undervalued, Levin said.
"If you strip out the cash on the balance sheet, this stock is trading at less than 10 times 2013 earnings estimates," he said.
Such a low valuation assumes flat to declining earnings over the next 10 to 20 years, putting Apple in the range of much more troubled technology companies, he said.
If Apple shares were trading at the market multiple of 14, they would be at just over $600, Levin said.
He suggests holding Apple and waiting for the stock to rise before writing another covered call. On Friday, Apple's calls that expire in January 2014 with a strike price of $600 were trading at $37.28.
If the shares reach $580 in the next two months, Levin said, he would write a covered call with a strike price of $600 that expires in January 2014 and collect that premium, which he estimates would be up about $50 a share.
The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.
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