Random Musings

December 15, 2012 (2:30 pm)

  • Stagnant Price Growth: Apple is currently sitting at a level it first hit in February 2012. That was over 10 months ago. Since then, LTM earnings have increased 26% from $35.11 to $44.17.
  • Crash: It looks – and feels – like shares of Apple are simply in free fall mode. They’re crashing. The last time we saw anything resembling the recent price action was during the fall of 2008 when there was a financial crisis enveloping the country. While I may not agree with all of Obama’s policies, his reelection certainly does not equate to a crisis. If anything, he’s a known commodity at this point. And the “fiscal cliff” is simply a tax hike in a couple of months. It is in no way similar to every large bank failing at the same time. Not even close. What am I missing?
  • Forward P/E: Looking forward, Apple will very likely have $60 in LTM earnings over the coming year and over $65 by January 2014 (based on the current low $500’s share price, that represents an 8.0x P/E).
  • Cash: And if that’s not enough, the company will likely have over $200 in cash – assuming a constant $2.65 quarterly dividend – by next January (2014). Therefore, those analysts going on CNBC arguing for a return to the low $400’s expect Apple to trade at two times next year’s CASH per share. Is that a joke? In what world is that a reasonable assertion?
  • Technicals: The technicals are simply not working here. This is similar to the action we saw early this year with the parabolic rally from January-March. The technicals did not work then either. Except this is the opposite. There were so many people expecting Apple to continue running without even a 5% pullback during the rally. We’re now hearing those same types of calls here. The end of this correction is near.
  • Opportunities: It is absolutely unbelievable to look at some of the opportunities opening up here. The January 2014 $800-$850 call spread is currently trading for $3.00. That means if Apple trades above $850 in 14 months, you’ll have made over 17x you money in a year (or more than a 1500% gain – you read that right). The market is currently giving you 16-1 odds against Apple hitting $850 next January. To put that in perspective, it will likely have LTM earnings over $65 at that point. Applying a 14.0x PE to that EPS gets you over $900. What’s going on here?