Steve Jobs’ Last Laugh

Nothing beats instant gratification. Bragging rights are nice too.

On Monday, when I strapped on this trade, angry readers emailed me to tell me that I was truly out of my mind. Apple was an ex-growth company, had lost its ability to innovate, shed its “cool” factor, and had fallen behind Samsung with its large screen smart phone. The shares were clearly in a free fall to under $300, and I had to be “Mad” to urge people into the stock at $395.

The Tuesday Q1, 2013 earnings changed everything. Revenues blew out to the upside at $43 billion, profits surprised at $9.5 billion, and earnings shocked, coming in at $10.09. Analyst forecasts minutes earlier ran as low as $8. The company sold a stunning 37.4 million iPhones and 19.5 million iPads.

Best of all, it returned a wad of cash to shareholders; increasing the dividend by 15% and boosting its share buyback program to $60 billion. It can afford to do so because it has an unprecedented $145 billion in cash on its balance sheet.

Not only is Apple now a value stock, it is a high yield value stock, offering investors a 3% annual yield at these prices, compared to only 2% for the S&P 500. Pension funds will not ignore this for long.

All of a sudden, Apple has recovered its “cool” factor and is back at the forefront of innovation. Its dominance in apps and iTunes gives it a huge sinecure in risk free income. The six or so new products it will launch in the fourth quarter of this year, like a low end smart phone for emerging markets, Apple TV, the iPhone 5s, a deal with China Mobile, and new generations of iPods and iPads, all look incredibly interesting. What a difference three days makes!

So it is time for me to take profits on my (AAPL) May, 2013 $320-$350 Call spread. I’m really doing this so I can print out the confirm and carry it around in my wallet next to my spare condom. That way I can whip it out and prove any bar challengers that I made money in Apple on the long side this year, no easy task.

I am also encouraged to take profits here because I have captured 95% of the potential profit in the call spread. Why bother carrying a position in one of the most volatile stocks in the market for three more weeks for an extra 2 basis points?

For options traders, there was something really interesting that happened to Apple this week. Although the shares have risen only $15, or 3.8% in three days, the value of my deep out-of-the-money call spread has soared by 11.4%. That is because implied volatilities on the options have completely crashed. This suggests that the last bottom in Apple shares at $392 is the final one.

I think there is a high probability that the final bottom is in for Apple shares. Sure, the Q2, 2013 revenue forecast was dire at only $33.5-35.5 billion, but everyone expected this. We will know for sure if the stock can break the 50-day moving average at $435. If it does, then it is off to the races once again, and $500 becomes a chip shot. That means flipping from selling rallies to buying dips, possibly for years. But it will take years to breach the old high of $706 once more.

Let me tell you how they could get there. What if the Federal Reserve normalizes interest rates and raises overnight rates from zero to 2%? Apple’s $145 billion cash mountain would throw off an extra $3 billion in interest income a year, boosting the company’s profits, and possibly its share price, by a third. Imagine that? Steve Jobs’ ghost must be laughing!

AAPL 4-25-13

AAPL 2 4-25-13

XLK 4-25-13

Steve Jobs Looks Like Steve Will Have the Last Laugh

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