What to Do About Apple?

Those who followed my advice to buy Apple a year ago are now drowning in riches (click here for ?Buy Apple on the Dip?). Since the July, 2013 bottom, the shares have risen by a meteoric 92%. It is the largest company in the world once again.

As a result, I have heard of my readers shopping for second homes on Lake Tahoe, sponsoring NASCAR teams, or buying new Rolex watches for significant others.

I recommended China Mobile (CHL) then as well, the big beneficiary of a new deal with Apple, whose shares have also gone ballistic.

The question of the day is: ?Now what do we do?

You are right to ask the question. The company?s stock is notorious for running up massively into every major product launch, and then giving back a big chunk afterwards.

So while the expected announcement of the iPhone 6 on September 9 is welcomed as producing a major new source of revenue, it could also signal the end of the current run.

Take a look at the long-term charts, and the hair on the back of your neck should stand up. The fanfare for the iPhone 6 will almost exactly come at a potential double top in the stock price. Could we be setting up for the greatest ?buy the rumor, sell the news? of all time?

The last time we visited this territory, which we visited on the launch of the iPhone 5, Apple?s shares plunged a gut churning 45%, prompting some shareholders to dump their iPhones in the trash.

Certainly the problems that caused the rally to fail last time are kicking in once again. The law of large numbers applies once more. Apple?s market capitalization is at $607 billion today. There may not be enough equity investors in the world to push the shares up appreciably from here.

Oh, and because of the recent rapid appreciation, most institutions are now overweight Apple, as they were in September, 2012. The only difference is that Apple accounts for only 3% of the S&P 500, compared to a hefty 5% two years ago.

The shares are now at a 15.5 earnings multiple, up from under 10 at the recent bottom, and 7 if you took out all of the cash. That is still a discount to the main market, as well as most other technology stocks.

The truth is that this is not your father?s Apple.

CEO Tim Cook has shown a much greater respect for investors compared to founder, Steve Jobs, who despised Wall Street with a passion. I know, because I escorted Steve to meet with institutional investors looking at a secondary share issue during the early 1980?s. It was not a happy time for me.

There is a $50 billion stock buyback program in place, which soaked up a ton of shares at the bottom.

We also now have a 2% dividend yield, a mere 37 basis points through ten year Treasury bond today, another idea Jobs poo pooed.

The company is also strategically in a much stronger position than it was in 2012. Apple has a far broader, more attractive, and more advanced product range than it did only 24 months ago. The China Mobile deal has kicked in big time.

There is immense demand for the new larger screen, faster iPhone 6, which will offer consumer untold bells and whistles. Some 50% of the iPhones in existence are 4s?s or older, so upgrades from the installed base will the largest in history.

This will enable it to retake market share from hated rival, Samsung, which moved to a big screen in 2013. This will open the way for an expansion of Apple?s profit margins, possibly by 25% or more.

Samsung?s smart phone strategy all along has been to copy Apple?s patents and milk them for whatever they are worth, before they inevitably lose the next infringement case in court. As I never tire of telling listeners at my speaking engagements and luncheons, you can?t steal your way to the top in technology.

I would expect, at the very least, that the market has to put the double top theory to the test at least once. That alone will prompt a 10% correction, back down to $92.

Then, if we really are still in a bull trend, it will bounce off that number and head to new highs. If it doesn?t, then it?s game over until the run up to the next big product launch. The iPhone 7?

So the clever thing to do here has to be to do a buy write and sell short Apple September, 2014 $105 calls against you existing stock position.

At this moment, you can get 96 cents for them, with September 19 expiration. If you are braver still, you can go out another month and take in $2.01 for the October 17, 2014 calls. Don?t go farther out than that, or you might miss the yearend rally.

That way, if the stock keeps rising, you will sell your shares out at the higher price of $105. If it falls, your average cost declines by 96 cents, or $2.01. Either way, it is a win-win.

Isn?t that what you pay me for?

AAPL 8-26-14

CHL 8-26-14

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