High Heeled Traders

Sweet Apple

July 24, 2015

With AAPL leaving a sour taste with some investors I want to give you some things to think about when looking for the place to put your money :
— where do we find value
— where do we find growth

The first is easy. It’s that sweet little number you can easily find in every description of a stock. It’s called the PE (Price /Earnings) ratio. The magic number is 17. That means it’s fairly valued and over than that, well the riskier the stock. AAPL as of yesterday has a PE ratio of 14.46 which indicates it is “undervalued” and that’s why for me AAPL is still a good buy. Compare that with Facebook PE ratio with 90s. Actually just before AAPL reported its earnings, I noted that it has gone up steady from below 120 during the Greek crisis to 130 so I thought there would be people keen to take profits already at the reporting period if it just produces a “decent” number. And so I hedged my AAPL position noting the high price of the call options at this time, which became profitable because of the sudden decline in price. (Options is a contract separate from stock holdings).

My strategy then is to let the stock recover ( seems likely! from -9% it is now up to -5% in one day ) and write another Covered Call. I am looking for the perfect opportunity, and probably not too long to wait with the stock going ex-dividend in less than 2 weeks.

The growth ‘blab fest” is where all the action is happening. Most analysts maintain their Buy and price targets given that there is growth expected on the AAPL stock with the different product rollouts from last convention, but with the limited Apple Watch earnings data — some say the stock is in shaky ground. Though, if you look at all the money that AAPL has been keeping it’s easier to say somehow that will be put to use to grow the business some more. Maybe that AAPL car rumor will turn to an AAPL (branded) airplane, that will surely fly! LOL. But seriously, below is an article describing why you have a golden opportunity to load up on AAPL.

Meantime, earnings season in full swing and it will be a shame though if we let these opportunities pass …
Visa reported earnings beat, so look at MasterCard to replicate the same success (as it has, I think these two cards in every consumer’s pocket at the same time).
Amazon reported huge revenue, so look at other retailers like Walmart as beneficiaries of the more confident consumer.
Healthcare, airlines, restaurants like McDonalds too have reported good earnings so there’s plenty more to boost the market.
UPDATE: Here’s your golden opportunity to buy Apple’s stock

11:07 AM ET 7/23/15 | MarketWatch
By Philip van Doorn, MarketWatch

The company’s results were astonishing, supporting a much higher share price

What would you say if I told you about a company that had increased quarterly sales by 33% and earnings by 38%, while widening its profit margin, reducing its share count through buybacks and building up a record cash hoard of over $200 billion?

And what would you say if that same company’s stock was trading for 13.8 times analysts’ 2015 earnings estimates, less than the S&P 500 Index’s 17.9?

The company is Apple Inc. (AAPL). The maker of the iPhone published results after the market closed Tuesday (http://www.marketwatch.com/story/apple-earnings-boosted-by-iphone-sales-2015-07-21-164853126), and investors sent its stock down as much as 8% in extended trading. The shares were declined 6% Wednesday to close at $125.22, but bounced back as much as 1.5% Thursday morning to $127.09.

Read:5 reasons why Apple’s stock still beats Google’s (http://www.marketwatch.com/story/5-reasons-why-apples-stock-still-beats-googles-2015-07-22)

Still, Apple pretty much hit a home run. The following tables put Apple’s quarterly results into perspective. The company is in the lead for best sales-per-share growth among the 78 S&P 500 member companies that have reported results this earnings season.

Here are the 10 S&P 500 companies with the largest increases in sales per share:

Company Ticker Industry Sales per share – Most recent quarter Sales per share – year earlier Growth of sales per share

Apple Inc. US:AAPL Computers/ Telecom Equipment $8.59 $6.20 39%

Walgreens Boots Alliance Inc. US:WBA Drugstore Chains $26.12 $20.05 30%

Lennar Corp. Class A US:LEN Homebuilding $10.36 $7.98 30%

Goldman Sachs Group Inc. US:GS Investment Banks/ Brokers $22.87 $17.91 28%

Yahoo Inc. US:YHOO Internet Software/ Services $1.33 $1.07 24%

Bed Bath & Beyond Inc. US:BBBY Specialty Stores $16.00 $13.15 22%

Netflix Inc. US:NFLX Movies/ Entertainment $3.77 $3.11 21%

Monsanto Co. US:MON Agricultural Chemicals $9.60 $8.02 20%

Darden Restaurants Inc. US:DRI Restaurants $14.63 $12.33 19%

Constellation Brands Class A US:STZ Beverages: Alcoholic $8.04 $6.81 18%

Source: FactSet

Here are changes to earnings per share for the same set of companies:

Company Ticker EPS – Most recent quarter EPS – year earlier Growth of EPS

Apple Inc. US:AAPL $1.85 $1.28 45%

Walgreens Boots Alliance Inc. US:WBA $1.18 $0.75 57%

Lennar Corp. Class A US:LEN $0.79 $0.61 30%

Goldman Sachs Group Inc. US:GS $1.98 $4.10 -52%

Yahoo Inc. US:YHOO -$0.02 $0.26 N/A

Bed Bath & Beyond Inc. US:BBBY $0.93 $0.93 0%

Netflix Inc. US:NFLX $0.06 $0.16 -63%

Monsanto Co. US:MON $2.39 $1.62 48%

Darden Restaurants Inc. US:DRI $0.82 $0.65 26%

Constellation Brands Class A US:STZ $1.18 $0.92 28%

Source: FactSet

There were two negative aspects to Apple’s earnings announcement that caused some analysts and investors to lose faith. Apple provided guidance, saying it expected sales for its fiscal fourth quarter to range between $49 billion and $51 billion. That was below the consensus estimate of $51.13 billion, among analysts polled by Thomson Reuters, before Apple’s announcement.

Sales of “only” $49 billion would represent a year-over-year increase of 16%, less impressive growth than Apple registered in the fiscal third quarter. Then again, during the fiscal fourth quarter of 2014, Apple increased sales by 12%. Apple’s sales tend to be much stronger in the first two fiscal quarters because new iPhone models are released in the fall.

Read:The message for bulls in Apple’s earnings (http://www.marketwatch.com/story/the-message-for-bulls-in-apples-earnings-2015-07-22)

There was plenty of negative reaction in the media to the sales guidance. Articles featured quotes from analysts saying Apple’s sales are slowing. That’s misleading. Maybe the pace of sales growth is slowing, but nobody expects the company’s quarterly sales to decline from a year earlier.

Another irritation for investors was Apple’s cagey comments about sales of the new Apple Watch (http://www.marketwatch.com/story/apple-hurts-itself-by-hiding-apple-watch-sales-2015-07-21). In the earnings release, Apple CEO Tim Cook said the company was “incredibly excited” about the watch. That’s it. During the earnings conference call, he said quite a bit about various ways customers have been using the watch, and that sales had accounted for “well over 100%” of growth in revenue from “other products.” That category, which includes Apple TV, Beats Electronics, the iPod and the Apple Watch, posted a sales increase of 49% to $2.64 billion.

Read:Apple stock downgraded on China demand concerns (http://www.marketwatch.com/story/apple-stock-downgraded-on-china-demand-concerns-2015-07-22)

Cook said the company’s decision not to release sales data for the watch was “not a matter of not being transparent, it was a matter of not giving our competition insight [into] a product that we’ve worked really hard on.” That’s a type of statement that really irks investors. It’s difficult to understand how providing sales figures would have given much “insight” to competitors, unless it would have discouraged them from competing in the smart watch business.

He added that “sales of the Watch did exceed our expectations and they did so despite supply still trailing demand at the end of the quarter,” and that “the Apple Watch sell-through was higher than the comparable launch periods of the original iPhone or the original iPad.”

So Cook seems hopeful about the long-term prospects for the Apple Watch, despite the perception that demand is weak. It’s possible that the Apple Watch won’t become a popular product, and that would be alarming to investors because of its major rollout this year. But as we have seen with Amazon.com (AMZN), which was forced to announce a $170 million write-down on its failed Fire Phone, a large company developing new technology can recover quickly. Amazon’s stock has soared 57% this year.

On a brighter note, Apple grew sales in China by 112% to $13 billion and said emerging markets contributed 35% of its total revenue. It was also interesting to see a 9% increase in Mac computer unit sales, with Mac revenue also rising by 9% to $6.03 billion. It’s a tall order to increase PC sales these days.

Apple’s stock

Apple’s stock closed at $125.22 on Wednesday. It was trading for 13.8 times the consensus 2015 EPS estimate of $9.08, according to analysts polled by FactSet. What makes Apple look even more attractive, by this measure, is the fact that analysts expect earnings per share for the S&P 500, excluding the beleaguered energy sector, to rise by 4.5%, according to S&P Capital IQ. That’s a decent figure, but it pales in comparison with Apple’s 45% EPS increase.

Apple’s earnings per share jumped 45%, and net income rose 38%. The difference is explained by the buybacks, which reduced the company’s diluted share count by 5% from a year earlier. During the first three quarters of fiscal 2015, Apple bought back $22 billion worth of shares, but its cash and marketable securities rose to a record 202.8 billion.

There’s been a lot of discussion recently about how buybacks might amount to “financial engineering,” especially if a company is buying back shares at high prices, or if the buybacks simply counter the dilution caused by stock-based compensation to executives (http://www.marketwatch.com/story/what-you-can-do-about-obscenely-high-executive-pay-2015-07-16), or if the money might be better spent on business expansion. But those arguments don’t mean much in the case of Apple, whose cash is piling up.

Though Apple’s stock is depressed, it is nonetheless an incredible bargain.

-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com

RELATED: It’s too soon to abandon the Apple ship, analysts say (http://www.marketwatch.com/story/its-too-soon-to-abandon-the-apple-ship-analysts-say-2015-07-22)

RELATED: First downgrade of Apple after earnings (http://www.marketwatch.com/story/apple-stock-downgraded-on-china-demand-concerns-2015-07-22)

(MORE TO FOLLOW) Dow Jones Newswires

July 23, 2015 11:07 ET (15:07 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc

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