Sunday, February 3, 2013

AAPL: Stock Oversold, Says Weeden; Sell Puts for Move to $520

Weeden & Co.‘s chief global strategist Michael Purves this afternoon writes that “We like AAPL long at this point, and are targeting a 14% move to $520/share by April 20th,” while offering up some options strategies for the potential rise.

Apple is now “less exciting” and more “range bound” as a stock than in past, he writes, and no longer the kind of stock that “works for everyone.”

But the valuation seems to suggest diminished prospects are fully priced in, he thinks:

The next major product, Apple TV, is too far away to infer any clear judgments about cash flow impact from this potential revenue stream. Meanwhile, the declining margins and competitive dynamics appear to be well priced in to the company�s $250 bln reduction in market capitalization over the last six months and concurrent reduction in forward P/E from 16 to nearly 10. Furthermore, AAPL�s forward P/E ratio is at six year lows. Adjusted for its sizeable cash balance, the stock is trading less than 7 times 2013 earnings, a level we think will begin to attract value investors

And technical levels suggest the stock is oversold:

The stock has become oversold on daily RSI levels while short term RSI levels (120 minute) have been trending higher. We have seen in the last two recoveries a 5 -8% move higher in the stock concurrent with basing/up-trending 120 minute RSI levels. Today�s short term RSI levels are increasing from a more heavily oversold position than they did the past two rebounds.

Purves’s “proposed structure” for playing Apple shares is based around selling puts, and some calls, and also buying calls:

While put pricing is not especially expensive relative to call pricing, we none the less take comfort in the technical and fundamental analytics and believe selling puts to finance call spreads makes a lot of sense at these levels. The next earnings release is expected beyond expiry (April 20th). We think a move higher will be driven more by a reappraisal of the stock at the current valuation and the technical support/rebound than by an event per se and thus not a major volatility event. At the same time, we like spreading the calls as we don�t see the pace of the rally taking us meaningfully through the $520 level during this time period. For those seeking to protect against a volatility event in either the stock or from a macro scenario, a $390 strike put can be purchased and the transaction can still be traded for a meaningful credit.

For those of you playing at home, Purves’s full breakdown of his options plan is as follows:

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