We have been awaiting a glimmer of evidence to convince us that this market truly can break through its trading range. This past week the market has tried to use the 'currency war' as a reason to sell off and
we felt it was important to see Friday's action following the employment report before making any more buys, considering we're already substantially invested. Obviously, the action is positive and we are confident to make our final Apple (NASDAQ:AAPL) purchase before its earnings report on October 18th. We are buying a 5% allocation of AAPL November and January option calls. This brings total cash to 28.5% of the portfolio (after Thursday's purchase of GLD puts) This is the optimal amount considering the economic timing barometer is in the green and considering we have a full allocation of LEAPS.
Yair Reiner with Oppenheimer said in a note to investors on Friday that although AAPL stock is up 37 percent in 2010, it has still lagged behind the company's fundamentals: "The prime factor behind the underperformance of the stock relative to the fundamentals seem to be investor concern about Apple's size," he wrote. But a blowout September quarter would spur an "overdue" catch-up with investors.
I agree that Apple stock is overdue to catch up to the fundamentals. We maintain our $330 price target for the aftermath of the earnings report at which time we will seriously consider taking profits and moving most of the Apple allocation into 2012 LEAPS. This earnings report is a rare opportunity to own short term options because the risk/reward is in our favor. Not only do we expect Apple to announce that they have sold every iPhone and iPad that they could produce, but we also anticipate the market will begin to price in the Verizon/China Mobile iPhone that is rumored to arrive in Q1 2011.
We believe the rumors to be true for a variety of reasons:
Apple wants to take some strain off of the AT&T (NYSE:T) network
Apple wants to compete more directly with Google's (NASDAQ:GOOG) Android
Apple needs to spread out the manufacturing burden.
Most are speculating that a move to Verizon (NYSE:VZ) means the end of Apple's exclusivity deal with AT&T but we hear that Apple might give AT&T exclusive rights to the new versions of iPhone while the Verizon release date lags 6 months or even one year behind. It will all depend on how quickly the new manufacturing partners can ramp production. It's really not that big of a deal because any margin squeeze that results from a loss of AT&T exclusivity will be made up in volume from Verizon. Steve Jobs has stuck with AT&T for so long that I expect his loyalty will remain with them even as iPhone expands to other carriers in the U.S.
Apple and its many catalysts will be the primary stock engine to drive the rest of the market through its stubborn trading range. It's nice to see Apple regain its leadership position this week as it indicates a breakout above Dow 11,000 will happen sooner rather than later.
Disclosure: long AAPL