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Mark W. Bertolin's  Instablog

Mark W. Bertolin
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I retired as Vice President of Market Technology in the optical- medical device industry for a top tier manufacturer. In addition to forming Innovative Insights LLC, a consulting firm, I've been managing three portfolios. I am a conservative investor and combine my business experience,of 30... More
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Innovative Insights LLC
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  • AAPL: Time To Get Onboard The iTrain

    Apple appears to have circumvented the proxy battle over share buy back levels. The current dividend is $3.05 and the current yield is 2.4%. There is a shareholders meeting this month as well on February 28th so now is a great time to take a look at Apple from a technical perspective.

    In addition to the technical aspects of Apple stock there are nearly limitless rumors and concepts regarding future products. In the past it seemed nearly impossible to predict either product or service advancements ahead of announcements. Things have changed and we are more capable of making educated guesses. It is still guesswork but we believe that we will see two new iPhones in June as well as a watch in time for back to school. Adding two phones to the continuation of the 5C provides, a broad product offering in the phone segment that closely mimics what Apple has done in the past with both the iPod and Mac product lines. We don't think its much of a stretch to extrapolate previous product strategy to the iPhone and there is strong support of a wearable device. We see the future product mix as the 5C with a reduced retail price, a new iPhone 6 with dimensions similar to the 5S in a new aluminum case and a newlarger format iPhone possibly with a 5.7 screen. This provides three price points and when paired with the watch offer the consumer multiple ways to access information.

    We believe the watch will be an evolutionary project rather than a revolution or launch of a new segment. Most likely the watch will offer some biometrics and basic phone pairing capabilities for email, music and messaging. As the segment grows watch for the watch to add features including a pay feature to disrupt the credit card industry. Apple is poised for profitability and a market share explosion. We don't trade on rumors, but married with the technicals an attractive opportunity is presented.

    There are many articles each day published on Seeking Alpha, as well as mass media outlining the various competitive and macro market challenges facing Apple. One of the investor challenges with Apple is navigating through the media noise and maintaining focus on investing objectives. Apple pricing has been locked in a wide 190 point trading range for the past twelve months. Prices have been as low as $385 and as high as $575. Most recently prices plummeted following the earnings report. An excellent review can be found here. As with any investment it's critical to learn as much as possible, and formulate your own personal investing thesis. It is even more critical with Apple due to the remarkable volume of information and opinion. Apple Investor Relations has current information as well as proxy materials, which will be voted on later this month. Is now a good time to invest in Apple shares, and what can be expected for the next few months? Importantly this review is looking at technical information. No future events or product adjustments are factored in. All technical information is sourced from recognia software.

    (click to enlarge)

    Current pricing is just above technical resistance at $501.53 and below resistance at $524.62. This narrow band demonstrates how difficult it has been for Apple to maintain share pricing and how deep both the gains and losses have been. This narrow band does not provide us with confidence for a breakout to the upside. The Relative Strength Index adds support to this direction as it has maintained a low trajectory.

    The chart below reviews dividends paid by quarter. Since Apple started their current dividend program it has been an important consideration for us. We prefer to invest in companies with acceptable yield and look at dividends as an important investment consideration. Interestingly the current price level presents a good value relative to the dividend paid. This gives us confidence that current pricing is a strong enough value to consider investing. A $3.05 dividend is significant.

    (click to enlarge)

    Earnings are another area we key on. In the case of Apple we look closely at not only the past performance but also estimates. The rational for taking this approach, and its investment value, is well demonstrated by last quarters price performance. Apple was severely punished for not hitting estimates in unit sales and lower than anticipated guidance. In order for share prices to maintain an uptrend this gap between estimates and performance needs to narrow. This narrowing will come from two primary areas. Apple can have a surprise quarter and blow out the numbers, or estimates can start to come down. We will be closely watching estimates and gauging sentiment for the next six months. Although we view current pricing as a good value there is significant risk looking into next quarter. This risk reduces our confidence in today's pricing as an entry point for further investment.

    (click to enlarge)

    Using the 52-week low and high pricing our probability model paints a rosier picture. Looking out six months we view pricing lower than today as an acceptable risk. This does not mean that pricing might not fall, but our model postulates a higher price scenario. There is a 49.94% probability that prices will be above today and a 4.98% probability of hitting the 52 week low. These price swings are moderated by the dividend as we are long-term investors in Apple.

    (click to enlarge)

    Using the information presented we see current prices as an acceptable entry point. Perhaps not the "no brainer" that Carl Ichan touts, but a good value. Given that Apple goes Ex-Dividend February 6th we will purchase shares today. Respecting the analysis and anticipated estimate effect we will enter with a 25% stake to capture the dividend. In addition to an open market purchase we have selected a March 22 Put as a secondary entry point. Selling a March 22nd Put with a $475 strike delivers a premium of $3.88 just above the dividend that would be paid if we bought shares. This will obligate is to a share purchase at the $475 level if there is another estimate verses performance downtick.

    Tags: AAPL
    Feb 11 12:48 PM | Link | Comment!
  • Apple: Investment Or Trade

    Apple announces earnings October 28th 2013. As demonstrated in the chart below there is not a strong correlation between earnings and a share price increase. The general media reporting on Apple has been that they have lost their innovation and gross margin is in decline. This media trend has been the main theme since September of last year when Apple traded at $705. Recently articles have been more upbeat and analysts are adjusting their opinions mostly upward. The momentum and comments have become more positive. I believe that this change signals the end of the "Apple is doomed" scenario and the market is once again ready to buy into the Apple business.

    The recent release of the new iPhones (5c and 5S) has analysts increasing iPhone sales estimates for the September quarter and 2014. The technical picture for Apple is very interesting as we approach earnings and we believe sets up a trading opportunity. The major elements of the trade are timing based rather than financial performance.

    1: Earnings release October 28th

    2: Debt Ceiling deadline October 17th

    3: Introduction of new iPhone products and music services

    4: Carrier expansion into Asia

    5: Analyst earnings upgrades for 2014

    6: Sentiment change to more positive

    7: Holiday sales season approaching

    We anticipate the confluence of government shutdown and debt-ceiling deadlines will increase market volatility. As the market becomes more volatile and investors look to shore up their portfolios for a government-induced decline is there a better place to hold cash than Apple? I am not claiming that Apple will be immune to these factors but we believe that the effects will be muted. Apples cash position only adds to the thesis as it adds stability to to the share price and dividend payments. Apple is an international powerhouse. Last years SEC report presented sales of $57.5 billion in the Americas of a total of $156.5 billion. Apple is strengthening their international position as represented in the YOY percent change table below.

    9 months

        

    Region

    2012

    2013

    YOY Change

    YOY % Change

    Americas

    43702

    48798

    5096

    10%

    EU

    28300

    29878

    1578

    5%

    China

    17106

    19684

    2578

    13%

    Japan

    8204

    10121

    1917

    19%

    Asia(rest)

    8631

    9201

    570

    6%

    The chart below demonstrates share price behavior following earnings.

    (click to enlarge)

    Technical indicators show support at $441 and resistance at $489. The RSI at the mid point of 50 (higher reflects overbought lower reflects oversold) a trade is setting up for this month's earnings release. The next level of retracement is $450.

    (click to enlarge)

    Using projected Fibonacci retracement levels the probability estimates represented in the chart below show a 22.4% chance of Apple reaching $450 by November 19th. These calculations do not include factors such as international growth, sentiment or earnings. We anticipate share price to be volatile but trend to the upside through earnings.

    (click to enlarge)

    Shares could be purchased as pricing declines through the government induced volatility. Price targets are $440 on the low side and $480 on the high side. Rather than purchase shares prior to earnings entering a bullish position with a cash secured Put is preferred. Today the November 16th put with a strike of $450 traded at $8.35. Since this is a sell to open position we are prepared to purchase shares if pricing declines to $450 by November 16th. This is a trade not an investment. If share price does increase through earnings we will close the position at the 50% gain level or option pricing under $4.00. Anticipated returns are between 4% and 7.15% depending on if the position goes to the full value or is closed prior to expiration. The risk is that share pricing does not go up as we anticipate and the put is assigned in which case we will own another 100 shares of Apple at $450. Since it is trading at $482 today this trade presents an acceptable risk reward profile. With all the non-Apple specific volatility and market pressure it is not the time to invest, its time to trade, and cash in on the volatility.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: earnings
    Oct 08 4:56 PM | Link | Comment!
  • Tesla Motors: Electrify Your Portfolio

    Tesla Motors designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components. The company also provides services for the development of electric powertrain systems and components, and sells electric powertrain components to other automotive manufacturers. Tesla recently released earnings and posted their first profit. On this news share pricing rocketed to a 52 week high in a parabolic move to $97.12. It has since retraced to $81.61 giving up pricing nearly as quickly as it gained. The one-month chart below illustrates the magnitude of the move.

    (click to enlarge)

    When a stock move as aggressively as Tesla has moved with a $.12 EPS announcement it points to other factors moving the price other than business fundamentals. Yes, its is wonderful Tesla posted its first ever profit and did it ahead of estimates but did anything other than hope move the price?

    (click to enlarge)

    With a short interest of 23.85%, and volume nearly double the average of 11 million shares, it seems like the traders have decided that pricing is headed down. As of this writing shares are down to $81.61 representing a 7% decline in daily pricing. One interesting dynamic of Tesla is that institutions hold 70% of the shares. This level of institutional ownership can have two effects, one positive and one negative. As long as Tesla performs to meet investor expectations high institutional ownership acts as a stabilizer. The risk is that when one of them decides to sell it has a magnified impact and others may follow, believing correctly or not, that one of their peers knows something that they don't.

    (click to enlarge)

    (click to enlarge)

    Since Tesla is barley profitable is it a place to invest? What do the institutional investors see in Tesla that others do not? I have toured the manufacturing facility and main showroom. It is impressive. Tesla represents a departure from every other automotive alternative in that they are focused exclusively on electric power. No comprise has been made in the design or quality of the Model S which compares favorably with the benchmark Mercedes Benz S class sedans. In addition to the manufacture and sales of cars they also have a robust design and engineering studio reminiscent of the Porsche Design Group. The consumer market will tell us over the next few years if battery powered cars are the path to the future, but in the mean time Tesla has successfully carved out a luxury niche and is supporting the brand with aggressive warranty and guarantee programs. With retail pricing ranging from $62,000 to $90,000 Tesla is targeted squarely at the luxury buyer.

    Our thesis for Tesla is strait forward. If there is a market for electric cars Tesla is in the best position to capitalize on the transition from fossil fuel to battery and they support auto sales with technology licensing and engineering consulting while the market builds.

    To enter the Tesla trade I will use Sell to Open Cash Secured Puts priced at the $70 strike for June 22nd 2013. This level is slightly below the 38% retracement of $73.3 and $4.11 over the next retracement at the 50% level of $65.89. If Tesla stock pricing falls to $70 or under by June 22nd I will own 100 shares. Today the Put pricing is trading for $4.00. The risk with this trading strategy is that Tesla share price will fall below $70 and I will buy shares at a higher than market price in June. The next quarter earnings announcement is scheduled for July 24th.

    I think it's too risky to enter a position at current levels but I do want to take advantage of their swing to profitability and opportunity for the future sales. There are no competitive luxury brands in the market. If the market segments into the categories I foresee then Tesla will be the global leader in luxury battery powered cars.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: long-ideas
    May 15 12:10 PM | Link | Comment!
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