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  • 9% Yield From Apple 0 comments
    Oct 4, 2012 12:33 PM | about stocks: AAPL

    A lot has been written about Apple (AAPL). The bulls argue that Apple at 15 times this years earnings is cheap factoring in its growth rate, its high margins and its market dominance. The bears argue that it can't keep up its growth rate forever, and sooner or later competitors will cut into its high margins.

    Although, Apple is a top pick at HypeZero (see our picks here), we will not argue the bull case. Instead, in this dividend-starved market, we offer you a 9% yield from Apple. But, before we present the yield, let's get a valuation of Apple that almost all bears and bulls will think is cheap, $500/share.

    Why $500/share?

    Currently, Apple has over $120 cash per share. All estimates point to Apple having nearly $200 cash per share by the end of 2013. So, if Apple is trading at $500/share on January 2014, almost 40% of its value will be in cash. If you back out the cash, it will be trading at a PE of 6 (assuming earnings are around $50/share). All bears will agree this is cheap even if there is no future growth for the company.

    9% Yield

    Currently, the January 2014 $500 put options are trading at around $40. A put allows an investor to sell a particular stock for a specified price by a certain date. If you sell the aforementioned put, you will receive $40 in hand and the buyer of the put will have the right sell you Apple for $500/share. On January 2014, if Apple is trading above $500, you will have made $40 on your $460 investment or almost 9% return in a little over a year. If Apple trades below that price, you will essentially buy Apple for $460/share. This is an 8% discount to the cheap $500/share valuation.

    We think the $500 price is the best risk/reward ratio because it offers a great yield in this market and allows investors to buy Apple at a low price just in case the stock dips. Let's look at all the different options.

    Puts

    Put Price

    Return

    Apple Purchase Price

    $600 Jan 2014

    $75

    14.3%

    $525

    $550 Jan 2014

    $55

    11.1%

    $495

    $500 Jan 2014

    $40

    8.7%

    $460

    $450 Jan 2014

    $27

    6.4%

    $423

    $400 Jan 2014

    $17

    4.4%

    $383

    Apple also has Jan 2015 options that investors may want to look at.

    Puts

    Put Price

    Return

    Apple Purchase Price

    $600 Jan 2015

    $111

    22.7%

    $489

    $550 Jan 2015

    $90

    19.6%

    $460

    $500 Jan 2015

    $70

    16.3%

    $430

    $450 Jan 2015

    $50

    12.5%

    $400

    $400 Jan 2015

    $35

    9.6%

    $365

    The $500 Jan 2015 options also look attractive with a 16.3% return in a little over 2 years.

    Risks

    There are considerable risks:

    · The maximum return is $40/share, but the maximum loss is $460/share (if Apple shares go to 0). However, the risks here are low due to Apple's cash cushion.

    · Apple could reduce its cash and the price of its shares by giving a one time special dividend.

    · It could make imprudent decisions with its cash and thus, make our thesis invalid.

    Conclusion

    Obviously, this strategy is not for everyone. Investors who are really bullish on Apple at $650+ should just buy the shares or call options. This strategy is for people who are bullish on Apple at a lower price and want extra income while they wait.

    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.

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