Apple's Prognosis: Range-Bound

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) became the largest holding in my portfolio this summer when the shares fell to under $400 a share. I added to my original position as the stock had become deeply undervalued. In the succeeding six months, the stock rewarded my faith significantly by advancing some 40%. The rise was powered by the release of new versions of the iPhone and iPad as well as signing two significant carriers (China Mobile (NYSE:CHL) & NTT Docomo (NYSE:NTT)).

I miss those days. Apple is still a good value at ~13x this year's expected earnings, a discount to overall market multiple (~15x). The tech company also should see revenues increases in the 5% to 7% range this year, above the 4% sales increase expected for the S&P 500 in 2014. This does not take into account the ~$160B the company has in net cash and marketable securities or its 2.2% dividend yield.

However, the shares are not even close to how cheap they were at $400 a share when they were selling at single digit price earnings ratios even including cash. For the last three months, the shares have been fairly range bound (See Chart).

I see this continuing for some time until additional catalysts come to the fore.

The Floor:

When Apple sold off ~8% post earnings, the company stepped in to buy some $14B at bargain prices. Carl Icahn, who now has more than $4B of Apple in his core holdings, also bought more shares. Apple has some $20B still left on its stock repurchase program. In addition, given they have already spent ~2/3's of their revised $60B program since summer and its huge cash balance, I expect the company to up its repurchase program in the near future. This huge buying power should put a floor under the stock where Apple dropped post earnings, or $500 a share.

The Ceiling:

The stock tested the ~$570 a share level a couple of times in the last few months and has failed to breach it. At that level, the stock would be selling for almost exactly the multiple of the overall market, and I believe this ceiling will be in place until some new catalysts power the stock forward.

Possible catalysts:

I can see several catalysts on the horizon for Apple:

  • I think analysts' earnings revisions are pretty much done until we get quarterly earnings again in late April. Other than beating earnings and revenue projections, investors will be looking to see if the company maintained its margins during the quarter. Also critical will be how the deal with China Mobile is driving sales in the Middle Kingdom. The carrier has over 750mm subscribers, and the iPhone launched on the network on January 17th.
  • The other big and predictable catalyst will be the announcement of the iPhone 6. The next version of the iconic franchise is expected to offer the larger screens that both customers and investors have been clamoring for. This probably will not happen until at least the summer, but should be a major positive.
  • The other catalyst that should provide major support is when/if Apple announces a product for a new category. One of the major criticisms of the company is that is has not had a major new product since Steve Jobs passed away, and this was the iPad in 2010. I would look for either something in the wearable technology category like an iWatch or the long rumored iTV, which could benefit greatly from Apple's huge and growing ecosystem, including the AppStore.

Summary & Strategy:

Until we hit a major catalyst, I believe the stock is range bound between ~$500 to ~$570 a share. Buying additional shares when the stock approaches $500 a share and selling a little of one's position when the shares get near $570 a share makes some sense.

Alternatively, one could sell out of money covered calls when stock gets near $570 a share and by selling out of the puts when AAPL gets near $500 a share. This is the strategy I will be taking for my own position until the stock gets another catalyst to break its trading range on the upside.

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.

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