Don't Go Bananas for Apple Yet

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The core strength for Apple (NASDAQ: AAPL) lies in its expertise in integrating hardware, software, and services in different devices through one simple, easy-to-use platform. Apple is about innovation, fulfilling the gap between vision and reality, and providing better living experiences. Has it changed after Steve Job's departure? I doubt it.

iPhones Vs. Samsung Galaxy S3

According to the research conducted by Strategy Analytics, a study found that 88% of U.S. iPhone owners are likely to buy another Apple smartphone, representing a decrease from 93% last year. In Western Europe, the number decreased from 88% in 2011 to the current 75%, as reported by Zak Islam. Incidentally, Samsung's Galaxy S3 became the world's best-selling smartphone model last quarter, pushing aside Apple's iPhone, which has dominated the chart for more than two years, as reported by Strategy Analytics on Nov. 8, 2012.

The report also stated that "a large touchscreen, extensive distribution and generous operator subsidies have propelled the Galaxy S3 to the top spot." However, cautious investors should not stop here. The report further concluded that "We expect the new iPhone 5 to out-ship Samsung's Galaxy S3 in the coming fourth quarter of 2012 and Apple should soon reclaim the title of the world's most popular smartphone model."

iPads Vs. Others

iPad Minis were sold out after pre-orders at a record pace. The demand for iPad Minis remain strong, despite the slowed supply with a two-week waiting period. Yes, there are concerns about the lowered margin for iPad Minis, but Minis were designed specifically to compete with the lower-priced Android tablets, such as the Kindle from Amazon (NASDAQ: AMZN) and the Nook from Barnes & Noble (NYSE: BKS).

According to the research from Strategy Analytics, global tablets shipments reached 25 million units in the third quarter of 2012, and Apple iOS slipped to 57% of these shipments while Android increased to a record 41%. "Demand for tablets slowed due to ongoing economic uncertainty and consumers holding off purchases in anticipation of multiple new models, like the iPad Mini, during the upcoming Q4 holiday season, " said Peter King, Director at Strategy Analytics. Neil Mawston, Executive Director at Strategy Analytics, further added, “No single Android vendor comes close to Apple in volume terms at the moment, but the collective weight of dozens of hardware partners, such as Asus, Samsung and Nook, is helping Google’s Android platform to register a growing presence in tablets.”

On the other hand, compared to Amazon's Kindle Fire HD, iPad Minis do have certain edges with some features, such as a rear-facing camera and availability in 64G capacity and 3G/4G/LTE, as reported by Chris Rawson from Tuaw. The competition in the tablet markets is picking up and Apple is fighting back with iPad Minis. If the Minis can do their job, then a reduced margin might be compensated for by increasing volume, and thus allow Apple to penetrate into the lower-end tablet markets to further leverage its integrated services and to enjoy even larger economies of scale. 

Apple Vs. Apple's Price

If Apple is still fundamentally sound, then are why some investors and analysts calling for the stock price to drop to $425, while many believed Apple would hit $1,000 per share 5-6 weeks ago? Apple is the best of its breed, with strong revenue and EPS growth for the past 3 years. These are accompanied by an impressive 26.7% net profit margin, 42.8 ROE, and zero debt-to-equity, which I assume all Apple investors already know and are proud of.

How about Apple's dividend? It's a good sign that AAPL continues to generate strong cash flow, but unfortunately it also hints that AAPL cannot generate better return for its cash. For pure dividend investors, there are definitely better targets to select from. How

Although I am not sure who was selling Apple in the past few weeks, I suspect investors are using AAPL as an ATM machine to get cash in preparation for the upcoming economic uncertainty. The future is still uncertain with a fiscal cliff looming, but the existence of fear is obvious.

Very Bearish Technically

As seen from the chart below, AAPL is very bearish in the short-term, as it had broken below its 50-day and 200-day MA since early October. The selling pressure continued to increase with RSI (14) currently at 24.33 (below 30 is considered over-sold). The MACD (12, 26, 9) indicator has continued to be a bearish sign since Sep. 24.

<img src="" width="396" />


Stay Focused and Leverage Options

For long-term Apple investors, it's time to focus on the reasons why you bought Apple in the first place. If those reasons are still valid, then it becomes a short-term concern that you can protect with simple put options, if you haven't already done so. Investors can consider buying puts with Apple's current 1.97% dividend. I like to view it as an insurance policy paid by Apple for Apple shareholders.

For bullish options traders and those investors who would like to potentially acquire Apple at a further discounted price while trying to capture some upside gain, an options play is reviewed below:

  • Short 1x Jan. 19, 2013 Put at the strike price of $500 for the credit of $16.95
  • Buy 1x Jan. 19, 2013 Put at the strike price of $470 for the cost of $9.70

For options trader who would like to bet on the short-term decline, a put spread is reviewed below:

  • Buy 1x Dec. 22, 2012 Put at the strike price of $520 for the cost of $17.33
  • Short 1x Dec. 22, 2012 Put at the strike price of $500 for the credit of $10.95

For long-term investors with a bearish short-term view, both options plays can be set up at the same time to capture the short-term downside profit, while preparing for the long-term gain with a discounted acquisition price. However, a shorter-term Dec. put spread needs to be closely monitored and managed if AAPL starts to turn bullish again. Traders and investors also need to keep in mind that Christmas season is coming, which is followed by the fiscal cliff in late 2012 or early 2013. It's not the time to go bananas, but apple investors definitely need to be prepared.

Note: All the prices are quoted from the closing of Nov. 8, 2012. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

NickChiu has a position in Apple. The Motley Fool owns shares of Apple and Motley Fool newsletter services recommend Apple and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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