Is Apple Ripe for the Picking?

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

Unless you've been under a financial rock lately you've seen the terrible drubbing of Apple (NASDAQ: AAPL) for the last 2 months. After reaching an intraday high of $705 on Sept. 21, it recently hit a low of $505.75 before reversing. You rarely see this kind of action from a world class business like Apple, which has been a darling of wall street for several years. If you listen to the talking heads you may have heard a number of reasons; lack of confidence in their ability to innovate without Steve Jobs or locking in a lower capital gains rate before next year's possible increase.

Whatever reason you want to buy into, the fact remains Apple is still a world class business. A cash rich business that is selling for less than 9 times earnings. I have been an apple enthusiast since the beginning and I have watched them grow from being labeled a flash in the pan to the top player they are today. There are 2 apple stores near me that are so busy I don't even bother going in on weekends, and they have recently opened another store in my area. So I don't see much a slowdown according to customers. The great investor Peter Lynch always assessed a business by watching how many customers flooded its stores.

I believe apple is a screaming buy here. To be sure there have been a bumps in the road lately and the stock has been overhyped and widely held. Other box makers such as Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) have become laggards due to their inability to change with the times. HP was a hot stock back in 2010 and was the No. 1 maker of PCs considering units sold. But it is not a good business; anyone can make a Windows based PC. Newer companies like Asus and Acer can make much cheaper PCs and laptops and undercut HP. We have a similar story with Dell, which was once a market darling in the 90's, but they have also been struggling since the days when laptops and PCs were not so much a branded name as a commodity.

Samsung has recently become more of a challenge for Apple, however Apple continues to have a loyal customer base. Steve Jobs, having known of his failing health, left the company a roadmap that will continue Apple's innovative spirit for some time. I am also a big fan of dividend paying stocks, and Apple started paying one this year. But I don't usually buy stocks outright unless I'm getting say a muni fund for income. In the case of a world player like apple, I sell a put option rather than buy it outright. With apple stock around $560 at the time of this writing, an Apple Dec $505 put is selling for around $5. What is the implication of this trade?

If I sell to open one contract my broker immediately gives me $500 cash which is mine to keep. My only obligation is to buy 100 shares of apple should it fall below $505 the third Friday of December. So the biggest risk is that I buy a world class business already selling for a cheap price for an even cheaper price. Many people leave skid marks when they hear the someone mention the word "option," but in reality you lower your risk and generate a good income when options are used properly. I can sleep easy knowing I may be owning a great business at a cheaper price than today. And in the most probable likelihood AAPL does not drop that far, I get to do the process all over again. Meanwhile I can use the $500 to have a great dinner and bottle of wine at a fine restaurant, or actually fix the breaks on my car that have been squeaking lately...

Fool blogger sabatuj is short an AAPL dec 505 put and does not own shares of AAPL. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Dell. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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