Own Apple For Less Than Market Price

By Sham Gad | August 30, 2010 AAA

Apple (Nasdaq:AAPL) is one of those companies that, in hindsight, many would have loved to have owned for any part of the last decade. Against a negative real return for the S&P 500 over the last decade, shares in Apple advanced by nearly 800%. Just owning the stock over the past three years would have more than doubled your investment. With shares now trading at $240 and a market cap of $220 billion, is there any room left for more gains?

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Be Realistic
Without question, this decade of returns for Apple will not be remotely close to what happened last decade. A 100% increase in the share price would give Apple an unheard of $450 billion market valuation, an unlikely scenario as well. Yet, over the next couple of years, shares in Apple could still deliver a double-digit annual return. Despite it's sizzling growth, shares trade for 18-times earnings. That's well below Amazon (Nasdaq:AMZN), at 52-times earnings, and still better than the likes of Google (Nasdaq:GOOG), despite the stronger growth outlook for Apple. Apple's new tablet computer, the iPad, is selling very well, and the iPhone 4, despite some glitches, is being received well.

David Einhorn, the successful value investor running Greenlight Capital, took a position in Apple during the second quarter of 2010, paying around $240 a share telling his investors that Apple's future growth is not yet over.

Buy Apple for Less
Investors interested in owning Apple but want a better entry price than Mr. Einhorn can sell put options on the stock. By selling a put option, an investor is making an obligation to buy shares of Apple at a predetermined strike price within a certain time frame. In exchange for taking this obligation, the investor will get a premium today. For example, the Apple January, 2011 $220 puts can be sold today for around $14 a contract. Each contract sale provides the investor $1,400 in premium income (ignoring commissions, for simplicity). If Apple shares hit $220, or decline by 10% from today's price, the investor will be required to buy 100 shares of Apple for each contract sold at $220. After keeping the put premium of $14, the effective cost for owning the stock will be $206, versus $240 today.

If Apple shares do not touch $220 within this time, the investor will get to pocket the option premium. In the end, you either get shares for significantly less than the market price, or you keep a little premium. Of course by selling a put option, you have to be ready with the capital if you are required to buy the shares. So if you sell five contracts for $7,000, you may be required to buy 500 shares for $220, or $110,000 less the $7,000 you pocket. On the other side, you may never get a chance to own the stock if Apple continues to go higher, in which case you miss out on future upside above the option premium amount. (For more, check out our Put Option Basics video.)

The Bottom Line
Buying Apple for $206 a share is like getting this innovative cash cow company for under 12-times earnings, based on 2010 earnings estimates. That's a similar multiple to names like Microsoft (Nasdaq:MSFT), and cheaper than Dell (Nasdaq:DELL), both of which have valuations considered very cheap by many investors today. Yet neither Dell nor Microsoft are growing their top and bottom line like Apple. (For further reading, check out When does one sell a put, and when does one sell a call?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Mixed on Durables and Jobless Claims - Ahead of Wall Street
    Stock Analysis

    Mixed on Durables and Jobless Claims - Ahead of Wall Street

  3. Why Would Apple Inc. Close Beats Music? Experts Weigh In
    Stock Analysis

    Why Would Apple Inc. Close Beats Music? Experts Weigh In

  4. Jeff Bezos Versus Elon Musk: The Space Race, Amazon.com, Inc. & More
    Stock Analysis

    Jeff Bezos Versus Elon Musk: The Space Race, Amazon.com, Inc. & More

  5. Alt-Energy Up on Emerging Markets - Industry Outlook
    Stock Analysis

    Alt-Energy Up on Emerging Markets - Industry Outlook

Trading Center