Here's a cautious way to pick Apple
May 13, 2012 (Menafn - Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) --The nagging question is whether to take a bite of Apple Inc. (AAPL; 566.71).
From nearly any perspective, the company is a top performer. But savvy investors will look beyond the company's numbers and understand that no company grows forever, said Christopher J. Grant, managing partner and portfolio manager at Grant, Koehler & Levin Ltd. in Mequon.
Apple's iPhones, iPads and other devices are fast becoming critical components of modern life. The Cupertino, Calif., company's stock price climbed 66.4% in the last 12 months, and Apple produced "spectacular" results that greatly exceeded analysts' expectations for its second quarter ending March 31, Grant said.
Sales of the company's iPhones grew by 88% for the quarter, and the devices produced more than half of Apple's profits. Driving those results was the explosion of sales in China.
"Twenty percent of the company's revenue comes from China. They are now a global company," Grant said.
Growth in the China market will offset a mature U.S. market, Apple's balance sheet is stellar, and its stock trades at a reasonable valuation, he said. "It's difficult to find anything bad about the company," he said.
One Wall Street analyst has estimated that 900 is a fair price for Apple shares.
But the laws of finance will always prevail, Grant said. Eventually, growth stalls, returns fade, margins stabilize and new threats emerge.
"There's an element of artificiality about Apple's products. They have the hot product but that doesn't necessarily last forever," Grant said.
For example, a potential problem is what Grant calls Apple's "ridiculously high" profit margins that are due in part because the high price of the iPhone is being subsidized by telecommunications companies, he said. As carriers start charging customers more to subsidize the cost of the iPhone, U.S. customers may be more inclined to keep the devices longer or buy refurbished handsets rather than the newest model, Grant said.
So what should an Apple-hungry investor do?
If you buy Apple shares, whose 52-week range is 310.50 to 644.00, you should have a time horizon of 10 years or more, Grant said. Investors with less patience should use covered calls.
Investors who use covered-call options sell to other investors the right to buy their shares at a higher price in the future. If the shares reach that higher price, the original investor must sell. Otherwise they keep the shares.
No matter what the stock does, the original investor pockets the cash from the options sale.
Investors who bought Apple at Friday's closing price of 566.71 and agreed to sell call options at a strike price of 600 on Jan. 13 would immediately receive 49.10 a share -- an 8.7% return. If the stock price reached 600 on Jan. 13, they would lose the shares, but their total return would be 14.5% for a little more than eight months, Grant said.
An investor would have to buy 100 shares -- the minimum required to do covered calls. The risk with using covered calls is that the shares would skyrocket and the covered call investor would lose out on some of the upside, Grant said. But that investor would have less risk on the downside.
"It's a nice way of playing Apple somewhat conservatively," he said.
The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.
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