You Can Still Play Apple in Spite of High Price

Apple in Spite of High PriceApple Inc. (NASDAQ/AAPL) cannot keep up with the production of its just-launched smartphone “iPhone 5,” which sold over five million units from Friday to Sunday. Wall Street was expecting to see sales top six million units, and analyst Gene Munster of Piper Jaffray was targeting sales of 10 million. Speculation of supply issues could have hurt demand, according to my stock analysis.

In my opinion, while the iPhone 5 is slimmer and incorporates a bigger screen to compete against the larger screen of Samsung’s “Galaxy III”), I didn’t feel the need to upgrade from my current “iPhone 4.” I did upgrade to Apple’s new “iOS 6” operating system for free; while there are clearly some better organizational functions with the new system, I’m disappointed with the loss of the “Google Maps” application on my iPhone, which was replaced with “TomTom,” an Apple maps application. Yet overall, the iPhone 5 and its new platform are much improved.

In my stock analysis, Apple will continue to dominate and gain market share in the smartphone market sector. Samsung’s Galaxy III and upcoming “Galaxy IV” are good, but my stock analysis is that it will not be easy to catch or even gain market share against Apple—at least not in the U.S. (Read “Heavyweight Bout—Apple vs. Samsung.”)

And while Wall Street is ambitious about the investment opportunity of Apple, there is risk in my stock analysis; but let’s first take a look at what analysts are expecting. Of the 55 analysts polled by Thomson Financial, 22 rate Apple a “strong buy,” with 26 analysts showing a “buy.” Only five analysts are neutral, and one gives Apple a rating of “underperform.” Finally, one analyst rates Apple a “sell.”

The most bullish analyst among the group is ISI Group, with its $1,111 price target on Apple, compared to the mean target of $763.49. In my stock analysis, I think ISI is overly optimistic.

I’m even hearing that Apple will become the first trillion-dollar company in the world. If ISI is correct and Apple reaches $1,111 a share, this would equate to a market-cap of $1.0 trillion, possibly longer-term, but I think it could take a few years. To help with the process, Apple could split its shares to allow smaller investors to come in and bid up the price, according to my stock analysis.

With the higher stock price, my stock analysis tells me that we can expect to see some profit taking.

Over the past six months, there were 17 insider transactions to sell 463,294 shares, according to data from Thomson Reuters. In my stock analysis, the insider selling is not a red flag, given the small size of the selling at less than 0.0005% of the shares outstanding.

Institutional investors sold 19.2 million shares over the past quarter-to-quarter, which, again, is normal, given the advance of the stock, and represents a minor 3.1% decline in institutional ownership, based on my stock analysis.

Short selling is also relatively absent with a mere 13.6 million shares short or about 1.5% of the float.

If an investor were eyeing Apple, my stock analysis tells me that they need to wait for weakness to enter, as this has been the recent pattern. Alternatively, an investor could buy call options as a risk-controlled trade where the maximum loss is known in advance in case the stock retrenches. For example, the January 2013 $700.00 call costs $40.20, for a breakeven of $740.20 (excluding commissions).

Moreover, an investor could buy Apple and write a covered call against their position to generate some premium income and, in the process, reduce their average cost base. For example, at the current $689.00, an investor could sell the January 2013 $730.00 call for $27.63. This reduces the cost base down to $661.37. If Apple does hit $730.00 by January 18, 2013, the investor would simply give up their shares and walk away with profits of $68.63 per share or 10.4% in a few months.

Please be advised these are not actual trading recommendations, but are simply an illustration of the possibilities.