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Home > Investing > Apple Is So Cheap, You Can Buy It For Free

Apple Is So Cheap, You Can Buy It For Free

There is so much chatter about Apple (AAPL) in the blogosphere and financial media, it’s getting ridiculous. I read some of the headlines and I cringe at how dumb some of them are. Look, I’m a writer in a sense as they are.  A very valuable company with broad ownership is gonna attract a lot of interest, they are simply supplying what the market wants: talk about Apple.

I’m done with talk, how about some action to make money with Apple?

As a value investor, it is difficult to convince people how cheap Apple is because the average investor who buys Apple isn’t a value investor and looks to make money through ‘growth’ or ‘momentum’. Right now, there isn’t any catalyst foreseeable that will offer these investors their opportunity so they have simply disappeared and have moved on to other prey. Without such a case, the market has simply abandoned the stock, waiting. Fortunately, there are financial instruments that you can use to make money when the market is overlooking a clear undervaluation story (or an overvaluation story as the the case may be) at any given time.

Don’t catch a falling knife. Don’t write articles about how cheap Apple is (or any other company is). Put your thesis into action to make money. Here’s how you can make money with Apple, read on.

A Huge Cash Pile

Technology companies don’t get a lot of respect because they often times have to go to venture capital or equity markets to get funding. This is the most expensive kind of funding because you are selling your future earnings away forever. If you fund a business through a bank loan, it has a stated interest rate and eventually it gets paid off.

The most successful technology companies have come to market without debt and have been able to build up cash because of business models built on high margin, high value products. Look at Google (GOOG), Microsoft (MSFT), and Cisco (CSCO). Each of these companies have high margins and have built up huge cash piles of money they don’t need to fund their businesses. Google is still investing lots of money but still throws off huge amounts of unneeded cash.

Apple gets lumped into this group, but it is an especially outsized example. Apple is a company that has never been seen before: high growth rate, largest company in the world, and the most cash (both in nominal amount and as a percentage of market cap).  Here’s a summary of Apple, compared to other large cap technology companies:

Large Tech Company Comparison

Company Market Cap Cash P/E (trailing) Cash as % of Market Cap
Apple (AAPL) 404B 137B 9.7 34%
Microsoft (MSFT) 234B 54B 15.4 23%
Cisco (CSCO) 111B 30B 12.0 27%
Google (GOOG) 265B 38B 25.0 14%

And Apple is also the cheapest by its earnings multiple.

Buy Apple For Free

If you think Apple is cheap, you have some options. You could buy Apple right now and hope for the best (not necessarily a bad option). I have another option that offers the potential to own Apple for free, meaning owning it at the cost of its expected future cash pile. If you buy Apple at the same cost as its cash pile, you will essentially get the business for free.

This is possible because their cash pile is so large and growing fast. There is a lot of pessimism out there, but there doesn’t seem to be much disagreement (from analysts, the company, and supply chain) that Apple is still going to accumulate about 15B per quarter under an assumption of status quo financials (stable or growing product sales, stable margins).

Here’s an estimate of what Apple’s cash pile could look like in the future:

Apple Cash Pile

Date Cash Hoard
Jan 2013 137B
Jan 2014 197B
Jan 2015 260B

You might see where I’m going with this. If Apple is currently valued at $404B, you would simply need to buy Apple at a price of (260B/939M shares) = $285 to own Apple in 2015 at the price of its estimated future cash pile. You could put your limit order in @$285/share and hope for the best.

A far better way to play this is the use the options market to sell a put. Selling puts is a very conservative options strategy that you can use to buy stocks you want to own, only cheaper. If you buy dividend paying companies, you know that a falling price means higher yield == making more money. I forgot about that, if you buy Apple at $285, you would also own this company with a dividend yield of 3.7%! If we want to factor in dividends as a form of return, we could make the case to buy Apple not at $285, but a slightly higher price to factor in this cash (and we could also add the cash used for buybacks as well). But,  I won’t complicate the calculations let’s keep it simple.

When you Sell A Put, you are looking for one of two outcomes: either the price never meets you lower strike price given in the option and you keep the premium, or the price falls to the level of the option price and you buy the stock at that price.

Selling Puts Primer

I wrote an article about options previously here. Here’s a recap of what Selling A Put means. It helps to understand this by first looking at it from the buyers point of view. An investor who want to buy insurance on their investment will Buy A Put. This means that they are able to sell a stock at a predetermined price during the option period. So, if you own Apple @$600, but fear that it could fall to $400, you might buy insurance to sell Apple @$500. It’s not free, you need to pay a premium to get this insurance. You are willing to take the loss to $500, but below that the ‘insurance policy’ kicks in and saves you from a further loss.

For every buyer there is a seller. You will be Selling A Put that the investor wants to buy. You will collect the premium. If Apple trades below $500 during the option period, you may get the stock ‘Put To You’, meaning you must buy the stock from the investor @$500/share.

If everything works out well, you should be overjoyed to take the stock off his hands if it occurs.

The State Of The Options Market

The options market offers insight into stock prices that is useful (even if you don’t trade options). Here’s a snapshot of the current options for Apple that are of interest to us, plus a few others that are outliers.

Apple Puts, Jan 2015

The option that interests us is the one that offers the possibility of owning Apple at the value of its cash pile as of Jan 2015. The 310 strike price is the one we want. After subtracting the $25 premium (indicated as the Price in the chart) from the 310 strike price, this gets us an effective share price of $285.

In addition to the 310 strike we have many others that are even lower. There are almost 700 open contracts at the strike of $225. What this means is that Apple could add cash at half the rate it currently does and you would still own the company for free once the option is exercised!

The Likely Scenarios

If this sounds like an easy way to make money, keep in mind what the risks are and what the likely scenarios are. There is a reason why Apple is cheaper than Microsoft and the other large technology companies I mentioned in the table above. Microsoft and the others have large and stable enterprise/corporate customers which provide a consistent revenue and earnings picture. Apple still is largely a consumer company which we know can be very fickle causing earnings to appear and also disappear quickly. I don’t expect that to happen but the market certainly thinks it’s possible.

However, an options strategy can work in your favor in this regard because we are not betting that Apple is going to be an earnings powerhouse forever, but just during the option period. This lowers the risk of this strategy compared to say owning the stock outright.

Here is a list of reasonable outcomes for this options strategy, using the Jan 2015 310 PUT:

  1. Apple announces a stock buyback, increased dividend which causes the cash to be less than anticipated. Very likely option is not exercised. Outcome: keep premium earned.
  2. Apple doesn’t earn as much money as expected. Assume they increase their cash pile at half the expected rate and earnings drop by 50%. Apple is Put to you at $310. Outcome: you own a company with a P/E of 11 and cash of $200B and a market cap of $285B. The effective P/E is 4 after backing out cash.
  3. Apple earnings do very well (better than expected), cash increases. The Put is never exercised. Outcome: you keep premium earned.

The risk/reward for this option trade is attractive. The exciting development is that it could get even more attractive if Apple shares fall even more.


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