Trading Apple: Betting Against Long-Term Potential Would Be a Mistake

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Apple ( AAPL ) is scheduled to discuss its second fiscal quarter earnings report at 5:00 p.m. EDT today, and this report is expected to be rather grim. To say that Apple's stock has tumbled in the weeks and months leading up to this report would be an understatement; the stock is currently trading between the very low $400s and high $300s, having broken through the proverbial Maginot Line at $400 last week. This means that the current valuation of the stock is trading at an aggregate price/earning ratio of 9X, which is shockingly low for any company. The precipitous drop in price is attributable to a stale product selection and no clearly articulated vision for the future, issues that have plagued Apple since the loss of former CEO Steve Jobs.

(See also: Are the Glory Days Behind Apple? )

The death of Steve Jobs signified more than simply the loss of a figurehead. It is becoming increasingly clear that his legendary micromanagement of product design and development was more valuable to the company than anyone knew. Apple hasn't released a new product since fall of last year, in sharp contrast to the fast and furious product development that was the hallmark of Jobs' time at the helm. This blackout is soon coming to an end, however, as the company has announced the impending release of the iPhone 5s and the next iPad Mini. Even if these two revamped products don't provide the type of excitement that would result from the announcement of a brand new gadget, they will certainly be better for the company than nothing at all. The concern that Apple is unwilling to take on a decreased profit margin in the name of growth-oriented strategy has been a longstanding barrier to the long-term outlook. That may be alleviated, however, as there are whisperings that a cheaper iPhone is currently in development.

Though the next few quarters are expected to show steadily decreasing earnings, this will also be the period when the post-Jobs management is tested. The current value of the stock shows a complete lack of faith in the current leadership at Apple, though this may very well work out in the company's favor. The primary reason that Apple's price collapse was so dramatic was the fact that Wall Street saw Apple as infallible. Lower expectations in the future will allow the company to -- in the event of a turnaround -- exceed those expectations, which is something that Apple has been hard-pressed to do for many years. It also seems unlikely that the management and development team, many who were mentees of Jobs, have completely scrapped the idea of a smart watch or another truly innovative development that could revive the company.

(See also: Apple's Implied Volatility: Long and Wrong? )

Apple is likely not the next Dell ( DELL ) or Nokia ( NOK ). However, Apple is currently trading at a lower technical valuation than Dell. The quality of the existing products is proven, and even reboots of these products will likely generate higher earnings than we are currently seeing. The innovation that had been Apple's bread and butter since the beginning has seemingly all but vanished now, but that does not mean that it is gone forever. The company lost a visionary, but enough of his protégées remain that to bet against the creativity of the company in the long run seems ill-advised.

AAPL Trade: Selling the Jan 360-340 put spread for $7.60
Risk: $1240 per 1 lot
Reward: $760 per 1 lot
Breakeven: $352.40

Greeks of This Trade:
Delta: Long
Gamma: short
Theta: Long
Vega: Short



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Earnings , Options

Referenced Stocks: AAPL , DELL , NOK

Minyanville

Minyanville

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