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Apple stock
Apple (NASDAQ: AAPL) Inventories have fallen by more than 17% year-to-date (YTD). And this is after the long-awaited 8% rise last week. This rise may be short-lived, perhaps because optimism is returning to the market.The market is probably noisy. I wouldn’t be surprised to see Apple stocks shortly retesting recent lows and many Seeking Alpha contributors being bearish. Even Michael Burry (of The Big Short) is hedging with Apple’s put options. But this is probably a short play.
What about long-term investors?
Warren Buffett bought another $ 600 million worth of Apple in the first quarter of 2022, so a small Titan battle is taking place. Buffett said he would have bought more, but the price went up. $ 600 million is just a round-off error that Apple’s total ownership of Berkshire (BRK.A) (BRK.B) is about $ 159. a billion.. But it provides tremendous clues as to where he sees the fair value of stocks. The low price in the first quarter of 2022 was just over $ 150 per share.
background
The investment conditions for 2022 were attractive and difficult. They also provided investors with a great entry point for many stocks that were caught up in general fatigue. Many recent public stocks, all hyped in 2021, returned to Earth as soon as they left.
The biggest cause is clearly very high inflation, which leads the Federal Reserve to a surge in interest rates. The Fed’s previous failure to recognize the crisis and respond in a timely manner has not stimulated self-confidence, and some investors have long memories.
But there is also good news. Many companies like Apple are making impressive revenues and generating chunks of free cash flow. The unemployment rate is still low and demand remains high. There is a supply problem and it will take some time to get smooth.
As a long-term investor, keeping an outlook can be difficult. And for some new investors who entered the market after the March 2020 crash, it could be even more problematic as it could be the first bear market experience.
The market is sluggish and there is race to the bottom. Who can write the most disastrous headlines and report them in the largest and most daring fonts? It was 2000, no, 2008, no, 1970s, and in any case, we are all destined!
But fear and emotion, like hope, can lead to transactions that kneel and eventually lose money, rather than long-term investment strategies. Hopefully we are on the sidelines of a certain percentage of cash to take advantage of such a recession and spot us.
There is no one-size-fits-all investment strategy, but there are some suggestions.
Regarding Apple’s Results, Capital Return, and Two Indicators
Apple continues to set revenue records, despite the headaches of its supply chain. Rumors of Apple’s potential supply chain problems continue, but Apple’s All-Star management team has made it happen. Apple also has a great deal of influence because of its size and importance to its suppliers.
Second-quarter 2022 sales increased 9% to $ 97 billion in the same period in 2021. Service revenue increased 20% throughout the first two quarters of 2022, and iPhone revenue remains strong. Service revenue includes advertising, the App Store, and cloud services.
Apple increased gross profit and operating profit year-over-year (Year-on-year) Until the first two quarters of 2022, as shown below. This is encouraging and a testament to strong control.
Data source: Seeking Alpha. Chart by the author.
Returning capital to shareholders is continuing in earnest. Apple returned more than $ 50 billion to shareholders between share buybacks and dividends by the second quarter of 2022. Apple is moving ahead of last year’s active pace. If the current pace continues, more than $ 500 billion will be returned to shareholders between the end of 2017 and the end of 2022. This is well over 20% of the current market capitalization.
Data source: Apple. Chart by the author.
Stock repurchases are a great way for companies to support stock prices during a recession. As the stock price goes down, the buyback gains more leverage because you can buy back and cancel more stock with the same dollar investment. This adds some weight to investor returns when the market becomes bullish again. It also helps long-term shareholders sleep well at night. If prices fall in the short term, management will take this opportunity to retire more stock.
There are currently two prominent concerns. First, Apple’s stock is trading at a slightly higher price-earnings ratio (P / E) than historical standards before the recent pandemic, as shown below.
This suggests a short-term downside risk.
Another source of concern is the crater of consumer sentiment. Consumer sentiment is considered one of the best barometers of personal consumption.
From early to mid-2021, emotions appeared to return to normal as COVID-19 declined. After that, inflation broke out and emotions plummeted. It’s now much lower than it was during the worst pandemic. This is of great concern to companies that rely on discretionary spending. Apple has a vast, dedicated customer base that should provide some degree of stability.
Target (TGT), in particular, recorded a disappointing quarter, reducing market capitalization by more than 20%. This surprised the market. Ulta Beauty (ULTA), on the other hand, gave excellent results and inventories went in the opposite direction.
Apple is reportedly working on a subscription model that allows users to pay for their devices on a monthly basis. Subscription plans are great for several reasons. First, it makes it easier for people to upgrade when time is tight. It also generates the company’s ordinary revenue. Partial migration to the “hardware as a service” model is definitely interesting.
Multiple Ways to Strip Apple: Three Strategies for Investors
Dollar cost averaging
Entering a stock position through a timed incremental purchase is known as the Dollar Cost Averaging (DCA). DCA is very important in a long timeline in a volatile market. This allows investors to avoid peak purchases and take advantage of falling stock prices. This is ultimately a risk mitigation tool. It is impossible to consistently time the bottom of the market, and DCA then removes uncertainty from it.
Investors who started buying Apple shares on January 1, 2020 and bought evenly on the first day of each quarter will have an average purchase price of $ 122.90, even though they bought at some of the recent peaks. ..
This is a disciplined way for long-term investors to continue to expand their portfolio over the years and leverage the downmarket.
A more aggressive variation of this strategy is to buy when inventory reaches a certain metric. Apple flirts with an average price-earnings ratio for five years. This is an interesting short-term benchmark.
Eligible calling options
Some Apple shareholders are in a difficult situation. They believe the stock is somewhat overvalued, but they don’t want to trade aggressively. Selling every time Apple inflates slightly can result in high taxes and increases the risk of untimely transactions. Selling out-of-the-money (OTM) covered call options can be a money-making opportunity, as Apple stocks are trading at above historical averages and the market is sluggish. ..
Selling OTM-covered calls creates a source of income and the risk is relatively low. The worst thing that can happen is that Apple’s stock price exceeds the strike price and the stock price is canceled at that price. Selling options at the strike price, which makes sure investors sell stocks anyway, removes this concern. For example, let’s assume that if Apple surpasses $ 165 by July 15, it will be a strong sell.
Apple On July 15, 2022, a call option with a strike price of $ 165 per share is currently priced at $ 1.60. The option is sold in lots of 100 shares, which deducts a $ 160 premium to the seller. As long as Apple’s stock doesn’t exceed $ 165 in the next 45 days, sellers will have a great 8% annual return in their pockets.
Below are other examples of current options and premiums from the market ending May 27, 2022. The higher the return, the higher the risk of the stock being canceled.
Market data: TD Ameritrade. Tables and calculations by the author.
Options are risky in nature and should only be used by investors with appropriate knowledge and risk tolerance.
Buy and hold
This idea seems incredibly boring. After all, why do we fill the time when we’re not out of breath waiting for the Fed’s latest minutes to be released? But here’s the secret-it actually works. Buying a good company with a good management team and holding them for years is a great way to increase your wealth. Buy good companies, get out of the way and let them do great things. This was certainly the case for Apple over the last decade. As shown below, you can reward a patient investor without buying or selling a share, trading options or looking at your account statement. This worked for Warren Buffett, who started buying Apple stock in 2016.
The bear market is harsh on the spirit of investors. No one likes to see the hard-earned money melt away. Unfortunately, the stock market and the economy are not always cooperating. Each investor has a different timeline, financial goals, and circumstances. Still, long-term investors who prioritize time in the market over timing in the market are often at the top.
Apple’s share price has fallen sharply from its highs, but the company’s long-term positive direction hasn’t been compromised. There is a big macro concern that the company will soon have to deal with it. Management has a track record of outperformance and resources to support shareholders. Once the rating returns to Earth, investors have several options to take advantage of Apple’s success.
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