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Apple Stock: Hope and Fear Are Not Strategies - But These Are Strategies (NASDAQ: AAPL)

Apple announces quarterly earnings after markets close

Drew Angerer/Getty Images News

apple stock

apple (Nasdaq: AAPLInventory is down more than 17% year-to-date. And that’s after a much-needed 8% rally last week. This rally could be due to some optimism returning to the market, or it could be short-lived. The market is likely to continue be noisy. I wouldn’t be surprised to see Apple stock retest recent lows soon, and many contributors looking for Alpha head lower. Even Michael Perry (from The Big Short) has hedged Apple’s rollout options. But this is likely to be a short-term play.

What about a long-term investor?

Warren Buffett bought Apple for another $600 million in the first quarter of 2022, so there’s a small battle between the two giants. Buffett stated he would have bought more, but the price went up. $600 million is just over a rounding error in Berkshire (BRK.A) (BRK.B) Apple’s total ownership of about $159 Billion. But it does provide a massive clue as to where he sees fair value in inventory. The low price for the first quarter of 2022 was just over $150 per share.

the background

Investment conditions in 2022 were impressive and challenging. It also provided investors with great entry points for many stocks caught up in public malaise. Several of the public stocks recently that were all a buzz in 2021 have returned to Earth as quickly as they left.

Obviously, the biggest culprit is the extremely high inflation rate, which has pushed the Federal Reserve (Fed) into a high interest rate environment. Past failures by the Federal Reserve to recognize and respond to crises in a timely manner do not inspire confidence, and some investors have long memories.

However, there is also good news. Many companies, like Apple, release amazing dividends and generate large amounts of free cash flow. Unemployment remains low and demand is high. We have a supply problem, and it is taking longer to solve than we would like.

As long-term investors, it can be difficult to maintain perspective. And for some of the new investors who came into the market after the March 2020 crash, it could be even more problematic because it could be their first bear market experience.

The market is going down, and we have another kind of race to the bottom. Who can write the boldest headline and report it in the biggest and boldest font? It’s 2000, no, it’s 2008, no, it’s the ’70s, and either way, we’re all doomed!

But fear and emotion, just like hope, are not long-term investment strategies and can lead to incomprehensible and, ultimately, money-losing deals. Hopefully we have kept a percentage of the funds on the sidelines to take advantage of such a downturn and continue our success.

There is no one-size-fits-all investment strategy, but I do have a few suggestions.

Apple’s results, return on capital, and two related metrics

Apple continues to record revenue records despite supply chain issues. Rumors of potential Apple supply chain problems persist, yet the company’s all-star management team is making it happen. Apple also has significant influence due to its size and importance to its suppliers.

Sales for the second quarter of 2022 increased 9% compared to the same period in 2021 to reach $97 billion. Services revenue is up 20% during the first two quarters of fiscal 2022, and iPhone revenue remains solid. Services revenue includes advertising, app store, and cloud services.

Apple increased its gross margin and operating margin year-over-year (year) during the first two quarters of fiscal year 2022, as shown below. This is encouraging and a testament to strong management.

Apple determined the results

Data source: Alpha search. Scheme by the author.

The return of capital to shareholders continues in earnest. Apple has returned more than $50 billion to shareholders between stock buybacks and dividends through the second quarter of fiscal year 2022. Apple is on track to beat last year’s fast pace. More than $500 billion will be returned to shareholders since fiscal year 2017 by the end of fiscal year 2022 if the current pace continues. This amounts to over 20% of the current market value.

Apple's return to capital

Data source: Apple Inc. Scheme by the author.

Stock buybacks are a great way for companies to prop up a stock price during a downturn. Buybacks gain more leverage as the stock price goes down because more shares can be bought back and retired in exchange for the same dollar investment. This adds some weight to investor returns when the market is bullish again. It also helps long-term contributors to sleep well at night. If the price drops in the short term, management will take the opportunity to retire more shares of ours.

There are two concerns that are currently emerging. First, Apple’s stock is trading with a price-to-earnings (P/E) ratio slightly above the last historical benchmark before the pandemic, as shown below.

Apple's P/E Ratio
Data by YCharts

This indicates downside risks in the short term.

Another cause for concern is the collapse in consumer sentiment. Consumer sentiment is seen as one of the best measures of consumer spending.

US Consumer Confidence Index
Data by YCharts

In early to mid-2021, it looked like sentiment would return to normal as COVID-19 wanes. Then inflation hit, and sentiment plummeted. It is now much lower than it was during the worst of the pandemic. This is very worrying for companies that rely on discretionary spending. Apple has a wide, dedicated customer base that should provide some stability.

Target (TGT) in particular posted a disappointing quarter and slashed more than 20% of its market value. This sparked panic in the market. On the other hand, Ulta Beauty (ULTA) released excellent results and the stock went in the opposite direction.

Target price vs. Ulta Beauty
Data by YCharts

Apple is said to be working on a subscription model where users can pay for a device on a monthly basis. Subscription plans are ideal for several reasons. First, it makes it easier for people to upgrade when times are tight. It also creates recurring revenue for the company. Partially moving to a “devices as a service” model is certainly interesting.

More than one way to peel apples: 3 strategies for investors

Average dollar cost

Entering into a stock position with timed incremental buys is known as dollar average cost (DCA). In a volatile market and over a long time frame, DCA is very important. It allows the investor to avoid buying at the peak and taking advantage of dips in the share price of the stock. It is, after all, a risk mitigation tool. The timing of the bottom of the market is not possible on a consistent basis, as DCA takes the uncertainty out of it.

An investor who started buying Apple shares on January 1, 2020, and bought in equal shares on the first day of each quarter, would have an average purchase price of $122.90 despite buying at some recent high.

This is a disciplined way for long-term investors to continue to grow their portfolios over many years and take advantage of bear markets.

The most active variation of this strategy is to buy when the stock reaches a certain scale. Apple shrugs off the five-year average price-to-earnings ratio. This is an interesting short-term benchmark.

AAPL . P/E Ratio
Data by YCharts

Covered Contact Options

Some of Apple’s shareholders are in a difficult situation. They think the stock is somewhat overvalued, but they don’t want to actively trade. Selling every time Apple swells a bit can create a huge tax bill and increase the risk of poorly timed trades. Selling out-of-the-money (OTM) covered call options could be an opportunity to make money as Apple shares are trading at the P/E multiple above historical averages and we are in a bear market.

Selling an OTM covered call creates an income stream and relatively low risk. The worst that can happen is that Apple stock rises above the strike price and the shares are called away at that price. Selling the option at the strike price at which the investor would definitely sell the stock anyway eliminates this concern. For example, suppose that if Apple prices rise above $165 by July 15, it will be a strong sell-off.

Apple call options are sold on July 15, 2022 at a strike price of $165 per share for currently $1.60. Since the options are sold in lots of 100 shares, this would fetch the seller a premium of $160. Provided the Apple stock price does not exceed $165 over the next 45 days, the seller will receive an annual return of 8%.

Here are some other examples of current options and premiums from the market close on May 27, 2022. The higher return comes with higher risk of stock exclusion.

Apple options

Market data: TD Ameritrade. Table and calculations by the author.

Options inherently involve risk and should only be used by investors with appropriate knowledge and risk tolerance.

Buy and keep

I know this idea sounds incredibly boring, right? After all, what are we going to fill our time with when we’re not impatiently waiting for the latest Fed meeting minutes? But here’s the secret – it actually works. Buying large companies with excellent management and holding them for years and years is a great way to increase wealth. Buy the big companies, then get out of the way and let them do great things. This has certainly been the case for Apple over the past decade. Without buying or selling a single stock, doing an options trade, or even looking at an account statement, the patient investor has been rewarded, as shown below. It worked with Warren Buffett, who started buying Apple stock in 2016.

Apple share price growth
Data by YCharts

Bear markets are tough on investor psychology. No one likes to see any of their hard-earned money slip away. Unfortunately, the stock market and the economy don’t always cooperate. Each investor has a different schedule, financial goals and situation. However, long-term investors who prioritize time in the market over market timing are often ahead of the curve.

Apple shares have fallen significantly from their highs, yet the company’s secular positive trajectory remains intact. There are significant macro concerns that the company will need to address soon. Management has a proven track record of superior performance and the resources to support shareholders. With valuation back down to earth, investors have many options to capitalize on Apple’s success.