Tim Bovee, Private Trader: AAPL: A longer-term play

Update 4/16/2015: I've closed my position in AAPL before meeting the year-long holding requirement for the lower long-term capitals gains rate. My new strategy of trades lasting 10 days or less has proven to be so lucrative, I decided that such trades would be a better use for the funds, even with the higher tax rate.

My AAPL position gained 20.3% over its 174 day lifespan, for a +43% annual rate.

By contrast, a position entered under my new strategy of shorter term trades produced an 80% yield over two days. Honestly, the early exit was a no-brainer.

Update 10/24/2014; I've opened a bull postion in AAPL as described in the "Decision" section.

Apple Inc. (AAPL) has a chart where the uptrends overshadow the occasional corrections. The innovation the company has shown, repeatedly reinventing the world -- first the music, then the cell phone as a device, then introducing a whole new genre, the tablet, and most recently announcing revolutions to payment in stores, health monitoring, and wrist-watches.

So it seems inconceivable that the ride might be over someday. Yet, success in the marketplace is a fickle friend. As the rest of the market has faltered since September, the question on every trader's lips ought to be, can Apple continue its stunning course while others fall by the wayside?

The Chart

Elliott wave analysis of the 20-year chart shows AAPL is in the 5th and final wave of a rise from 1997, when the stock was going for 47 cents a share, adjusted for the recent stock split. In the 11 years that have followed, the price has rise no more than 20 times that ancient ticker quote.

Click on chart to enlarge.

AAPL 20 years monthly bars (left), 2 years daily bars (right)

I've labeled the current wave as 5 {+3}. It has seen underway since January 2009, making it the longest wave of that degree, both by duration and distance traveled. Wave 3 {+3} comes in as the second longest, avoiding a violation of the Elliott wave rule dictating that the 3rd wave cannot be the shorter than the 1st and 5th of the series..

Internally, wave 5 {+3} is in wave 3 {+2}, which began in April 2013. That wave is in a 3rd wave of its own, wave 3 {+1}, which in turn in in its 5th and final wave, called wave 5.

At the same level as wave 5, wave 1 lasted for six months. A similar duration for wave 5 would carry it into next April. Proportionality isn't required under the Elliott wave rules, but I've seen it occur often.

However, the fact that AAPL broke out to a new high today indicates that wave 5 is still going strong.

The the {+1} and {+2} degrees are 3rd waves, the decline will be a counter-trend correction and then will resume its march to new heights.

The Company

Apple, headquartered in Cupertino, California, is the world's second-largest info-tech company. To know Apple is to simply list its products: iMac, MacBook, iPod, iTunes, iPhone, iPad, Apple Watch. There can be few people in the rich world who cannot instantly identify those devices, and that is a measure of Apple's success.

Analysts give it a 34% enthusiasm rating.

And no wonder. The company reports return on equity of 33%, with debt amounting to 26% of equity.

The most recent earnings came in higher than a year previously. The company has had only two downside earnings surprises, both in 2012. All other quarters have surprised to the upside. Analysts expect continued growth in the all-important quarter covering the winter holidays.

The earnings yield is 6.13%, compared to 2.26% on 10-year U.S. Treasury notes. The dividend yields 1.79% annualized at current prices.

Earnings growth estimates, combined with the dividend, imply a fair price of $108.61, meaning that shares are presently underpriced by 3.4%.

The company next publishes earnings on Jan. 26. The stock goes ex-dividend on Nov. 6 for a quarterly payout of 47 cents per share.

Liquidity and Volatility

AAPL is one of the most liquid stocks on the exchange, on average trading 74 million shares a day. The options are highly liquid, making them eminently suitable as as hedging vehicle to complement a longer-term position.

For a discussion of volatility, see the posting for my recent very short play play, "AAPL and KO: Volatility play".

Decision for My Account

I intend to open a bull position in AAPL under my longer-term rules, structuring the position as long shares. Under the rules I must hold the position for at least a year, hedging any downturns with bear position in options.

-- Tim Bovee, Portland, Oregon, Oct. 24, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.