ALL OF THIS IS GETTING COMPLETELY UPDATED: FEBRUARY 4, 2012
The new Apple Overview
Notice BC Live is almost always focused on the following themes:
1. Apple Earnings
2. Apple Valuation
3. Apple Trending i.e. post-earnnings analysis, seasonality, & technical analysis
4. Apple Investing
So why not focus the publication on these major themes? Makes sense right? We also focus on the direction of the broader market. But most of the time we’re discussing either an Apple earnings related issue, a valuation issue, a trending issue or an investment strategy issue. Thus, I think we’re going re=focus and re-organize the entire site so that it’s focused on this major themes. Then we will treat BC Live like a classroom environment where we expand on these themes. So we have written material published on the site. Then we have the class-room which is BC Live and BC Weekly. This new organization is going to be great. We’re going to eliminate a lot of worthless garbage and refocus on the important elements.
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OLD STUFF:
The old Apple Overview
Understanding our broad approach to Apple is key to developing a very lucrative and successful investment thesis. Just like with any other field, merely knowing how each independent part of a system functions without fully grasping the intended purpose behind that system or how the system works as a whole is not a very good recipe for success.
For example, if a thoracic heart surgeon doesn’t understand how his work effects other parts of the human body or how it may effect the human body as a whole, he wouldn’t be very good at what he does. This is precisely how we approach Apple at Bullish Cross. Every detail is explained with the context of the Bullish Cross Broad Approach.
Thus, in a lot of ways, this page is probably the most important of the entire site because it provides a grand overview of our Apple approach giving our readers the ability to see the forest for the trees, so to speak. When approaching any independent article, comment or thesis, you should do so only against the backdrop of the greater picture laid out in this page.
What’s the Broad Approach?
Earnings, valuation, strategy, risk assessment, thesis and execution. This is precisely what we do when approaching a long or intermediate-term position in Apple. While we go into great detail in each of these individual areas, it is extremely important to understand the defined reason behind the analysis and/or conclusion.
For example, in June 2011, Bullish Cross offered a 2013 Investment Thesis for Apple entitled “Apple: The Easiest 500% Gainer in Years.” The majority of Bullish Cross subscribers who executed the strategy are not only up tremendously in one-month’s time (over 100% in most cases), but they are also now in a very secure position as we head into 2012.
Yet, while this particular investment opportunity has now passed, the broad approach and thought process used to execute this particular investment thesis is exactly the same for every other investment thesis we analyze. Earnings, valuation, strategy, risk assessment, thesis and execution.
The sections below demonstrate exactly what we laid out in the Apple Investment Report, and how this general framework applies to each and every strategy going forward. The “Apple” section of the Navigation bar is entirely organized based on this exact framework:
I. Research First: Earnings & Valuation
The first thing we did in the 2013 Apple Investment Report was lay out the earnings picture for 2012. For example, at the time we argued that Apple would report about $40.00 in earnings per share (not our current estimate) in fiscal 2012.
Understanding what the company will report in any given quarter or fiscal year as well as what the TTM will be in any future quarter is central to formulating a price target. We concluded that in Fiscal Q4 2012, Apple’s TTM would be right at $40.00.
1. Earnings Central: Begin with the Earnings Picture
The Earnings Central tab of the Navigation bar lays out our earnings outlook including what we believe Apple’s future TTM will be in every future quarter through 2012. We also lay out where Apple’s stock price will be based on certain P/E assumptions.
Remember, analyzing every detail of the earnings outlook and understanding what Apple will likely report in terms of EPS is the first element of the Bullish Cross Broad Approach. If you know the earnings outlook, then you can start to focus on the P/E outlook. If you know the P/E outlook, then you know the price outlook. Once you know the price outlook, then you can move to the investment side of the equation.
2. Valuation: Creating Price Targets
The Valuation tab focuses on formulating price-targets based on what type of a valuation we believe Wall Street will give Apple at some point in the future. For example, in the Apple Investment Report, we made the case that Apple would conservatively trade at least above a 12.5 P/E ratio in the fall of 2012. Based on our expectations for $40.00 in EPS, that would put the stock at $500 a share.
The Valuation tab of the “Apple Research” link in the Navigation bar, focuses exclusively on this type of content for every quarter for the next few years.
3. Apple Articles: Researching the Intangibles
The third part of the “Apple Research” section of Bullish Cross contains a link to every Apple Article we’ve ever written. It provides a lot of context and tackles a lot of intangible issues for the earnings and valuation side of the equation.
Intangible issues might including looking at the stock’s seasonality. How the stock trades during the first-half of the year relative to the second-half is key to figuring out where the stock might be trading during a particular time-period. So the Apple Articles part of the research tab lays out all of the general Apple information.
Yet, bringing this back to the investment report, now that we nailed the earnings outlook and valuation elements of the Bullish Cross Broad Approach, we now move to the investment side which looks at how to best capitalize on the thesis.
II. Apple Investment Strategies: Strategize, Assess Risk, Formulate a Thesis, and Execute It
Should we buy shares of the company now? What about call-options? Leaps? What about call-spreads? How do we buy the call-spreads? What price makes the most sense? What strike prices should we buy? Which call-spreads should we buy? Which strategy would make the most possible money with the highest risk-profile? What about making the most possible money with the lowest risk profile?
These are the types of things we look at under the Apple Investment Strategies section of the website. Yet, the first thing investors should look at are the various tools and strategies that can be used to properly execute any investment — whether it be Apple or some other company.
1. The Strategy Room
In the “Strategy Room” part of the website, we lay out the different investment vehicles used to execute our future strategies. For example, one “Strategy” people often use is called a stock-replacemenet strategy where an investor will sell his stock in favor of deep in the money call options or deep in the money call-spreads. By doing this, the investor gains non-margin based leverage to make more on his money.
For example, the January 2013 Apple $300 leaps cost $115.00 as of July 29, 2010. If Apple goes to $500 by January 2013, those leaps will be worth $200.00. That’s nearly a 100% gain from where Apple is currently trading — $400.00. Yet, with the stock, that is only a 25% gain.
Please note, this is just an example of what a “stock replacement strategy” is and not meant to be investment advice. It’s just an example of one particular general strategy focused on using deep in the money call-options as a stock replacement strategy.
Another strategy might be focused on call-spreads. In the strategy room, we lay out what a call-spread is, how it is used to maximize leverage and how to best create these spreads. There are different ways to create call-spreads and those general methods are discussed in the strategy room.
The information in the strategy room is more of an education or guide on different investment strategies that can be applied to almost any other stock. It is static background information the knowledge of which is generally required of each subscriber who intends to keep up with the execution side of the equation.
2. The Situation Room
If the strategy room focuses on the different investment vehicles, tools and investment strategies which can be employed to execute a particular investment thesis, the situation room focuses on applying the strategy to a very particular investment thesis for a very particular time-frame.
For example, the tool we used to execute the January 2013 Apple investment thesis back in June was the Vertical Call-Spread. You can either leg-into a call-spread or create one in a single transaction. We chose the latter.
We explained that the January 2013 $400 – $500 call-spread at a cost basis of $15.00 – $20.00 a contract was the best overall way to capitalize on the Apple based on the overall risk-reward profile.
Why the $400 – $500 call-spread? Why not the $450 – $500? Why not the $300 – $500? Why a call-spread at all? How about shares? These types of questions were answered by going through the risk assessment element of the Bullish Cross Broad Approach to Apple.
Remember the approach? Earnings, Valuation, Strategy, Risk Assessment, Investment Thesis and Execution. The Situation Room deals directly with the risk-reward profiles of the current option pricing of a future expiration. For example, if you notice the situation room has four current sub-links pointing to “October 2011,” “January 2012,” “January 2013″ and “January 2014.”
The situation room uses the tools laid out in the Strategy Room to come up with an investment thesis for each of these expirations based on our (1) Earnings Outlook and (2) Valuation.
For the January 2013 expiration, the reason we chose the $400 – $500 call-spread was an easy decision because the risk at the time was so off-balanced to the low side that it made this particular investment thesis one of the best I’ve ever seen in the financial markets.
Based on our expectation of $40.00 in EPS for fiscal 2012 which ends in October 2012, if Apple traded at a strikingly low 10 P/E ratio, the stock would trade at $400.00 a share. Through simple calculation, this suggested that the $400 – $500 call-spread would likely trade at around $20.00 in October 2012 if this happened to be the case.
This meant that in the highly unlikely scenario — we put it at less then 5% chance — that Apple trades at a 10 P/E ratio against our expectation of $40.00 in earnings, the overall investment thesis would break-even at a $20.00 cost basis! Between May and July, that call-spread was trading between $15.00 and $20.00. That’s almost 30+ trading sessions.
Yet, from the reward side of the equation, if the stock trades at or above a very conservative 12.5 P/E ratio, that would put the stock at over $500.00 a share. At $17.20 cost-basis — the average price Bullish Cross purchased this spread in its model portfolio — the investment thesis would yield a 481.4% gain.
Thus, from a pure risk-reward profile, this January 2013 $400 – $500 call-spread made a tremendous amount of sense at the time. The risk of loss was very low and the potential reward if Apple trades at a rather conservative 12.5 P/E ratio was very high — 481.4%. At a $20.00 cost-basis, the reward is a 400.0% gainer. As of the close of trading on Friday, July 29, 2011, these call-spreads are now worth $34.00 a contract — that’s 97.7% higher than where Bullish Cross purchased and recommended the spread.
3. The Apple Investment Weekly: Staying up to Date
The Apple Investment Weekly tab of the website is focused mostly on covering what if anything has changed in the situation room. This is mostly convenience for Bullish Cross subscribers so that they won’t have to check the situation room every 5-minutes to see if something has changed. The changes will be issued both in the investment Weekly article and in the Situation Room.
4. Investor Commentary: Investment Related Commentary
Any commentary we publish relating to the investment side of the equation will not only be published in the general site feed, but will also be found under the “Investment Related Commentary. This is sort of an organizational issue which helps keeps articles grouped into categories.