How to Play Apple Right Now

Total Wealth Staff Nov 14, 2018

… what do I do with Apple??!!

Bar none, that’s the single most asked question I’m getting at the moment.

As of Tuesday’s close, the stock is down 16.83% from its 52-week high of $233.47 a share and falling again today, as I write. Adding insult to injury, several of the big analyst houses – including Guggenheim, UBS, and Goldman Sachs – have downgraded the company and/or reduced price targets.

Frankly, I think that’s great!

It’s also about time.

The Apple of tomorrow is not the Apple of today, which means that legions of mainstream iPhone-obsessed analysts are finally going to have to do their job and think about the company differently.

Like we do.

Let me explain…

Apple Inc. (NasdaqGS:AAPL)’s been a long-term investment for a long time, but what’s happening right now is almost entirely short term in nature. The business case for owning the company is still exceptionally strong, albeit very different from the device-centric focus that put it on the map.

Why’s it trading lower? There are three very good reasons, none of which are readily apparent to individual investors, and all of which are critical to the world of High Finance.

First, Apple is one of the single most widely owned stocks in the world, which means that every institution of any significant size owns it, as well as legions of pension funds, qualified plans and, of course, millions of retirees. That means any price change whatsoever has a cascading impact via the allocation models they rely on to meet their obligations and risk parameters.

Second, there are the computers themselves, specifically as they relate to the relatively recent rise of “passive” investments.

Chances are good that you’ve heard the term.

Passive investing has become very popular in recent years, and it’s a path taken by millions of investors who mistakenly believe that they can’t beat the markets, and it’s taught by academia as a copout.

Wall Street will never tell you this because they rake in billions in fees a year as a result, but passive investing is exceptionally destructive to broader markets and far more risky to individual investors than they’re let on to believe – for reasons we’ll get into another time.

What you need to know today is that passive investing is a huge risk to a stock like Apple, which is a key component in many exchange-traded funds – ETFs for short.

That’s because the computers tasked with keeping “indexed” portfolios in line with mathematical models issue buy/sell orders based on nothing more than price.

This means you’ve got huge blocks of stock being bought and sold, completely irrespective of the fundamental underpinnings. And, not surprisingly, every new price point potentially becomes a negative feedback loop that can work for or against you, which is why Apple (like many stocks) has become far more volatile.

And, third, there’s decimalization.

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Stocks are no longer traded in “eighths” (worth $0.12 cents) or “quarters” (worth $0.25) a share like they were when I came into global markets 36 years ago. These days, they’re traded in pennies, as required by the SEC.

The by-product of this is closely related to the Law of Unintended Consequences. You see, market specialists and market makers alike now have to boost liquidity by trading millions of shares for their own accounts to maintain “fair and orderly markets,” which they’re expected to do as a part of their job function.

Taking huge risks to make a penny is now de rigueur, especially with a stock like Apple.

Which brings us full circle.

There is absolutely nothing wrong with Apple. Contrary to what conventional iPhone-obsessed analysts would have you believe, the investment case for ownership is damn good.

It’s the valuation that’s in question.

The much-ballyhooed decision to stop reporting iPhone, iPad, and Mac sales during their Q4/2018 earnings result just 13 days ago is a smokescreen and nothing more than a distraction.

Apple hasn’t been a device company for a long time, and I know you’ve heard me say that countless times over the past five years, so please forgive me at the risk of sounding like a broken record.

  • Services are on track to exceed $10 billion a quarter.
  • There are more than 300,000 third-party apps being sold in the Apple Store.
  • There are 300+ million subscriptions to various offerings, a jump of more than 60% this past year alone.
  • They have 50+ million Apple Music subscriptions, growing at 88.98% a year.
  • They even have original video content and reportedly autonomous driving software coming down the line. Don’t forget “all-Apple” building systems that will drive your home and probably a good many buildings entirely within the next few years.

The real key from this moment forward is the monetization of 1.3 billion installed devices.

Not selling new iPhones.

Obviously, it’s going to take some time for analysts to properly assess variables that have historically been beyond their understanding of what makes Apple tick. Not surprisingly, traders won’t catch up until they do.

A quick look at my charts tells me that the next logical support is somewhere in the $180-a-share range, but I think Apple blows through that pretty quickly if my read on institutional analysts is correct (like I think it is).

A far more likely and far stronger range is between $150 and $175.

Three Key Ways to Play Apple’s Short-Term Drop and Long-Term Growth

So, how do you play that?

Depends.

  • If you already own Apple as a “Free Trade” (having converted shares when your profits hit 100%) and are following along in one or more of my paid services or right here at Total Wealth, do nothing. Except, that is, possibly laugh all the way to the bank. Apple could literally fall all the way to zero and you wouldn’t lose a penny, having already recovered your purchase price.
  • If you own Apple but have not yet reached profits of 100%, apply a standard 25% trailing stop loss and exit if the market forces you to. Alternatively, consider using put options or spreads to hedge off some risk if you’re options savvy.
  • If you don’t yet own Apple shares but want to, set up a LowBall Order in advance to pick up shares when Apple drops to the sweet spot I just identified – between $150 and $175. Many people can’t fathom Apple falling that far, which tells me that the price is just about “right” when it comes to placing a LowBall Order like this one. The ideal price point is something bordering on extreme, but it’s close enough that it’s supported by chart action within the past 12 months.

I see $150 a share as the ultimate downside extension while Wall Street gets its proverbial act together. That’s the point at which you’ll want to enter for maximum profits. In that case, the order you’ll want to give to your broker or stage online right now would be “Sell-to-open one AAPL January 18, 2019 $150 Put (AAPL190118P00150000). Limit $1.50 (meaning you’re going to accept no less than $1.50 for your troubles).”

Obviously, Apple is an expensive stock.

Buying 100 shares will set you back $15,000, even at “just” $150 a share.

So consider an alternative approach like the Red Oak Technology Select (Nasdaq:ROGSX), which I recommend as one of the best “26(f)” programs out there. But if this is your plan, make sure you do it only when Apple falls to the price range I’ve outlined.

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Apple’s a top holding – with a 4.72% weight in ROGSX’s portfolio – which means you’ll substantially enjoy all of the upside you can handle but at a fraction of the price and risk of buying Apple stock by itself. Plus, you’ll get a slew of other super technology companies at the same time, too.

Now, I get asked about buying put options or simply shorting a stock in a scenario like this one where I expect lower prices ahead. Both of those things are great if, a) you have nerves of steel, and b) very, very strict risk management discipline.

Apple’s one of those stocks that can turn on a dime and run higher, which will instantly cause anybody shorting it a lot of financial pain if they can’t get out. And you do NOT want to get caught flat-footed when that happens.

In closing, the markets – and Apple in particular – are being driven by sentiment right now.

Not logic.

Many people think that’s a risk because it messes with their long-term investment perspective but, actually, the opposite is true.

Apple shares are trading sharply lower in the short term because iPhone centric Wall Street analysts cannot wrap their heads around the longer-term shift in Apple’s business and valuation.

It’s a tailor-made recipe for big profits, especially if you “buy right.”

When the selling stops.

I will be with you every step of the way.

Until next time,

Keith

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