It seems investors have turned very bearish on Apple, as options buyers are strongly preferring bear options over bull options. Also the company’s shares immediately started to decline in early trading today, falling as much as 2.59% to $107.44 per share within less than two hours of the market’s open.
Identifying “Quality” stocks
In spite of Wall Street’s widespread bearishness on Apple, most analysts remain firmly in the bull camp. In fact, Goldman Sachs analysts Katherine Fogertey and John Marshall have a suggestion that could raise your investment by seven times—if they’re right about the stock, of course.
They see Apple as one of a handful of “Quality” stocks, which they define as having “a superior mix of Cash Return on Cash Invested (CROCI), [and] strong asset productivity (Novy-Marx), stable to growing gross margins with investment in their asset base.” Based on these features, the Goldman team looked for stocks that could have attractive December call options. To identify such stocks, the optimized the call strike between 3% out of the money and their firm’s price target to identify the maximum returns on the call premium paid.
Options buyers are bearish on Apple (AAPL)
The analysts suggest that options investors grab up some January 16 $115 calls on Apple, which are $5.70 at 5.2%. This purchase would allow investors to get in and buy shares of Apple to potentially capture positive impacts from the company’s October earnings report and the holiday shopping season.
They report that currently the three-month skew for Apple is high, which means options buyers are have become more worried about potential catalysts for Apple shares.
Catalysts like the October earnings report and unit numbers will likely drive the company’s stock higher or lower, depending on the results. The Goldman team notes that call buyers are at risk to lose the premium they paid on the purchase Apple shares close under the strike price when the options expire.
So why bullish on Apple (AAPL)?
Their colleague Simona Jankowski sees 50% upside to Apple’s shares in the next year due to “meaningful upside” to fiscal 2016 estimates. She expects Apple to outperform in iPhone units—in stark contrast to much of Wall Street, which appears to think that the iPhone 6S and iPhone 6S Plus won’t do well this year. She also expects a strong iPad cycle and believes that upward estimate revisions will boost Apple shares higher.
She also mentioned a recent survey which indicated that the iPad is at the top of the list in terms of consumer electronics products people want to buy during the holiday season. Goldman Sachs discovered that 16% of respondents are planning to buy one this year. This is interesting in light of the fact that Apple has been battling steadily declining iPad sales over the last several quarters. The company unveiled the 12.9-inch iPad Pro last month, and most analysts agree that the tablet – laptop hybrid will likely boost tablet sales for Apple.
Amazon calls also recommended
Fogertey and Marshall also suggest that investors might buy calls on Amazon for the upcoming Amazon Web Services conference, which is scheduled for Oct. 6 through 9. They note that the company’s shares have moved higher in all three of the past AWS conferences by an average of 5%. Further, Amazon shares have moved up or down by an average of 10% over the last eight earnings reports.
Here’s a look at their full list of options recommendations: