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Time to Think About Apple Again!

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How did investors respond to the tech behemoth's earnings report?

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Apple (NASDAQ:AAPL) dipped into the low $590s today on the back of "disappointing" earnings. I wouldn't call it disappointing earnings; I think they delivered exactly what was expected.

A bear might point to the lower-than-expected iPad sales. But I think that the iPad mini will fill the demand back in, and the iPad and iPad mini will combine to create great sales.

A bull would point to the blow-away iPhone sales and the iPhone 5 demand. Apple can't keep up with the production demand so far. In addition, the new line of Macs look terrific to me, and the early benchmarks on the performance of these machines is impressive. I expect these to sell very well in the holiday season along with the iPhone 5, iPad, and iPad mini.

But my biggest reason to like Apple down at these levels is just plain old valuation. It has $120 billion in cash on its balance sheet and it generated $50 billion in pre-tax cash from operating income in the last 12 months. At a market cap minus cash of roughly $440 billion, the stock is trading at less than 9X the pre-tax cash flow.

I think this is a fair value for a company that sells great products and will sell more of them in the next 12 months than they sold in the last 12 months.

At these levels, it is time to re-think Apple. I dipped my toe into it today. I sold the $565 puts that expire in January. I collected $18 in premium. If I get exercised, my effective price would be $547. At that valuation, I would be paying 7.5X the trailing 12 month cash flow.

If I don't get exercised, I made roughly 3% return for three months' investment ($18/$600 stock price). I like the fact that if Apple keeps to the estimate for its January earnings release, it will be after these options expire by a few days. So I won't likely carry the risk related to an earnings pop.

I like this as my disciplined way to enter into the Apple trade.

(See also Apple's iPad mini Off to a Strong Start)
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No positions in stocks mentioned.
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