Chasing Value: Apple Falling, Opportunity Calling

Tuesday the news was filled with stories about Apple trying to negotiate the rights to rent television shows through iTunes for 99 cents each. This would be another landmark deal and yet again another revenue stream.

The company is still adding to its $48 billion mountain of cash, which is becoming a more significant drag on earnings. While it is better to have too much rather than not enough cash, it does leave one wondering why they need it. An acquisition anywhere that size would be a mistake. I think it's time to announce a dividend. If the stock continues to fall, a share buy-back seems ever more likely.

Many have pointed to Apple's seemingly low P/E ratio in the mid-teens as reason to believe there is value now. My attention is drawn to the PEG ratio. Whereas the P/E ratio is slightly above the market average, the PEG ratio of 0.76 is half what most value investors would consider desirable. It is also noteworthy that Apple is averaging over 25 across the board in ROE, ROA, and ROIC with zero leverage. Often companies can boost these numbers by taking on more leverage (debt), but Apple is not because it has no debt, making the returns all the more impressive.

As the stock has dropped my interest has increased and that will likely hold true for the rest of the investing public. Checking the options activity, I like the idea of selling to open the January puts at a $210 strike, five months out, offering a $10.95 per share premium. This equates to a 13.20% annualized return with a break even price of $199.05. That is a margin of safety more to my liking.

If the stock does drop further, the puts as well as the stock itself will become even more rewarding. This seems likely, based on market sentiment, not value.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He does not own shares of AAPL.