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Top Trades for Wed, 06 Sep 2017 08:19 – AAPL, IMAX, LB, WPM

Here's my agenda for Money Talk (BNN 7pm) tonight:

Apple (AAPL) was our Stock of the Year in 2013 ($55), 2014 ($75) and 2015 ($105) but we hit our $130 target so we moved on (WPM is our current Stock of the Year) but we do like Apple again as they are coming into another up cycle in sales, which should take them up over $180 by next year.  

Apple (AAPL), who usually give conservative guidance, indicated that they expect $52Bn in sales in Q3 (July, Aug, Sept – which is their Q4), presumably indicating a sales boost of the IPhone 8.  AAPL is very secretive but there is an event on Sept 12th and, generally, devices go on sale a week after they announce so Sept 17th makes sense, especially as the 5, 6 and 7 were all released in the 3rd week of September as well.  

This will end Apple's fiscal year with about $228Bn in sales and about $49Bn in profits and on track to hit $250Bn next year with $55Bn in profits which puts a $1Tn valuation ($195/share) firmly in reach as the p/e would be only 18 and, don't forget, AAPL is sitting on $250Bn in cash which, thanks to Trump, it's likely they will be able to bring home from overseas at a very low tax rate, which could lead to a massive dividend distribution or stock buyback.  

That being the case, we could play AAPL to certainly stay over $160 with the following spread:

  • Sell 10 AAPL 2019 $140 puts for $9.10 ($9,100) 
  • Buy 20 AAPL 2019 $150 calls for $25.30 ($50,600) 
  • Sell 20 AAPL 2019 $165 calls for $17.70 ($35,400) 

Your net cash outlay on the spread is $6,100 and the potential upside on the spread is $30,000 if AAPL is just over $165 on expiration day (Jan 18th, 2019) for a gain of $23,900 (392%).   Selling 10 puts obligates you to buy 1,000 shares of AAPL at $140 ($140,000) plus the $6,100 cash so $146.10 per share is a $16 discount (10%) to the current price as a worst case.  Ordinary margin on the puts is just $10,361 since it's far out of the money so the return on margin is excellent as well.

We are expecting a short-term pullback in Apple and the overall market of perhaps 10% so, it may pay to be patient on this trade.  In the very least – it's a good idea to keep hedges in your portfolio.

The second trade we like today is Limited Brands (LB) who own Victoria Secret, Pink and Bath and Body Works.  Aside from the general fear of Amazon that has been hitting the entire retail sector, LB has been putting up weak comps all year but that's because they cut their swimwear line in Q3 last year as it was not profitable – as well as seasonal and the company chose to streamline their offerings.  They also stopped sending out a paper catalog, which also impacted some sales.

So the damage is self-inflicted and, going forward, the comps should be much stronger but, at $36.68, the Market Cap has dropped to $10.4Bn for a company with $12Bn in sales that's dropping over $1Bn to the bottom line for a p/e of about 10.  Strong sales, strong profits and an iconic brand at a huge discount makes LB a strong contender for our Trade of the Year for 2018 (if it stays this cheap).  

At the moment, our trade idea would be:

  • Sell 20 LB 2019 $32.50 puts for $4.70 ($9,400) 
  • Buy 40 LB 2019 $32.50 calls for $7.50 ($30,000) 
  • Sell 40 LB 2019 $40 calls for $4.30 ($17,200) 

The net cash outlay on this spread is just $3,400 and the margin requirement is $4,974 while the spread returns up to $30,000 at $40 or better on Jan 18th, 2019 for a net profit of $26,600 (782%).  Worst case is owning 2,000 shares of LB at $32.50 + $1.70 cash lost would be $34.20, about 5% below the current price.  

 

IMAX is another stock that's on sale because the 2017 box office has been a huge disappointment but you can hardly blame IMAX for that.  There may be a bit of a trend away from movie-going but IMAX is multi-national and it will be many years before China and India stop going to the movies – even if this is a downward trend.  

IMAX's market cap has fallen to $1.25Bn at $19.50 and they are making about $40M this year and projecting $65M next year so we are looking for growth going forward but that's indicated by how many new theaters they have signed up.  

IMAX doesn't have 2019 options, they only go out to March so our trade idea for IMAX is:

  • Sell 10 IMAX March $20 puts for $2.35 ($2,350) 
  • Buy 20 IMAX March $18 calls for $3.10 ($6,200) 
  • Sell 20 IMAX March $22 calls for $1.30 ($2,600) 

Here our cash outlay is $1,250 on the $8,000 spread that's $3,000 in the money to start.   The margin is a steep $2,200 because we're selling aggressive puts but the turnaround time is just 6 months if all goes well and we stand to make a potential $6,750 (540%) return on cash if IMAX is over $22 on March 18th.

We will be tracking our trade ideas in a special Money Talk Portfolio which we're starting with $50,000, giving us $100,000 in ordinary margin to play with.  We will update it monthly and post a link for our viewers to follow and we'll do live progress reports along the way:

Our current Trade of the Year, WPM, still has a year to run and, although the spread is already net $9,100, up $7,100 (355%) from our net $2,000 entry – the maximum payoff at $22 is $25,000 so this trade can still make another $17,900, close to a 200% return on $9,100 – so we still like this trade, even as a new one!  


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