How You Can Profit Alongside Apple Inc.
At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. When I find one of these rare Tier 1 enterprises, I tend to add to them repeatedly over time as favorable opportunities arise. It's a strategy that has helped me achieve a time-weighted return of 91.84% since Tier 1 was launched on Sept. 1, 2011, compared to the S&P 500's 74.42% return during that time. And today, I believe I have one such opportunity in Apple . Although Apple's stock is once again near its all-time high, I see multiple opportunities for the tech titan to continue to profit handsomely in the years ahead.
Apple's enterprise assault
After gaining a beachhead in the enterprise, or corporate, market segment thanks to the popularity of the iPhone and iPad, Apple is taking steps to grab an even bigger share of this immense opportunity. Long dominated by Microsoft and its Windows operating software, the corporate PC market is seemingly shifting away from Microsoft-powered personal computers and related devices and toward Apple's ecosystem of products. Last year, Forrester Research reported that 18% of employees said they used an Apple device for work, up from about 3% just a few years ago. I expect that those numbers are even higher today.
Apple's recently forged alliance with IBM should advance and accelerate that transition. IBM will help sell iPhones and iPads to its corporate clients and develop apps that will enable large corporations to access IBM's analytics from Apple devices. The deal brings two one-time rivals together in a strategic partnership, and further strengthens Apple's suite of offerings to enterprise customers.
In addition, in recently making its popular Office software available on the iPad, Microsoft appears to be acknowledging that its best chance at remaining relevant in the enterprise segment is to surrender Windows' main advantage over Apple -- full Office functionality -- in order to protect its Office profits. I commend Microsoft CEO Satya Nadella for making such a move. But, in doing so -- to Apple shareholders' delight -- he removed a major obstacle to Apple's growth in the corporate sector, and further paved the way for Cupertino's enterprise assault.
My Foolish colleague Brian Nichols recently highlighted three big reasons that mobile payment service Apple Pay can succeed -- and I agree with all of them. As Brian explained, "Apple can implement more aggressive security features, migrate iTunes users onto the Apple Pay platform, and maintain control over carriers because it owns its own hardware and software." That's a powerful combination. And with more than 800 million accounts with credit card information on iTunes, Apple is a competitor not to be taken lightly. Taking significant share of an industry as massive as the payments market could be a needle mover even for a behemoth like Apple. It won't be an easy fight -- the payments business is highly competitive -- but Apple has become an intriguing challenger in this arena.
The Apple TV we've been waiting for
The core of many Apple bears' arguments is that the company's innovation magic died when Steve Jobs passed away. Probably the best way to prove to critics and investors alike that Apple is still capable of creating game-changing new products is ... to create game-changing new products. CEO Tim Cook and company took a big step in beginning to silence the skeptics when they recently announced Apple Pay and the Apple Watch. But Apple can further crush the bear argument by finally launching the long-rumored Apple TV, and in the process, potentially disrupt an entirely new market -- the large, and very profitable, cable television industry.
The almost mythical Apple TV appears to be getting closer. Will it be an actual TV made by Apple or a set-top box-like device? That remains to be seen. What we do know is that Apple has already sold more than 20 million of its existing Apple TV devices, turning what was once a "hobby" into a full-fledged (although small by Apple standards) business. But with the company bringing on Comcast cable veteran Lauren Provo, and, according to The Wall Street Journal, attempting to secure long-term deals for Internet infrastructure, the signs point to Apple unveiling something even grander in the months ahead. Such a creation would probably meet with strong demand and drive excitement for Apple's ecosystem of products and services, thereby strengthening the Apple halo effect and further polishing the shine on the brand.
Tier 1's strategy
I want to increase Tier 1's ability to profit alongside Apple, but in a more conservative manner than simply buying shares to account for the possibility of a substantial market pullback in the months ahead. To do so, I will sell "mini" puts on Apple. With this option strategy, I will be paid a premium to enter a contract to buy 10 shares of Apple at a specified time and price. Specifically, I will sell the Apple January 2016 $100 puts, currently trading at about $12 per share. If Apple is trading at or above $100 on the Jan. 15, 2016, expiration date, the puts will expire worthless. And the $120 I receive in premium ($12 per share times 10 shares) will amount to an approximately 12% gain on the $1,000 at risk ($100 per share times 10 shares).
If Apple is trading below $100, I will be obligated to purchase shares at an adjusted price of $88 ($100 strike price minus the $12 per share in premium), or about 12% lower than today's $100 price. I think it's also important to note that I would be buying Apple in January 2016, after the company will have had time to grow earnings and cash flow. In effect, I would buy shares of an outstanding business at an even better valuation than is possible by simply buying shares today. Importantly, I'd be very happy to purchase Apple shares at that adjusted $88 price.
Finally, between the time I sell the puts and the expiration date, I will have the option of buying back my puts or rolling them to other strike prices and/or expiration dates. With this put writing strategy, there will be many ways to earn a profit.
The Foolish takeaway
Recently, Tier 1 closed its written puts position in Apple after capturing more than 92% of the maximum potential profit on the trade. I believe this Apple written puts trade is likely to end in a similar fashion. Apple remains one of the most dominant businesses in the world, and while its stock might not be the rocket ship it once was, I still see value in its shares. And so, at least 24 hours after this article is published -- standard operating procedure for The Motley Fool's Real-Money Stock Picks program that's designed to give Fools the opportunity to buy ahead of us should they so choose -- I will write Jan. 15, 2016, $100 puts on Apple in hopes of profiting from the continued success of this Tier 1 enterprise.
If you'd like to learn about more ways to profit alongside Apple, simply click here.
The article How You Can Profit Alongside Apple Inc. originally appeared on Fool.com.Joe Tenebruso is portfolio manager of Tier 1 Investments, a Motley Fool Real-Money Portfolio. You can connect with him on Twitter @Tier1Investor. Joe has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.