Warren Buffett bought AAPL stock worth $1B is the latest hot news while another pro investor Carl Icahn sold his position in AAPL when disappointing earnings were reported just recently.

How does one go about buying a stock like AAPL? The greatest value investors use what is called a “discount cash flow” (DCF) analysis. This method will provide a conservative evaluation of the stock price with a factor of safety. The factor of safety takes care of the market risk and the other unknown market drivers. What we need are (can be obtained from MSN Money or Yahoo Finance):

1. diluted earnings per share (EPS) for the last ten years (or whatever is available)
2. earnings per share trailing twelve months, EPS (ttm)
3. price/earnings (P/E) ratio, trailing twelve months, P/E (ttm)
4. Current price of AAPL ($100.35)

The earnings growth rate is calculated using the formula
FV = PV * (1+i)^n                                          (Equation 1)
where
FV = future value ($9.28) (see EPS Table below)
PV = present value ($6.38) (see EPS Table below)
i = growth rate
n = number of years (3 years)

i = (FV/PV)^(1/n) – 1 = 0.13

Trailing twelve months P/E ratio is 11.17 (Yahoo). Professionals use twice the earnings growth rate typically for the P/E ratio going forward, which is 26% (2*0.13). In 10 years, the future earnings would be $30.48 (using FV formula in Excel Spreadsheet, or hand calculation using equation 1; use $8.98 (Yahoo), diluted eps as the start, 13% growth rate for 10 years).

Future AAPL retail price in 10 years = P/E * EPS = 26 * 30.48 = $ 792.56
Let us assume an aggressive rate of return of 15% (can be 10%, 5% or whatever)
Discounted Current Retail Price = $195.91 (use the Present value Excel formula or equation 1)
Let us assume a factor of safety of 2.

Discounted current sale price = $ 97.95

Current AAPL Price = $ 100.35 (as of May 30, 2016)

Let us buy AAPL at the sale price. How do we do that?

Let us do what pros would do. Sell a PUT option expiring in June, 2016 at the strike price of $98 per share. We will get paid a premium of $0.87 per share. This means the buyer of the $98 AAPL June 2016 PUT option has the right to sell APPL shares at a strike price of $98 on or before June 17th, 2016. This would make sense for the buyer of the option only when the price of AAPL shares fall below $98 a share. The buyer of the PUT option is paying a premium of $0.87 per share for insuring his price at $98, should the AAPL price drop below $98.

From our side, who cares? According to our evaluation, AAPL at $98 a share is a price with a margin of safety of 2. We have done our homework. We can be obligated to be sold the AAPL shares at the price we want and and get paid a premium for it. If we put in 10 contracts, which is 1000 (10 x 100) shares, we get paid $870 (1000*$0.87) instantly. But then we have to have $98,000 in our trading account to pay for 1000 shares.

What happens when the AAPL shares stay above $98 a share at expiration, which is more likely. We get to keep all of $870 with no questions asked! Robert Kiyosaki, the Rich Dad would say, that is printing money out of thin air! This is what the rich do anyway!

Trade like a rich pro using options!