Articles | TheAcsMan

Dec182013

eBay's Mediocrity is the Gift that Keeps Giving

(A version of this article appeared on TheStreet.com)

December 26th will be the one year anniversay of my having purchased shares of eBay (EBAY).

During that time not much positive has been said about the company and just a few short weeks ago Ladenburg issued a downgrade, stating “until eBay can reclaim the $54 level, we believe eBay will be range-bound.”

Shares then dutifully traded down to the lower end of that range and have since been nestled near the mid-point.

The words “range-bound” are absolutely music to my ears, despite the fact that they may scream of mediocrity and lost opportunity to many others. It is as good of an example of the aphorism “one man’s trash is another man’s treasure,” as I can imagine.

While this has been one of my slowest trading weeks in a long time and everyone, including myself was eagerly awaiting the release of the FOMC minutes and Chairman Bernanke’s likely last press conference, I bought shares of eBay. Having done so marked the 15th occasion in the nearly one year period, with those shares always serving to create an opportunity to sell call options, usually utilizing short term and near the money strike levels

During that time eBay has indeed traded in a range. That $10 range from the yearly high to yearly low would have represented a 21% return for that very special investor who was able to purchase shares at the low and then exercise perfect timing by selling shares at their high. Even then that would have under-performed the S&P 500 for the year.

But for anyone practicing a buy and hold approach to stocks and entering a position at the time as did I, 2013 has been a lost year, with shares almost unchanged in that time. I’m certainly not that perfect investor who is able to time tops and bottoms. Instead, eBay is an example of why the imperfect trash is worth re-evaluating on a recurring basis. It is also an example of why there may be no particular advantage to over-thinking the many issues that everyone else has already considered.

I don’t think very much about eBay’s ability to compete with Amazon (AMZN) or about challenges that may be faced by its profitable PayPal division. It’s not very likely that I would have any great or undiscovered insights. What I care about is illustrated in its chart that demonstrates the horizontal performance for much of 2013 that Ladenburg highlighted. (EBAY data by YCharts)

The average cost of the 15 lots of shares was $51.41, while the average strike price utilized was $51.43. Since eBay doesn’t offer a dividend, the net results for the past year have been almost exclusively derived from call option premiums and have delivered a nearly 34% return, subject to today’s sole open lot being assigned.

While eBay has given up much of the glory of its past as a market leader, there’s still glory to be had by making it a workhorse part of a portfolio that utilizes a covered option strategy.

Dec182013

eBay’s Mediocrity is the Gift that Keeps Giving

TheAcsManArticles

(A version of this article appeared on TheStreet.com)

December 26th will be the one year anniversay of my having purchased shares of eBay (EBAY).

Shares then dutifully traded down to the lower end of that range and have since been nestled near the mid-point.

While eBay has given up much of the glory of its past as a market leader, there’s still glory to be had by making it a workhorse part of a portfolio that utilizes a covered option strategy.

Dec172013

Caterpillar is My Annuity

TheAcsManArticles

(A version of this article appeared in TheStreet.com)

Years ago I treated a teenager in the emergency room after an assault, re-implanting a tooth that had been knocked out during an assault.

His mother was so appreciative that before they left she had taken the time amd effort to sell me an annuity. Young and gullible and with discretionary cash, I signed on thinking “what a great idea.” I canceled that annuity within the three day window once I learned what an annuity actually was and soon after made my first stock investment.

When my son did an internship at a leading insurance company I refused to give him the names of any of my professional contacts, once he started telling me how great annuities would be for them. That valuable information on my enemies, however, were readily turned over I didn’t even give him my contact information.

To this day, I really dislike the idea of annuities, except if they’re unintentional and of my own making. I

‘m reasonably certain that no one on Caterpillar’s (CAT) Board of Directors thinks of it as a company in the business of providing annuities, but I do. I’m certain that their heavy equipment is excellent, but their artificial financial engineering products are even better.

My memory may be failing, but I can’t think of a company in the past year that has been disparaged more than has Caterpillar. It’s CEO, Douglas Oberhelm, has been generally pilloried and is frequently suggested as a leading candidate for “Worst CEO of 2013,” as Herb Greenberg collects nominations for that annual honor.

At this year’s Delivering Alpha Conference, famed short seller Jim Chanos presented a compelling argument for the reasons that Caterpillar was his choice as “short of the year.” While being in the running for worst CEO of the year is humbling enough, having your company in the crosshairs of someone willing to put their substantial assets to work in support of the thesis should be cause for further introspection. While perhaps true, it’s not entirely clear that Caterpillar has been engaged in any activities that are designed to help propel its shares higher, other than overpaying for shares as part of its share repurchase program.

It’s certainly not easy keeping a low profile when you’re a member of the Dow Jones Industrial Index as it spent much of the year hitting new record highs and your share price languished in a trading range. However, perhaps “Type A” personalities require a stock that is firing on all cylinders, but I prefer one that has settled into mediocrity and knows how to tread in place. Welcome to Caterpillar.

Let’s look at the simple 2013 YTD statistics. While the DJIA has advanced 20.2%, Caterpillar has fallen 4.0%, but only down 2.1% if you plow dividends back into the equation. Unfortunately for those 2013 Caterpillar statistics the company advanced a dividend payment from 2013 to 2012 in order to take advantage of a lower tax environment. (CAT data by YCharts)

While no one really cares about the sum of the absolute value of share price moves Caterpillar would be worshipped if they did. I have to admit having spent some time at the altar of Caterpillar, especially for most of 2013 as it rarely ventured far from home.

While the lack of performance is shameful, perhaps the real shame comes from exercising a buy and hold approach with a stock that has been so well suited for a covered call strategy, as it has traded in a range and has been repeatedly cited and chided for doing so.

Whenever you hear a stock criticized for being unable to break out of its trading range it’s time to think of creating your own annuity, rather than looking for an alternative investment.

Here’s why.

That range has created the opportunity to create your own annuity by serially purchasing shares when within that range and selling near the money or in the money calls. After all, why use out of the money calls in an attempt to optimize share gain when the real gain is from premiums? Collecting premiums and collecting dividends with occasional, albeit small gains or losses on shares over and over again has been an annuity in disguise. The income not only flows on a regular basis, but its accumulation can be significant and even make a celebrated short seller salivate.

In an 18 month period I have owned shares on 15 different occasions, sometimes holding different priced lots concurrently. In that time the average purchase price per share was $84.74, as compared to today’s $86.05 close. Adding dividends the 18 month return would be 5.2% for the buy and hold investor as compared to 52.7% for the aggressive covered option investor. During that same period of time the Dow Jones climbed 22.3%

Ultimately, every single argument being made against Caterpillar may be warranted and Oberhelm may, in fact, be deserving of an unwanted appellation. However, Caterpillar’s pricing behavior provides a good argument for remaining agnostic regarding the issues that others find so compelling.

Who knows, maybe even annuities can someday get beyond their “Worst Investment of 2013” status.

Dec132013

Fastenal is Fascinating

TheAcsManArticles

(A version of this article appeared in TheStreet)

Actually, that may be a little bit of an over-statement. Fastenal (FAST) is fairly staid, at least on a conceptual level.

In a previous life, one that included legitimate employment, I flew into a New England city on a weekly basis and would pass a Fastenal store on a lonely back road with equal frequency. On the occasional daytime landings I noticed that the parking lot and sidewalks would sometimes be packed, sometimes empty and never thought twice about it, otherwise.

During an economic period when businesses opened with great expectations and closed with great disappointment, that solitary Fastenal store was there for at least the 7 years that I drove past it. Nothing terribly fancy nor ostentatious about its appearance, just a utilitarian building, presumably delivering the literal and figurative goods.

Back then I had no idea what exactly Fastenal did, nor whether it was a publicly traded company. My assumption was that it had something to do with fasteners. “Fasten All. we fasten everything,” I envisioned their ad campaign for people in need of fasteners not knowing where else to go. I’m just smart that way.

Its location certainly couldn’t be associated with high profile consumer items and the word “technology” wasn’t anywhere to be found on the building’s edifice. But at least in the recent aftermath of the dot com bust it still had a building with its name on it. Little did I know that there were many of those buildings in the kind of places or beaten paths that I didn’t frequent very often and that they had lots more than hardware and fasteners.

Years later, when I had devoted myself to full time portfolio management I happened to pass another Fastenal site, this one in rural Delaware. On that particular day the lot was packed. A year later the same lot was empty and a few months later packed again. I may be smart in certain ways, but sometimes a sense of curiosity is helpful, as well. I don’t have much of the latter, but the laws governing osmosis are difficult to avoid.

At some point following all of those sightings I had a reasonable idea of what Fastenal was about and aware that it was about lots more than fasteners. Yet, even with a little bit of knowledge in hand I had never taken the leap and invested in shares. It’s just not one of those companies that you hear discussed very much, but it casts a fairly wide footprint among those people that actually do something tangible with their skill sets, like building and improving things that we may often take for granted.

In a world that takes great pride in and expects pant waists to ride at or above the actual waist, Fastenal was treading in a world where slippage may have been more the norm.

At some point casual observations can lead to intrigue. Certainly the idea of channel checking has some merit, but the occasional glimpse of a single store is probably not the sort of thing that channel checkers would trumpet as validating their work. Additionally, as hard as I might try to find an association or correlation to suggest that Fastenal could serve as a proxy to herald changes in GDP or broad market averages, the thesis was just lacking.

Looking at every potential investment from the perspective of a covered option writer and having started following Fastenal shares, as is my custom when my interest is piqued, for 6 months or more, I finally decided to purchase shares in June 2013 and am currently on my fifth lot of shares in that time.

The average purchase price for those 5 lots was $47.27 with the average strike price of the lots being $47.80. Based on today’s closing price of $46.41, the average price of all shares, including those of previously assigned positions is $47.45. If somehow I could magically close the book on the positions today the cumulative return would be 23.6% when shares themselves are actually trading at a loss compared to the average cost. During that same time frame the S&P 500 has advanced approximately 8.5%.

Why am I telling you any of this? Sure, boasting is one reason, but despite the lack of a coherent thesis to urge the use of Fastenal as a predictive tool, what now captures my attention with regard to future opportunities is a quick look at Fastenal’s chart over the past 5 weeks.

The banality of variation during that time is exactly what excites a covered option strategist. While a consistent flat line wouldn’t do very much to encourage option buyers to ante up the premiums, the occasional paroxysms of price, up or down, make selling Fastenal call options an appealing complement to an overall strategy of trying to optimize share returns and dividends. More importantly, the setting of a strike price at which options are sold establishes a discipline by creating an exit point and doing what is often left undone – taking profits. While Fastenal may be staid, most of us would consider the idea of profits to be fascinating regardless of how often we would have to be subject to them.

FAST data by YCharts

Nov142013

Cisco was a Friend of Mine

TheAcsManArticles

You have to be of a certain age to recognize the Cisco Kid character, but somewhat younger to be familiar with the song that paid homage to the fictional character.

After terrible earnings and poorly received guidance that stunned most everyone, Cisco (CSCO) hasn’t made many friends, but it’s still a friend of mine.

Maybe the problem is all in the name. No, not Cisco, there are worse things in the world than being confused for a food services company. Maybe the problem is in the name John Chambers.

Barely two years ago it was a John Chambers, as head of Standard and Poors’ Sovereign Debt Committee who lowered the debt rating of US Treasury debt. He wasn’t very popular at the time, as many people are put off when they can connect the dots and point fingers at the catalyst for a market wide plunge.

But the John Chambers who is the CEO of Cisco has seen his popularity mirror that of many stocks, in general, as it has gone up and down and up again.

Now it’s down.

Not too long ago John Chambers was said to be on the short list to be the Treasury Secretary in the Bush administration. He was regarded as a model CEO of the new economy and his slow drawl and transparency were welcome alternatives to the obfuscation spun by so many others. His candor during interviews in the immediate moments of earnings being released were always respected.

Then the bottom fell out from Cisco and there were calls for his ouster. Seeing share price in 2011 challenge the lows of 2009 wasn’t the sort of thing that engendered confidence and the calls went out for his head. At that point Treasury Secretary may have been looking pretty good, but that ship had long sailed.

But Chambers was eventually rehabilitated. Rising stock prices, perhaps buoyed by aggressive buybacks, will do that for you. In fact, if you conveniently have data points extend only from the lows in August 2011 to yesterday, Cisco actually out-performed the broader index.

Ironically, John Chambers is somewhat like fictional The Cisco Kid, who actually started his life as a cruel outlaw, but became regarded as being a heroic character. It’s just that Chambers can stay a hero.

Chambers has been there and done that, but now he’s back in that dark place, where people are even poking fun at his drawl and once again saying that his ship has sailed. Perhaps plunges on two successive earnings releases will create that kind of feeling. He certainly may have cut back a bit on his candor, as even his appearance yesterday offered little insight into the disappointment that awaited.

In fact, many asked, given how substantive the alterations in forward guidance were, why Cisco didn’t pre-announce or issue revised guidance weeks ago.

Personally, I don’t see the difference between getting hit with an earnings related surprise earlier, rather than when scheduled. I actually prefer knowing the date and time that i may see my shares subject to evisceration.

I owned Cisco shares and have done so on 5 different occasions this year. My shares had calls written upon them and were due to expire November 22, 2013. Barely a few hours ago they seemed certain to be assigned. Now they are more likely to be seeking rollover opportunity to a future date.

As most everyone has piled on the sell wagon, much as had occurred with Oracle (ORCL), which also had two successive share plunges after disappointing earnings, I believe that for the short term trader and particularly for the covered option trader, this most recent fall in share price is just an entry opportunity.

Yesterday, I did something that I very rarely do. I purchased shares in the after hours. Usually when I do so, in the anticipation that by morning calmer heads will prevail, I’m typically wrong. That was the case with Cisco this morning.

In addition to buying shares in the after hours, another thing that I rarely do is to purchase shares without immediately or very shortly after selling calls on those shares. In essence, both actions were counter to my overall desire to limit risk.

While I’m usually on the wrong side of momentum when entering, I look at these positions as ones to generate both capital gains from shares and option premium income, whereas for the majority of my positions I emphasize premium and dividend income.

In the case with Oracle, opportunity existed after bad news and exaggerated downward price movements. SInce I tend to be short term oriented, I only care about the opportunity and not about structural issues that may have longer term impact.

While earnings represented a risk and shares moved quite a bit more than the implied movement, suggesting that investors were surprised and unprepared, I think the risk is now greatly discounted.

I make no judgment regarding the ability of Cisco, whether under Chambers’ leadership or anyone else to compete in the marketplace and to recapture its glory or restore Chambers to a position of honor.

Instead, Cisco is nothing more than a vehicle. The Cisco Kid had his horse, John Chambers had his buybacks and for some the shares of this beleaguered company are the vehicle of the day.