Jun242013

Wintel for the Win

Articles

There was a time that most everyone who had a computer knew exactly what the word “Wintel” meant.

The combination of Microsoft (MSFT) and Intel (INTC) vanquished the competitors. You don’t hear or see too many Commodore, Tandy or Kaypro computers these days running on their own operating systems, or at all, for that matter. The combination became especially potent after MS-DOS became simply the shell for the graphic user interface that Microsoft was luckily able to render from Apple (AAPL) for nothing more than the cost of a legal defense. Although Advanced Microdevices (AMD) computer chips are still finding their way into lower priced computer systems, others, such as Cyrix and Zilog have long since ceded the computer microprocessor space to Intel.

The timing couldn’t have been better. If you’re going to be at the top of the competitive heap what better time than during a phase of tremendous marketplace growth? The real heyday of “Wintel” began with the introduction of the Windows 95 operating system and the mass production of cheaper hardware by the likes of assemblers like Dell (DELL) and Gateway, who back during that era never manufactured a machine with anything other than a Microsoft operating system and an Intel chip.

Wintel. Windows and Intel.

While Apple and its operating system powered by varied IBM (IBM) and Motorola (MSI) chips may have been, according to devotees, a far superior consumer product, it’s market penetration was no more than a nuisance to the Wintel alliance.

But as so often happens with size comes complacency and perhaps losing sight of events going on where your toes used to be. Add to that an occasionally less than inspired leadership and supremacy can devolve into mediocrity.

Not seeing or not being adequately nimble enough to recognize and react to the revolution in personal computing, beginning with the smartphone and then the tablet, Microsoft and Intel both ceded ground to Apple and smaller chip manufacturers in markets that hadn’t previously existed. Those new markets also had the ability to cannibalize existing markets, particularly for personal computers.

Whether Qualcomm (QCOM), ARM Holdings (ARMH) or others, the mobile and tablet markets erupted with neither a “win” nor a “tel” along for the ride.

The past decade has been a veritable wasteland for both Microsoft and Intel with regard to their perceived place in consumer technology. Although Apple Computer successfully transitioned to Intel processors, they didn’t look to Intel for its explosive growth in the mobile market and for the new tablet market. When you’re the size of Intel, the addition of Apple computers to your stable isn’t the kind of stimulus that’s going to push the needle very much. It certainly wasn’t enough to fuel growth.

That’s not to say that neither Microsoft nor Intel have stood still in their own technological and product advances or taken the opportunity to expand into new areas, such as gaming consoles. But their stranglehold on households has diminished during an era when “eco-system” has become the new buzzword replacing “Wintel.”

But faster than you can say “Moore’s Law,” the landscape is changing, yet again, as it appears that Apple is now the one having some difficulty remembering where its toes are located. For more than a decade the very essence of engineering marvels that also captured the consumer’s fancy, Apple has slowed down and has become susceptible to competition.

Unless you have been hiding in a cave you haven’t seen the onslaught of Microsoft ads on television and in movie theaters. They are now pushing their own eco-system in tablets, smartphones and computers, as well as in the gaming world. Less well seen are the acquisition of data centers and ventures to move software into the cloud, including an impending partnership with Oracle (ORCL).

It was once a Windows world and Microsoft is addressing the convergence of the PC, laptop, tablet and communication devices through a singular operating system in order to ensure that it remains a Windows world, with or without Intel. Retaining control of that niche is far more important than capturing a nascent mp3-player market. Success of the Zune wasn’t necessary for continued sales of the Office Suite, but maintaining supremacy of the personal computing and tablet market is required in order for that cash cow to keep the enterprise afloat. It is far more important to get this battle won than some earlier generation diversions.

Even more of a signal of commitment toward the future is the rumored restructuring of Microsoft that will place greater emphasis on hardware as Microsoft takes control of its own destiny in support of vehicles to propagate its software platforms.

Borrowing a page from Ron Johnson, who was credited with the success of the Apple stores, and who didn’t survive his tenure as CEO at JC Penney (JCP) to see the store within a store concept play out, Microsoft, along with Samsung (SSLNF.PK) is employing the concept within a resurgent and re-energized Best Buy (BBY), putting itself directly in the eyes and into the hands of the buying public.

While Intel is no longer Microsoft’s sole and unqualified partner in their new ventures, their future is increasingly looking brighter than it has in years.

Intel is now under the new leadership of an individual who breathes operations, following a period of listless direction that was in sharp contrast to the great vision and leadership that had previously marked Intel’s executive offices. The announcement earlier in the year that Samsung, the very same company that has been eating away at Apple’s place in consumer’s hearts, had selected Intel for its new line of tablets should serve notice that Intel is back.

Add to that the growing presence of Intel chips in smartphones, including those made by Motorola Mobility, which is now owned by Google (GOOG), and you have the largest of the mobile phone operating systems able to be run by a new generation of Intel chips and easily transferred into Android tablets, as well.

Take that ARM.

Thus far both Intel and Microsoft have outperformed the S&P 500 in 2013.

In 2012 Microsoft continued to receive its share of disparaging comments by analysts taking delight in referring to it as “dead money.” Those jeers ended when shares surpassed $30 at which point everyone seemed to climb aboard. Of course that heralded the end of the upward climb. In 2013 very much the same phenomenon was repeated when shares again broke through the $30 barrier and it again became acceptable to admit that Microsoft was part of your portfolio.

I do not currently own shares but am anxious to purchase them once again if share price returns to the $30 level, as I have used Microsoft as an annuity for years, collecting dividends and premiums from having sold options.

Intel is a bit of a different story. While it too has traded in a fairly narrow range and hasn’t been terribly exciting unless collecting dividends and option premiums, I think that it is fair priced at current levels and would add additional shares below $25.

While the world may no longer be quite the Wintel world it was 10 years ago, as a stock investor, Wintel is a winning combination even if they are going increasingly their own separate ways in the consumer marketplace.

Individually or together, Microsoft and Intel can serve as linchpins of a portfolio, if you’re ready to go for the win.

 

Apr282013

Weekend Update – April 28, 2013

Weekend Update

Schadenfreude suits me just fine.

Is it really “schadefreude” when you don’t really know or see the people upon whom misfortune has been heaped?

For those that aren’t familiar with the word, “schadenfreude” is the strangely good feeling that some people derive when others fail or are subject to misfortune.

In Talmudic teaching the highest form of charity is when neither the donor nor the recipient are aware of one another’s identity. Complete ignorance raises the act of charity to a higher level.

Of course, we will never be able to answer the question of whether there is really a sound produced when a tree falls in the forest and there is no one present to lay witness. A single degree of separation can completely call into question that which seems patently obvious. Ignorance of an event can be is as if it doesn’t even exist.

Being a covered option seller, I do take some perverse pleasure and satisfaction when the market goes lower, even though I know that the vast majority of investors, especially the individual investor, fares well only when the markets are moving higher.

When I sell longer term call options, such as the monthly variety, I just love seeing the share price exceed my strike level early during the term of the contract, only to watch those gains dissipate as the term nears its end, especially if the end returns right to the strike price.

Somewhere, I just know that someone is asking themselves why they didn’t take their profits when they had the chance.

That’s pretty bad, right? But I never see that person. I’m not really certain that they even exist, except for the fact that I was once that person. To a large degree I believe that I was deeply ignorant back in those days with regard to the discipline of securing profits. These days I’ve simply added ignorance to the fortunes of those on the other end of trades to the list of things unknowable. Additionally, not knowing who they are is the highest form of ignorance.

As this past week was one that I immensely enjoyed and briefly put away my short term pessimism in order to trade at levels that reflect a more bullish tone, I’m now on the fence as to whether the bullish feeling can be sustained given what the past may be revealing.

After hitting market peaks 2 weeks ago and then alternatively going from the worst week of 2013 to one of the best weeks of 2013, I continue to believe that we are replicating the first 5 months of 2012.

So while I’m very happy with the higher tract that stocks took this past week, I’m especially happy to see assignments take place and have the cash settle in my account, to hold or to invest, as the market reveals itself.

Although I would much rather be fully invested, I really do want to see give backs of many gains at this point. Having a sizeable portion in cash and evolving from the use of weekly contracts to monthly ones, or even the occasional June 2013 cycle, makes it easy to make that wish.

If history is a guide, the last correction we experienced lasted just one month and then was completely recovered 2 months after it ended.

I can live with that, at least while cash is on the sidelines. If it happens, and assuming that it’s within tolerable levels, such as 10%, I’ll be reasonably happy, but not in a schadenfreude kind of way, although that kind of admission would certainly get me much more attention. Everyone notices the misanthropic guy and wishing that stock prices retreat may be the highest form of misanthrope, especially if it disproportionately impacts widows and orphans.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence. Additionally, as with the previous week, we are at the height of earnings season and thus far there have been some surprises, perhaps offering more opportunity to sell well out of the money puts prior to earnings.

I really can’t recall the last time I owned shares of ExxonMobil (XOM). Although it is one of the shares that I consistently follow, it rarely has piqued my short term interest. That may be changing a bit as I look at its upcoming and increased dividend. At a time that I’m expecting to be on the precipice of a market decline that is technically driven, rather than fundamentally, I would be more inclined to limit new investments to more defensive stocks that are likely to outperform a falling market during a period of economic stability or growth.

Although Apple (AAPL) was a potential earnings related trade last week, I ultimately waited for earnings and instead purchased shares the next day. Those were assigned, but if shares open the week near the $410 level, I am interested in establishing a new position and using an out of the money monthly contract in order to have an opportunity to also secure the newly increased dividend. I believe that Apple will out-perform the market in the near term and will offer trading opportunities in addition to appealing option premiums.

With last week’s selection Cisco (CSCO) among those assigned, Oracle (ORCL) also one of last week’s potential picks went unrequited. It also under-performed Cisco as some of the networking companies were depressed following Broadcom’s (BRCM) earnings. I’ll be looking to Oracle as a potential purchase this week as well, as the technology sector may be showing some signs of catching up to the overall market with Microsoft (MSFT) and Intel (INTC) showing strength.

As news related to the Chinese economy seems to wag our own stock market, the heavy machinery titans have been slammed back and forth as what is called “news” is so often re-interpreted or presented in different lights that create an alternation between good economic news and bad economic news on a near daily basis. Very often the sector moves in unison even when the exposure to China is limited. While Joy Global (JOY) has significant exposure, PACCAR (PCAR)certainly has less so. Both have recovered a bit this past week as have Caterpillar (CAT) and Deere (DE). ALl, however, continue to trail the S&P 500 in 2013.

Petrobras (PBR) suspended its regular dividend payment in 2012. I’m somewhat embarrassed to still be holding shares priced in the $19-20 range, purchased just before a slew of bad news. Having held onto shares even as they sank as much as almost 25%, it has been clawing its way back. Among the positive signs are the recent announcement of two special dividends. With the hope for some stability in its share price after bad news regarding pricing and production issues have now been digested, it may be time to restart accumulating shares.

Last week playing earnings related trades was a very timely strategy. I don’t know if the pleasant surprises will continue, but I think there may again be some very reasonable risk-reward propositions available, as long as you don’t mind the possibility of owning shares after it’s all said and done.

Among those reporting is Facebook (FB), which despite having received an IPO allocation and currently owning shares at various price points, has become one of my favorite stocks. The existence of extended weekly options opens up many more opportunities to generate option premiums and mitigate the potential impact of sudden adverse moves in share price. At Friday’s closing price, a weekly put sale at a strike price 12.5% below the close could return a 0.7% ROI. For those more adventurous, a strike price only 9% lower could yield a 1.4% return.

Pfizer (PFE) reports earnings this week and fits into the profile that appeals to me the most when considering an earnings related trade. This past week it sustained a large price drop, which is usually the signal that clears me to sell puts on shares. However, in this case, I more likely to consider an outright purchase on shares, not only for some capital appreciation and option premium income, but also in order to capture the May 8, 2013 dividend payment.

Humana (HUM) has been on a true rollercoaster ride. As often happens with health care stocks the various interpretations of how changing legislation or pricing structure may impact share price sends the shares in irrational and alternating directions. With earnings approaching and shares down almost 10% from its 2 week ago high, it represents a potentially acceptable risk-reward offer. If it falls less than another7% the ROI is approximately 1%. That, however, is for the time remaining on a monthly contract, which makes it a little less appealing to me, but still under consideration.

Finally, I’m not certain how much longer the world needs an independent Open Table (OPEN) but it has the kind of pricing volatility at the time of earnings release to make it worth considering a purchase of shares and the sale of deep in the money calls or simply a sale of deep out of the money puts.

Traditional Stocks: ExxonMobil, Oracle, Paccar, Pfizer

Momentum Stocks: Apple, Joy Global

Double Dip Dividend: Petrobras (ex-div 4/30)

Premiums Enhanced by Earnings: Facebook (5/1 PM), Humana (5/1 AM), Open Table (5/2 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Mar62013

Google is a Bargain

Articles

How many times have you heard the expression that “everything is relative?”

Certainly, when it comes to the price of anything, on some level a determination is made of its relative value. It can be a complicated process combining objective and subjective measures and is often re-assessed in hindsight.

That latter part is especially true with stock purchases. Buying and selling stocks that should be a simple exercise as you don’t really need to deal with intangibles, such as emotion, fear and the specter of a collapse of the Euro. At least not if you believe that the P/E ratio is a fair measure of value and a simple means by which to make comparisons. It would also helped if absolutely everyone agreed with you in that regard.

Barely a year ago it seemed as if all attention and all excitement was focused on Apple (AAPL) and what kind of price targets it could breach in its unstoppable ride. How often did analysts refer to Apple’s price movement as something unique and special?

As Apple is now having some difficulty living up to those lofty expectations it really shouldn’t come as much of a surprise that it has hit a wall faced by other invincibles of past. Being unique and special is not all that unique if history is a guide. I did my best to suggest that in a number of Apple-centric articles in the past 6 months. While history suggests that Apple will fall even further it gives reason to suspect that Google will march significantly higher.

Let’s go to the charts.

Just look at what happened to some of its sector mates about a dozen years ago. Whether Cisco (CSCO), Microsoft (MSFT) or Intel (INTC), their charts all look very similar. Although the 200,000% increase in shares of Cisco at its peak may be an outlier, Microsoft experienced a 57,000% climb, while Intel and Apple had 18,800% and 21,400% increases from their opening day close trades.

While Cisco, Microsoft and Intel all experienced their high points during the technology bubble, Apple waited the same dozen years to begin resembling the pattern of its Silicon Valley neighbors. Coincidentally, that was the length of time that Steve Jobs was estranged from Apple, before his return following the purchase of Next Computer by Apple.

By the standards of a decade ago, Apple’s share price may still have some way to go to match Microsoft’s 60% drop, Intel’s 74% retreat or Cisco’s 76% plunge. Thus far, with its recent low of $420, Apple has fallen 40% from its 2012 peak. All you need to do is slide its representation on the charts above or below over to the left 12 years and see how nicely they superimposes with the others.

But then there’s Google (GOOG). The company that’s feared, has moved into everyone’s space, is willing to fail, yet somehow garners little respect and attention. Even as it achieved its trading highs, surpassing the $800 level, analysts downplayed the achievement. Instead of discussing the juggernaut that Google is and its expansive vision, the price increase has widely been attributed to people trading out of Apple and into Google. Those are the same people that downplay market rallies by saying that it occurred on light volume. If your banker doesn’t ask about the white powder on your deposits, they’re not likely to ask if they were the result of light volume.

Google simply isn’t really generating the same kind of excitement as Apple did just a year ago. No one has even thought Google deserved an utterance of the “Law of Large Numbers” as a reason why it would have difficulty in continuing its climb.

 

Granted, Google didn’t start it’s first day of trading as a sub-$10 stock, so it is a bit more difficult to achieve a 200,000% gain. To do so, its share price would have to advance to approximately $200,000, although it could conceivably split its shares on the order of the 288 fold times that Microsoft has done. While Cisco only had to climb to $22 to increase its share price 100% after it opened for trading, Google had to climb $108 for that distinction. At $838 it is currently up less than 700% from its closing trade on its IPO day in 2004.

700%? That’s nothing by relative standards. That is the poor section of Atherton, barely even good enough to step foot into Palo Alto. Besides, even Johnson & Johnson (JNJ) was able to mount that kind of appreciation in a nine year period beginning in the mid-1980s. By historical standards there’s nothing rarefied about Google’s performance.

Certainly, by no relative measure is Google over-extended. Further, Google’s mettle has been tested and it has shown its leadership qualities. Although Google fell more than the others during the market meltdown beginning in 2007, its descent started later and ended earlier. In fact, Google started its climb back more than three months before the market bottom, having advanced more than 40% in those months preceding the market nadir.

While Apple had out-performed Google in both the periods from the October 2007 peak and the March 2009 bottom, Google has handily beaten the others.

Google’s most recent advance began November 15, 2012, moving forward 20.3%. Coincidentally, the S&P 500’s march higher (13.6%) began on November 15, 2012.

Yet the Google chart looks nothing like that of its one time glorious and subsequently fallen neighbors.

 At this point all it has done is to return and mildly surpass its 2007 peak price.

Once ad click money truly started flowing in Google has always taken the opportunity to try new and exciting ventures, most of which have been scuttled or perpetually stayed in beta. While small in the scope of the enormously growing enterprise, under the leadership of Larry Page the ventures are increasingly bold and increasingly poised to create meaningful revenue streams in addition to the growing annuity that ad click revenue has become. Even if no meaningful or immediate direct revenue is recognized from a venture, Google is a disruptor in the market place and is able to soften the underbelly of a potential competitor. Just ask Apple.

With a growing cash horde and a dividend in its inevitable future, Google has already one upped Apple with its proposed, albeit controversial, stock split. Arguably, the series of stock splits that Microsoft, Intel and Cisco undertook helped to fuel their stock appreciation and Google is still on the ground floor in that regard, standing to benefit from the illusory increase in value.

Most of all, Google is still such a relatively young company that is just learning to walk. Granted, it is doing so during a very different era than did its counterparts, but even by Apple’s modest 18,000% growth, which was not artificially fueled by the technology boom, Google has plenty of room to still return incredible profits to new investors, if it follows the script that has been played out by others.

Finally, I would be negligent, and certainly not mindful of my own history, to not suggest that there are covered option opportunities always available with Google. Although I do not currently own shares, Google has been a frequent source of premium income for me over the past 6 years. With extended weekly options now available as well, there are many choices among strike prices and contract length that both price bulls and bears can find appealing. Even those thinking that there may be no more than an 8% drop by April 20, 2013 can get a !% ROI for their pessimism. For those with a tighter price range the rewards can be substantial if Google stays within that range.

Google is also always an exciting play upon earnings announcement. Of course the premature announcement of two quarters ago was more excitement than many would want to repeat, especially, RR Donnelley (RRD), but Google is a frequent candidate for the “Premiums Enhanced by Earnings” strategy, either through covered calls or put sales, whether its shares move up or down. Seeking to take advantage of its historically large earnings related moves may be a good, and fairly conservative mechanism to find an entry point for those not currently holding shares.

I’ll be looking forward to earnings on April 15th and hope to be in a position to pay a fair share of taxes on the profits the next April 15th.

Feb172013

Weekend Update – February 17, 2013

Weekend Update

It’s all relative.

Sometimes it’s really hard to put things into perspective. Our mind wants to always compare objects to one another to help understand the significance of anything that we encounter. Having perspective, formed by collecting and remembering data and the environment that created that data helps to titrate our reaction to new events.

My dog doesn’t really have any useful perspective. He thinks that everyone is out to take what’s his and he reacts by loudly barking at everyone and everything that moves. From his perspective, the fact that the mailman always leaves after he has barked out reinforces that it was the barking that made him leave.

The stock market doesn’t really work the way human perspective is designed to work. Instead, it’s more like that of a dog. Forget about all of the talk about “rational Markets.” They really don’t exist, at least not as long as investors abandon rational thought processes.

It’s all about promises, projections and clairvoyance. Despite the superficial lip service given to quarterly comparisons no one really predicates their investing actions on the basis of what’s come and gone.

During earnings season one can see how all perspective may be lost. It’s hard to account for sudden and large price moves when there’s little new news. Although I can understand the swift reaction resulting in a 20% drop when Cliffs Natural Resources (CLF) announced that it was slashing its dividend, filing for a secondary stock offering and also creating a new class of mandatory convertible shares, I can’t quite say that the same understanding exists when Generac (GNRC) drops 10% following earnings and guidance that was universally interpreted as having “waved no red flags.”

Of course, the use of perspective and especially logic based upon perspective,  can be potentially costly. For example, it’s been my perspective that Cliffs and Walter Energy (WLT) often follow a similar path.

What has been true for the past year has actually been true for the past five years. So it came as a surprise to me, at least from my perspective that the day after Cliffs Natural plunged nearly 20%, that Walter Energy, which reports earnings on February 20, 2013 would rise 6% in the absence of any news. From my perspective, that just seemed irrational.

But of course, perspective, by its nature has to be individually based. That may explain why Forbes, using its unique perspective on time, published an article on February 12, 2013, just hours before Cliffs released its earnings, that it had been named as the “Top Dividend Stock of the S&P Metals and Mining Select Industry Index”, according to Dividend Channel. In this case, Cliffs was accorded that august honor for its “strong quarterly dividend history.”

Apparently, history doesn’t extend back to 2009, when the dividend was cut by 55%, but it’s all in your perspective of things. I’m not certain where Cliffs stands in the ratings 24 hours later.

What actually caught my attention the most this past week is how performance can take a back seat to  perspectives on liability, especially in the case of Halliburton (HAL) and Transocean (RIG). On Thursday, it was announced that a Federal judge approved a mere $400 million criminal settlement against it for its seminal part in the Deepwater Horizon blowout. That’s in addition to the already $1 Billion in fines it has been assessed. In return, Transocean climbed nearly 4%, while it’s frenemy Halliburton, on no news of its own climbed 6%. Poor British Petroleum (BP) which has already doled out over $20 Billion and is still on the line for more, could only muster an erasure of its early 2% decline. For Transocean, at least, the perception was that the amount wasn’t so onerous and that the end of liability was nearing.

From one perspective reckless environmental action may be a good strategy to ensure a reasonably healthy stock performance. At least that’s worked for Halliburton, which has outperformed the S&P 500 since May 24, 2010, the date of the accident.

I usually have one or more of the “Evil Troika” in my portfolio, but at the moment, only British Petroleum is there, at its lagged its mates considerably over the past weeks. Sadly, Transocean will no longer be offering weekly options, so I’m less likely to dabble in its shares, even as Carl Icahn revels in the prospects of re-instating its dividend.

Perhaps the day will come when stocks are again measured on the basis of real fundamentals, like the net remaining after revenues and expenses, rather than distortions of performance and promises of future performance, but I doubt that will be the case in my lifetime.

In fact, the very next day on Friday, both Transocean and Walter Energy significantly reversed course. On Friday, the excuse for Transocean’s 5% drop was the same as given for Thursday’s 4% climb. Walter Energy was a bit more nebulous, as again, there was no news to account for the 3% loss.

So what’s your perspective on why the individual investor may be concerned?

As always, this week’s potential stock selections are classified as being either in the Traditional, Momentum, Double Dip Dividend or “PEE” categories (see data).

Technology stocks haven’t been blazing the way recently, as conventional wisdom would dictate as a basic building block for a burgeoning bull market. My biggest under-performing positions are in technology at the moment, patiently sitting on shares of both Microsoft (MSFT) and Intel (INTC). Despite Tuesday’s ex-dividend date for Microsoft, I couldn’t bear to think of adding shares. However, despite a pretty strong run-up on price between earnings reports, Cisco (CSCO) looks mildly attractive after a muted response to its most recent earnings report. Even if its shares do not move, the prospect of another quiet week yet generating reasonable income on the investment for a week is always appealing.

Although I was put shares of Riverbed Technology (RVBD) this week, which is not my favorite way of coming to own shares, it’s a welcome addition and I may want to add more shares. That’s especially true now that Cisco, Oracle (ORCL) and Juniper (JNPR) have either already reported or won’t be reporting their own earnings during the coming option cycle. With those potential surprises removed from the equation there aren’t too many potential sources of bad news on the horizon. The healing from Riverbed’s own fall following earnings can now begin.

MetLife (MET) is, to me a metaphor for the stock market itself. Instead of ups and downs, it’s births and deaths. Like other primordial forms of matter, such as cockroaches, life insurance will survive nuclear holocaust. That’s an unusual perspective with which to base an investing decision, but shares seem to have found a comfortable trading range from which to milk premiums.

Aetna (AET) on the other hand, may just be a good example of the ability to evolve to meet changing environments. Regardless of what form or shape health care reform takes, most people in the health care industry would agree that the health care insurers will thrive. Although Aetna is trading near its yearly high, with flu season coming to an end, it’s time to start amassing those profits.

It’s not easy to make a recommendation to buy shares of JC Penney (JCP). It seems that each day there is a new reason to question its continued survival, or at least the survival of its CEO, Ron Johnson, who may be as good proof as you can find that the product you’re tasked with selling is what makes you a “retailing genius.” But somehow, despite all of the extraneous stories, including rumored onslaughts by those seeking to drive the company into bankruptcy and speculation that Bill Ackman will have to lighten up on his shares as the battle over Herbalife (HLF) heats up, the share price just keeps chugging along. I think there’s some opportunity to squeeze some money out of ownership by selling some in the money options and hopefully being assigned before earnings are reported the following week.

The Limited (LTD) is about as steady of a retailer as you can find. I frequently like to have shares as it is about to go ex-dividend, as it is this coming week. With only monthly options available, this is one company that I don’t mind committing to for that time period, as it generally offers a fairly low stressful holding period in return for a potential 2-3% return for the month.

While perhaps one may make a case that Friday’s late sell-off on the leak of a Wal-Mart (WMT) memo citing their “disastrous” sales might extend to some other retailers, it’s not likely that the thesis that increased payroll taxes was responsible, also applied to The Limited, or other retailers that also suffered a last hour attack on price. Somehow that perspective was lacking when fear was at hand.

McGraw Hill (MHP) has gotten a lot of unwanted attention recently. If you’re a believer in government led vendettas then McGraw Hill has some problems on the horizon as it’s ratings agency arm, Standard and Poors, raised lots of ire last year and is being further blamed for the debt meltdown 5 years ago. It happens to have just been added to those equities that trade weekly calls and it goes ex-dividend this week. In return for the high risk, you might get am attractive premium and a dividend and perhaps even the chance to escape with your principal intact.

I haven’t owned shares of Abercrombie and Fitch (ANF) for a few months. Shares have gone in only a single direction since the last earnings report when it skyrocketed higher. With that kind of sudden movement and with continued building on that base, you have to be a real optimist to believe that it will go even higher upon release of earnings.

What can anyone possibly add to the Herbalife saga? It, too, reports earnings this week and offers opportunity whether its shares spike up, plunge or go no where. I don’t know if Bill Ackman’s allegations are true, but I do know that if the proposition that you can make money regardless of what direction shares go is true, then I want to be a part of that. Of course, the problem. among many, is that the energy stored within the share price may be far greater than the 17% or so price drop that the option premiums can support while still returning an acceptable ROI.

Also in the news and reporting earnings this week is Tesla (TSLA). This is another case of warring words, but Elon Musk probably has much more on the line than the New York Times reporter who test drove one of the electric cars. But as with Herbalife and other earnings related plays, with the anticipation of big price swings upon earnings comes opportunity through the judicious sale of puts or purchase of shares and sale of deep in the money calls.

From my perspective these are enough stocks to consider for a holiday shortened week, although as long as earnings are still front and center, both Sodastream (SODA) and Walter Energy may also be in the mix.

The nice thing about perspective is that while it doesn’t have to be rational it certainly can change often and rapidly enough to eventually converge with true rational thought.

If you can find any.

Traditional Stocks: Aetna, Cisco, MetLife

Momentum Stocks: JC Penney, RIverbed Technology

Double Dip Dividend: The Limited (ex-div 2/20), McGraw Hill (ex-div 2/22)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/22 AM), Herbalife (2/19 AM), Tesla (2/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Feb32013

Weekend Update – February 3, 2013

Weekend Update

On Wednesday evening, Bloomberg Rewind host, Matt Miller tweeted that he was interviewing Wilbur Ross in a live segment in a few moments and was soliciting questions for one of the century’s greatest investors and serial turnaround artists.

Never really needing a reason to Tweet, I was nonetheless pleased that my question was chosen, but I especially liked the ultimate answer. I simply wanted to know if the cool and calm demeanor that Wilbur Ross always displays when on television was ever belied by emotion that got in the way of a business or management decision.

The answer was, to me, at least, incredibly profound and absolutely reflective of the persona that we get to see when he makes appearances. Ross said that in takeovers things often do not go as planned, but you have to “roll with the punches.” He further went on to point out that emotions conspire to work against you in making decisions and taking actions. He was calm and collected in his response and barely showed any facial grimacing or twitching when the question was being asked.

I, on the other hand was twitching, contorting and breathing rapidly at the mere use of my question. I do the same with every tick up and down of every stock I own.

My initial thought was that was probably among the best pieces of advice that could ever be given, but it was just too bad that human nature so reflexively intervenes.

One of the things that I like about buying stocks and then selling calls is that it takes so much of the emotion out of the equation. It also frees you from being held hostage to each and every dive that shares can take for no rational reason. This week alone we watched Petrobras (PBR) drop nearly 10% as it announced fuel increases that Deutsche Bank (DB) described as a “positive” action and Chesapeake Energy (CHK) surge 10% on news that their founder and CEO, Aubrey McClendon, would be leaving in 3 months. In the case of Chesapeake Energy that surge was dissipated in just a day, although that may have been as irrational as the initial move.

Recently, large adverse moves impacted shares of Tiffany (TIF) and YUM Brands (YUM) as downgrades, stories, rumors, a smattering of data and a myriad of other factors took their turns at poking holes in whatever support existed for share price. Of course, they weren’t alone in the cross hairs of the barrage of often transiently irrelevant “facts.”

But by and large, if you sell covered options you can roll with the punches. Instead of feeling the anguish when your stock takes a hit it’s similar to seeing road-kill. It’s terrible, it’s a tragedy, but for the most part you realize that in the big picture it’s all just a blip. Those options that someone else was kind enough to buy from you protect you from having to suffer through the anguish and gives you a chance to get over the initial emotional reaction so that when it is time to make a decision, such as at the end of the option period, you can do so with a far less clouded mind.

Wouldn’t it be nice to have a little Wilbur Ross inside of all of us? Maybe even better would be to be his sole heir, though.

As everyone seemed to be giddy about the fact that the DJIA briefly crossed 140000 for the first time since 2007, I reminded myself of how short a period of time it remained there and then saw that the slopes of the periods preceding the 2007 and 2013 tops are remarkably similar. If anything, maybe a bit more steep this time around?

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Fortunately for me that was the time I learned to start going with the punches and had already started protecting my stocks with calls and then used the premiums generated to purchase more shares during the ensuing drops.

Not that history is ever in a position to repeat itself, but we’ve seen this before.

As always, this week’s potential stock positions are all intended as part of a covered option strategy, whether through the sale of covered calls or puts. The selections fall into the usual categories of Traditional, Momentum, Double Dip Dividends or “PEE” stocks (see details).

As the market found itself celebrating jobs on Friday, one sector that was left behind was retail. Among my favorites this year has been The Gap (GPS). They’re mundane, not terribly innovative, but they are ubiquitous and always a safe fashion choice. Although its next support level appears to be 10% lower it does offer an appealing enough option premium to accept that risk of wearing brown shoes with a tuxedo.

Murphy Oil (MUR) just took a large hit after announcing earnings. More and more I question the extreme earnings related reactions. What seems to separate some stocks from one another is the rapidity at which they recover from those reactions. The faster the recovery the easier it is to call it an over-reaction. Otherwise, if I own such shares and they don’t rebound quickly, it’s just a case of them being under-appreciated. In Murphy Oil’s case, I think it was a welcome over-reaction.

Southwestern Energy (SWN) has been lagging behind some of its sector mates thus far in 2013, but that situation is reversed if looking at the one year comparisons. It reports earnings early in the March 2013 option cycle and I believe may be poised to challenge its 52 week high.

I’m somewhat reluctant to consider adding Intel shares (INTC) this week. The only lure is the dividend that comes along with it as it goes ex-dividend on February 5, 2013. My reluctance stems from the fact that if I add shares my Intel position will be too large and it has been a disappointingly under-performing asset in the months I’ve held shares, having waited a long time for something of a rebound. While I don’t expect $24 or $25 any day soon, I’m comfortable with $21, a dividend and some option premiums. At least that would ease some of the paper cuts on my wrists.

Starbucks (SBUX) another favorite is a reluctant choice this week, as well, but only because of its strong gain in Friday’s trading and the fact that its option contracts are spread a bit too far apart. With more and more options being offered at strike prices in $1 and even $0.50 gradations the $2.50 and $5 differences seen with some stocks makes them less appealing, especially if selling options to optimize income production over share gains. What’s really needed is for more people to read these articles and drive up the option trading voliume as they realize what an opportunity exists.

Chesapeake Energy has been in the news quite a bit this year, but for all of the wrong reasons. AS usual, its high profile story this week concerned its founder and CEO, Aubrey McClendon. The market quickly added 10% to share value upon learning that McClendon will be leaving the company in April 2013. It quickly gave that gain up during the course of the rest of this week. This is a position, that if I decide to enter, would likely be done on the basis of selling put options. That has been a common theme as I’ve re-entered Chesapeake Energy positions over the years.

What again distinguishes this week’s target stocks is that there is greater emphasis on risk, specifically earnings related risk, as Friday’s jobs data numbers fueled a strong week ending rally that further added to already high stock prices, making bargains harder to find.

Acme Packet (APKT) was one of the first earnings related situations that I described in an article entitled “Turning Hatred into Profits” that sought to create income from either disappointment or reaffirmation. It’s share price is higher now than it was the last time around, but I think that a 1% or more ROI for the chance that it’s share price may go down 10% or less after earnings is a reasonable risk-reward venture. If it works again, I may even try to understand what it is that Acme Packet does the next time earnings season rolls around.

Baidu (BIDU) has been on my lists for the past 2 months or so and has been purchased several times. Under the best and calmest of circumstances it is a volatile stock and is sometimes a frustrating one to match strike price premiums with anticipated objectives because the price moves so quickly. As it gets ready to report earnings, it too can easily move 10% in either direction, yet still meet my threshold of 1% ROI for the level of risk taken.

When it comes to stocks that are capable of making big moves in either direction on any given day and especially on earnings, there aren’t many that are better at doing so than Green Mountain Coffee Roasters (GMCR). This is certainly a stock that has required “going with punches” over the past few years, but it has been a mainstay of my speculative slice of my portfolio for quite a while. I typically think in terms of 25% moves when it comes to earnings. In this case I’m looking at about a 25 to 1 proposition. A 25% drop for securing a 1% profit for one week. If not, then it’s just back to the usual Green Mountain “grind” and selling calls until shares are assigned.

While Herbalife (HLF) has been having all of the fun and getting all of the attention, poor NuSkin (NUS) has been ignored. But, it too, reports earnings this week. I have no opinion on whether NuSkin or any other company are engaged in questionably ethical business practices, I just see it as a vehicle to throw off option premium with relatively little risk, despite it’s overall risky persona. It’s not a stock that I would want to hold for very long, so the availability of only monthly options is of some concern.

Riverbed Technology (RVBD) was one of the most early and most frequent members of my covered call strategy. It always feels strange when I don’t have shares. As it gets ready to report earnings this coming week I’m reminded why it so often makes numerous and sizable movements, especially in response to earnings. It has a bad habit of giving pessimistic guidance, but after a long courtship you learn to accept that failing because even if punished after conference calls it always seems to get right back up.

Finally, Panera Bread (PNRA) reports earnings next week. It too is highly capable of having large earnings related movements. Its CEO has lots of Howard Schultz-like characteristics in that he truly knows the business and every intricate detail regarding his company. Interestingly, it went up almost 4% just 2 trading days before earnings are released. That kind of investor “commitment” before a scheduled event always concerns me, but I’m not yet certain just how much it scares me.

Traditional Stocks: Murphy Oil, The Gap, Southwestern Energy

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Intel (ex-div 2/5), Starbucks (ex-div 2/5)

Premiums Enhanced by Earnings: Acme Packet (2/4 PM), Baidu (2/4 PM), Panera Bread (2/5 PM), Green Mountain Coffee Roasters (2/6 PM), NuSkin (2/6 AM), Riverbed Technology (2/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy