At the time I wrote the initial draft of this article in mid March of 2012, International Business Machines(股票代號: IBM) was trading at  $197/share with a total cap of $229 Billion.  I have been observing the price movement, and noticed that the recent pull back in May after ex-dividend. The current Net Income is about $16 Billion.  Management has reaffirmed the target earning of $20 Billion by 2015.  The annual compounded growth rate from $16 Billion to $20 Billion for the next 3 years will need to be at about 7.7%, which is roughly in line with the company’s short and medium term and multiple years growth rate average.  Assuming the growth rate fall back to a base line of 3% after achieving the goal of $20 Billion in 3 years, I estimated the market cap today is conservatively $267 Billion, or at least $230.8/share or higher pending on the $7 Billions dollars buyback announced on 4/24/2012.

With management’s dedication to ongoing buybacks, the EPS will sure increase in proportion to the share outstanding reduction on top of the net income growth, and the per share price upward readjustment should follow accordingly. Long term investor would also appreciate the 1.5% dividend, and its dividend growth history.  Moreover, if needed, smart management would be wise to consider increase bonds issuance, which IBM already did, if 1)the cost of debt is significantly lower than the cost of equity, 2)the cost of debt is at record low because of the low interest rate environment, 3)the company’s free cash flow generation is strong and more than enough to service and cover debt and interest payment without jeopardizing credit rating.

As a result of the company being currently undervalued by the market, the management’s decision of aggressive buyback is valid and will benefit the existing shareholders tremendously.

 

Conventional wisdom tells us that because of the relative higher growth and risk and possibility as an M&A target, the average long term return on small and mid cap indices are usually higher than their large cap counterpart.

A quick scan reveals four intriguing names that I like to look deeper into.  They reside in the mid and small cap space.  They are CBOE Holdings(股票代號: CBOE), Intuitive Surgical(股票代號: ISRG), Paychex(股票代號: PAYX), and Rollins(股票代號: ROL).  This is just a starting point.

CBOE stands for Chicago Board Options Exchange, where it clears and handles the lion share of U.S. options trading.  It also is the owner of such products as the VIX and SPX.  ISRG stands for Intuitive Surgical, where its line of Da Vinci Surgical Robotics help surgeons and offer patients the option and ease of minimally invasive surgeries.  PAYX stands for paychex, Inc.  It provides small to medium size firms services such as payroll processing, human resources, and benefit administration.  ROL stands for Rollins Inc.  It is the parent company of the famous pest control firm, Orkins, and many others.

None of these stocks are on sale right now, but there is one thing that they all have in common that caught my attention.  All of them have no debt.  Not having debt in your capital structure is not necessary a good thing, but what set these four companies apart is their ability to earn a “high return on equity without the use of any debt!” Now that is impressive.  Perhaps we shall in the future visit and explore the subject of  the Du Pont formula.

The ability to earn high return consistently is no easy fluke.  Each of these businesses probably has something that distinguishes itself from competition, whether it be a great brandname recognition in Orkins, a great proprietary technology and patterns in the Da Vinci’s, a great help to small businesses in Paychex with high barrier of entry, or simply popular trading tools like the SPX and VIX, they are all necessities in some form or another to the growing clientele that they serve.  Cyclical or Secular, a great business that consistently earns a great return selling at a sensible price most certainly deserves a place in a long term investor’s portfolio in almost any economic cycle.  Keep these names on your watchlist, as more due diligence research and investigation is needed before any of us pull the trigger.

 

Apple Store, 上海浦東

Apple(股票代號: Aapl) is on Sale!  It closed yesterday at $587.44, and it is definitely cheaper than when it was at $640ish.   Long AAPL like you buy edible apples while grocery shopping, the more an item is on sale, the more you buy!  Don’t chicken out!  Rise above your own emotion!

Refer to my previous post for apple valuation.

Sell Apple May $540 Put expiring in 4 weeks for $12.00(This is the price it last traded at yesterday, but the higher the price the better for us) for a 4 weeks holding period yield of 2.22% (28.85% annualized return for comparison)!  The option price is still very expensive because of high volatility, so sell cash covered put to give yourself a chance to enter.  Adjust the strike depending on your own risk appetite.

 

Let’s take a quick look at two big box retail chains whose symbols are only off by one letter, but their financial pictures couldn’t be further apart.  Retailing is a tough business, kudos to those that continue to survive and blossom.

As a long term value investor, preservation of capital is probably the most important issue one should address when it comes to deploying your money on certain stocks for a long haul.  Ask yourself the question why a company will continue to exist for the next 10, 15 or 25 years.  Do your due diligence before hand, buy with a margin of safety, and utilize the proper options strategy to hedge your risk, then you will be able to sleep more soundly at night, and not worry about which way the market turns.

(股票代號: BBY)- Best Buy; (股票代號: BBBY)- Bed Bath and Beyond

Best buy recently reported a loss in the most recent quarter.  It is a great place for loitering, playing with, and trying out new electronic gadgets.  I thank them for their generosity of supporting the landlords with long term huge square footage lease, and without hesitation, shamelessly whip out my mobile device and put in an online order of that device I just played with, on AMAZON.COM.  As a reward for my patience of delayed gratification, I receive, very often, better pricing, no sales tax, and free shipping.  What more can you ask for as a price conscious consumer?  Service?  I think it’s overrated in this particular situation.  No disrespect to Bestbuy, but do you remember Circuit City, the good guys, CompUSA, and the smaller RadioShack(Déjà vu to the new Bestbuy smaller store concept), that have all been put into oblivion.

Bed Bath and Beyond is a specialty retailer of everything bed, bath, kitchen and home decor.  However unexciting this business sounds, it continues to deliver very good profit margin, and above average return on equity with little or no debt.  I cannot think of a strong reason why this simple business can’t be duplicated and knocked over.  I think the reason for its good performance is largely due to the absence of a yet clearly dominating low-cost competing counterpart that would drive BBBY sales into the ground.  The emergence of such online retailer, in my humble opinion, is perhaps only a matter of time, and not if.  Nevertheless, in the mean time, if Walmart and Target can’t seem to put a dent into its fortress-like balance sheet, perhaps this is a retailer that may be worth a little bit more digging into.

My favorite retailers(or to take a page out of the Bill Gross sound bites, the cleanest of the dirty shirts):  Walmart; Target; Amazon.com, and various dollar stores, but then this will be a story for another day.  No trading recommendation offered at this time for any of the aforementioned companies.

 

Goldman Sachs recently upgraded Starbucks(SBUX) to buy from neutral, citing the coffee company is entering a new growth phase.  Newly added to Goldman’s conviction buy list, the bank expects Starbucks will double its earning to the $3.50 ~$3.60 range by 2015, a compounded earning growth of roughly 24% a year.  The robust earning growth will come from expansion in emerging markets, Starbucks single-serve-coffeemaker as well as declining coffee bean prices.  Goldman has a new target price for Starbucks at $66.

Yesterday it hit its new 52-weeks high, and crossed its resistance pivot point of $57.52 and so far, at the time I was writing this, it has traded as high as $58.47.

Starbucks is quick approaching its target of $66.  This is a great stock for utilizing the “covered call” strategy as outlined by Trader BigO, plus it has a 1.2% dividend yield to sweeten the deal.  If Starbucks hit significantly above $66 and I were doing covered call, I would most likely let it get called away.  I would then buy a longer term OTM call or bull call spread, however, to try to participate in any speculative upside while reducing my downside risk of owning the stock.  Let’s face it, who wants to bet against Howard Schultz, Starbucks, Goldman, and the emerging market in China?

For more conservative folks like me, my own “optimistic version” of the intrinsic value for Starbucks is around $63, I would try selling one May $62.50 call against every 100 shares to fund the purchase of two May $65 calls.  This way I get to participate on any upside surprise in May if my underlying got called away.  This is by no mean a negative view on Starbucks or the good folks at Goldman.  I am in the camp of sell in May, walk away.  There is absolutely nothing wrong with taking some money off the table especially if my favorite coffee company seems a bit too frothy for my taste.

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