The Money Tree

Safely Generating Income in Retirement

Can You Believe It – Choices!

Posted by mounddweller on December 19, 2009

Yes, it is true.  For the first time in months I feel like I have multiple stocks from which to pick my next trade.  As all of my regular readers know I haven’t been trading much of late.  Quite simply, I couldn’t find stocks that both met my VISIONS criteria AND had what I considered to be an acceptable risk/return ratio.

This month that has changed.  I have four, yes FOUR, stocks that I feel are worthy of consideration.  They are Gamestop (GME), Illumina (ILMN), Knight Capital (NITE), and MEMC Electronics (WFR).  Let me give you a brief description of each:

GameStop operates as a retailer of video game products and personal computer (PC) entertainment software. It sells new and used video game hardware; video game software; video game accessories, including controllers, memory cards, and other add-ons; PC entertainment software; and strategy guides and trading cards. The company sells its products through its 6200+ stores, as well as through an electronic commerce Website gamestop.com.

This is the second time I have considered a trade in GME.  Earlier this year (July/August) I executed a very successful CC and NP trade on GME. 

Illumina, Inc. engages in the development, manufacture, and marketing of integrated systems for the analysis of genetic variation and biological function.  It also is a stock I’ve traded previously.  However, in this case it was a trade I entered before I began using Ron’s VISIONS methodology and software.

Knight Capital Group, Inc., a financial services company, provides electronic and voice access to the capital markets across multiple asset classes for buy-side, sell-side, and corporate clients; and asset management for institutions and private clients in the United States. It operates in two segments, Global Markets and Asset Management.

And last, but not least there is MEMC Electronics.   MEMC Electronic Materials, Inc. designs, manufactures, and sells silicon wafers for the semiconductor industry worldwide. Its products include prime polished wafers, such as OPTIA and annealed products; epitaxial wafers consisting of thin silicon layer grown on the polished surface of the wafer; test/monitor wafers for testing semiconductor fabrication lines and processes; and silicon-on-insulator wafers used for the chip making process. The company’s products are used in the manufacture of various semiconductor devices, including microprocessor, memory, logic, and power devices, as well as the starting material for solar cells.

As you know I entered a trade in MEMC just a week or so ago.  My December calls expired worthless so I hopefully will be selling a second round of calls on it this coming week.  I am including it again in this analysis because I feel it is still at a good entry point for folks who didn’t join me in the trade last week.

Below is a spreadsheet showing the key metrics for each of the stocks under consideration.  Cells shaded in green are the best value among the four stocks for that particular metric.

As you can see NITE is the clear choice based simply on having the best metrics in 5 categories.  At 92, it has the best Gold$ score.  It also trades at closest to it’s book value, has an exceptional amount of net cash on its books, and has the best TAI score.  However, let’s not make a hasty decision.  Let’s have a look at the stock charts.

In my opinion, of the four stocks under consideration, ILMN has the best looking chart.  After selling off sharply late in October it has since stabilized and is now trending back up right in the middle of the V.

OK, now let’s see what our ATM call options look like.  Below is a list of the near month ATM options for each of the four stocks being considered.  None jump out at me as being far superior to the others.  The disadvantage with the ILMN stock price is that it is right in the middle between the next available strike prices.  The other three stocks all trade at or within mere pennies of the ATM strike price.  Thus, with ILMN you have to make a decision as to whether to write the ITM or OTM call.  WFR offers the best uncalled and second best called return, followed by GME.  NITE offers the least return but is by far the safest pick with the huge pile of net cash sitting on its balance sheet.

 

What to do, what to do? For me, it comes down to choosing either GME or NITE.  Why?  Well, I already have a position in WFR that I need to sell a second round of calls on so I don’t want to pick it and end up with too large a position in one company.  With GME I get a company I’m very familiar with and which I have successfully traded before.  With NITE I get a company selling for less than its net cash.  In this market, that ‘safety net’ is very appealing.  While I like ILMN’s chart I don’t like its fundamentals.  It sells for over 28 times earnings and almost 3.5 times book value.  I also don’t like having to choose between the ITM or OTM call.

So what am I going to do?  Well, I’m going to wait and see what Monday brings.  Its a toss-up right now between GME and NITE.  Perhaps the market will make the decision for me on Monday with one or the other moving sharply one way or the other.

What do you think?  Reply to this post and let me know which one you like and why.

Merry Christmas,

Troy

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3 Responses to “Can You Believe It – Choices!”

  1. Rich said

    Troy, what search function in Visions did you use to find these stocks? Its been awhile since I did an all stocks search.

    Rich

  2. mounddweller said

    Rich,

    I used Scout to find these stocks. As you can see from the Gold$ scores they certainly don’t fit Ron’s criteria for a perfect set-up. However, I still think they will be alright.

    Troy

  3. Rich said

    I ran an all scout search this morning and the results came back with no level 3 stocks. Market just keeps on trending up. I’ll keep selling cash secured puts until the market comes back some.

    Rich

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