The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – SEP Week 3

Posted by mounddweller on August 28, 2011

Fellow Traders,

This week we have a decent number of selections from which to choose.  Unfortunately, I only found one of them to be of interest.

As you can see the one I selected is James River Coal (JRCC).  Why JRCC you ask?  Well, you can be sure it wasn’t because of the fantastic looking 1-yr price chart.  Take a look…

That, my friends, is ugly!  No, the reason I selected JRCC is because it is cheap.  It is trading at just 79% of its book value which is $13.07.  Can it get cheaper?  Of course it can!    However, our selected strike price of $8 give us 23% down-side protection (DSP) from Friday’s closing price.  At $8, JRCC would be trading at 61% of book value.

So why is JRCC so cheap?  Well, it missed analyst’s last quarterly earnings estimate by a wide margin.  Top line revenue growth was fine but the bottom line was not.  The guys over at The Motley Fool think the selling was over done and now is a good time to get into JRCC.  You can read their comments here: http://www.fool.com/investing/general/2011/08/10/james-river-coal-shares-plunged-what-you-need-to-k.aspx.

Likewise, during the quarterly earnings call, both the CEO and CFO were enthusiastic and said the shortfall was not due to higher operating costs at any of their mines.  Rather, the increased costs came from purchases of coal for their new Metallurgical coal blending process.  You can read the earnings call transcript here: http://seekingalpha.com/article/286118-james-river-coal-s-ceo-discusses-q2-2011-results-earnings-call-transcript?source=yahoo.

As I mentioned earlier the stock is cheap and not just from a balance sheet perspective.  It is also cheap relative from an income statement basis as well.  It is trading at < 7x trailing and anticipated earnings.

So, with 3 weeks to expiration, the SEP $8 put is going for $0.10 bid.  That gives us a 1.25% ROIC with over 23%  DSP.  In my opinion the bad news is already out so this might not be a bad trade.   Given it is trading at multi-year lows, it just seems to have limited further downside from here.

As always, do your own DD and trade accordingly.

Regards,

Troy

 

 

 

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