The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – OCT Week 2

Posted by mounddweller on October 8, 2011

Fellow Traders,

This week we have 15 selections which meet our Week 2 criteria (>12.5% DSP, >2.0 PF).  Of these I have selected 3 for your further consideration.

The first thing you’ll notice is that none of these are household names.  However, this is not unusual this late in our monthly expiration cycle.  Since we do not reconsider stocks that have already appeared on our list earlier in the month it is to be expected that later in the month we will have smaller, lesser known companies from which to choose.

Given my penchant for conservative picks some of you might find my selections this week to be a little out of character.  And you would be partially correct.  These selections do not fit my normal ‘modus operandi’.  However, they are also not wildly speculative either.  I have selected them with the following criteria in mind:

(1) strong technical support at or above the strike price

(2) reasonable debt levels relative to cash on hand

(3) profitable with a low P/E ratio

(4) DSP well above our minimum 12.5% selection criteria.

So, with those things in mind let’s look at each of my 3 selections.  First up is Flextronics (FLEX).  Flextronics International Ltd. provides design and electronics manufacturing services to original equipment manufacturers. The company offers its services to a range of products in the infrastructure, mobile communication devices, computing, consumer digital devices, industrial, semiconductor capital equipment, clean technology, aerospace and defense, white goods, automotive and marine, and medical devices markets.   It was founded in 1990 and is headquartered in Singapore.

FLEX has support at the chosen $5 strike price.  It bounced off this price back in August, hitting a 52-wk low of $5.05.  It has about $650 million in debt net of cash.  This is a little high but FLEX has good free cash flow so it is manageable.  FLEX trades at less than 8x trailing earnings and 6x estimated earnings.  The $5 strike offers 1.2% ROIC with 18.62% DSP.

Next up is Harman International (HAR).  Harman International Industries, Incorporated engages in the development, manufacture, and marketing of audio products and electronic systems primarily in the United States, Germany, and other parts of Europe.  It was founded in 1980 and is headquartered in Stamford, Connecticut.

HAR has support at the chosen $25 strike price.  It bounced near this price back earlier this week, hitting a 52-wk low of $25.53.  It has about $539 million in net cash.  This equates to $7.71 in cash per share.  HAR trades at 16x trailing earnings and 8.55x estimated earnings.  The $25 strike offers 1.0% ROIC with 18.69% DSP.

Last up is Allegiant Travel (ALGT).  Allegiant Travel Company, through its subsidiaries, operates as a leisure travel company in the United States. It focuses on transporting travelers in small cities to leisure destinations, Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, and Ft. Lauderdale in the continental United States.   It is headquartered in Las Vegas, NV.

ALGT has support at the chosen $40 strike price.  While this is above the 52-wk low of $38.12 is has recently found support multiple times at or above the $40 strike price.  It has about $175 million in net cash.  This equates to $9.18 in cash per share.  ALGT trades at 16.65x trailing earnings and 12.61x estimated earnings.  The $40 strike offers .83% ROIC with 16.14% DSP.

Well, that’s it for this week.  Best of luck trading in the coming week.

Regards,

Troy

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One Response to “Deep OTM NP Strategy – OCT Week 2”

  1. trading001 said

    I was very skeptical until I did the math — very nice!

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