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Archive for November 20th, 2011

Deep OTM NP Strategy – DEC Wk 4

Posted by mounddweller on November 20, 2011

Fellow Traders,

There are 186 selections which meet our Week 4 criteria (> 17.5% DSP, PF > 2.0).  Of these I found two, Coinstar (CSTR) and Radioshack (RSH) that might be worth a deeper look.  You can see the entire list here:

Let’s take a look at Coinstar.  Coinstar provides automated retail solutions primarily in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. The company’s core automated retail businesses include the ‘redbox’ self-service DVD rental; and Coinstar self-service coin-counting brands.   The company was founded in 1991 and is headquartered in Bellevue, Washington.

Coinstar has decent fundamentals.  It trades at 11.2x forecasted earnings, has a 12% operating margin, and generates an impressive 22.5% ROE.  The company carries about $123M in net debt but this is easily covered by the $229 in free cash flow.

What caught my eye about this trade is the solid line of support CSTR has around the $40 mark.  The put option we’re interested in has a strike price of $35.  Now there are no guarantees CSTR can stay above $40 the next time it gets down there but historical results are in our favor.

Next up let’s look at Radioshack (RSH).  RadioShack Corporation engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and kiosk operations.  RadioShack Corporation was founded in 1899 and is based in Fort Worth, Texas.  Did you catch that?  Radioshack existed long before electronics were even invented!  That tells me they know how to reinvent themselves as their primary market evolves over time.

Like CSTR, RSH has decent fundamentals.  It trades at 8.6x forecasted earnings and 1.5x book value.  It has an almost equal amount of cash and debt and generates strong free cash flow.  So much so that it recently announced that it was doubling its annual dividend to $0.50.  At the same time it also announced a $200M stock buy-back.

I like this trade because our chosen strike price of $10 is below the 52-wk low of $10.68.  I also like it because at that price I would own a company that’s been around for over 100 years and it would pay me a 5% dividend yield.

Well, there you have it.  That’s all I’ve got time for this weekend.  I’ll be back later this week to let you know how are November results turned out for the Deep OTM NP Strategy.



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