The Money Tree

Safely Generating Income in Retirement

Archive for December, 2011

Dividend Superstars

Posted by mounddweller on December 30, 2011

Fellow Traders,

I have updated my blog to include a new page listing the companies which meet my “Dividend Superstars” criteria.  You will find that page here: https://troysmoneytree.wordpress.com/dividend-superstars/.

On that page you will find that I have segmented the companies into three categories; Champions, Contenders, and Challengers.  Definitions for the categories and further details on the selection criteria can also be found on the new page.

Also, on my page you will find a link to my trading plan page.  However, I have not yet had time to update that page to include details on my new Dividend Superstar trading strategy.  The page requires a total rewrite because it includes a lengthy discussion of the newly retired Deep OTM NP Strategy as well as other dated material.  I will post another message when I get it rewritten.

Regards,

Troy

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Weekly NP Strategy – JAN 6 Expiration

Posted by mounddweller on December 30, 2011

Fellow Traders,

Our weekly NP Strategy screen identified 47 possible trades with a January 6 expiration.  Of these I found two that I think are worthy of your consideration.  They are trades in Abercrombie & Fitch Co (ANF) and Cleveland-Cliffs Inc Co. (CLF).

Here are the specifics for the two trades.  I’m late in getting this posted so the bid prices may no longer be accurate.  Be sure to double check prices if you decide to execute either one of these trades.

(1) ANF at $48.74 sell the $46 strike at $0.34 for 0.69% ROIC (36.37% annualized) with 6.32% DSP

(2) CLF at $62.39 sell the $57.50 strike at $0.31 for 0.54% ROIC (28.11% annualized) with 8.33% DSP.

Note: for the more adventurous among you, CLF also has a good trade at the $60 strike.  This is right at recent support levels.

Happy New Year!

Regards,

Troy

 

 

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New Trade – BBY

Posted by mounddweller on December 28, 2011

Fellow Traders,

I have a new trade, well actually trades, to share with you.  Today I executed the following naked put trades on Best Buy (BBY):

(1) STO 2 JAN $22.50 at $0.56

(2) STO 3 MAR $20 at $0.56

The JAN $22.50 puts give me a 2.49% ROIC with 24 days to expiration, albeit with very little downside protection.  My annualized return on this trade is 37.85%.  The MAR $20 puts give me a 2.80% ROIC with 80 days to expiration.  The annualized return is 12.78% with 13.04% downside protection.  My combined ROIC for both positions is 2.67%.

These are the first trades I’ve executed in my new trading/investment strategy.  First, let me provide a few more details about BBY then I’ll tell you more about the strategy.

Best Buy Co., Inc. operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China.  The company was formerly known as Sound of Music, Inc. and changed its name to Best Buy Co., Inc. in 1983. Best Buy Co., Inc. was founded in 1966 and is headquartered in Richfield, Minnesota.

As you can see in the chart below Best Buy has solid financials.  Like most retailers it has slim net profit margins.  However, it has an outstanding return on equity (ROE), while maintaining a reasonable debt/equity ratio.  It has grown revenue substantially in the last 10 years.  In 2003 it began  paying a modest annual dividend of $0.20/share.  It has raised the dividend every year since.  It’s last quarterly dividend payment was $0.16/share implying an annual rate of $0.64/share.

Other financial information not shown above but worth mentioning are the fact that Best Buy generated $2.16B in levered free cash flow in the past twelve months.  Also, it has more cash in the bank than debt on its balance sheet.

Now, let’s take a look at the price history of Best Buy.  A 3-year price chart is presented below.

As you can see Best Buy is trading very near its 52-wk low of $21.79 which occurred on October 4.  It is also trading at 3-year lows.  That’s what I like most about this trade.  In my mind the downside risk is very low.  This is a key feature in my new trading strategy.

Now, having mentioned that let me briefly describe my new strategy.  My new strategy focuses exclusively on 76 large-cap companies which pay a substantial and growing stream of dividends.  I’ll soon be adding a new page to my web-site containing the names of these 76 companies.  For now, suffice it to say that Best Buy is on the list.

My plan is to only execute trades on these stocks when the price is at multi-year lows.  There are a great number of stocks that have cycled up and down over the past 12 years having essentially gone nowhere.  Anyone following a buy and hold plan has seen very little capital appreciation over the past 12 years.  Any gains received would have come from dividends.

The strategy will be to sell naked puts on the stocks when they are within 10-15% of the bottom of their 12-year range.   Depending on how the stock is acting, if the puts finish ITM I’ll either let the stock be put to me or roll it out a month or two.  I will use the proceeds from the put sales to reduce my overall net cost position in the company.  After accepting assignment I will begin selling OTM covered calls and will begin collecting the quarterly dividends.  I will sell the stock when it approaches multi-year highs OR if I feel I have captured a majority of the gains possible and a better use of my capital is available.

So, now having told you a little bit more about my strategy let me show you why I chose Best Buy as my first trade.  I’ve already told you Best Buy is at 3-year lows; however it get even better than that.  I’ve looked at 12-years of price history for Best Buy.  It is now in the bottom 10% of its price range for the past 12-years.

This chart gives me confidence that my downside risk is limited.  It shows me that over 97% of the time in the past twelve years Best Buy has traded at higher levels than it is now.   Best Buy has fallen over 50% since hitting a high of $48 back in late April of 2010.  It trades at less than 8x trailing earnings.  Everyone thinks the economy is headed for another recession and that holiday sales were weaker than anticipated.  They’re all saying SELL, SELL BEST BUY.  I say, be a contrarion, BUY BEST BUY while it is on sale.

Now, let me conclude by saying Best Buy may indeed have further to fall and that I may not have perfectly timed the bottom.  However, I again refer you back to my Decile chart.  12-years of price history is a long time, over 3000 days.  It has traded at less than $23.58 for only 95 of them.

Regards,

Troy

Posted in Troy's New Picks! | Tagged: , | 5 Comments »

Merry Christmas!

Posted by mounddweller on December 25, 2011

“The angel said to her, “Do not be afraid, Mary, for you have found favor with God.  And now, you will conceive in your womb and bear a son, and you will name him Jesus.  He will be great, and will be called the Son of the Most High, and the Lord God will give to him the throne of his ancestor David.  He will rule over the house of Jacob forever, and of his kingdom there will be no end.”  Luke 1:30-33 NRSV

“In those days a decree went out from Emperor Augustus that all the world should be registered.  This was the first registration and was taken while Quirinius was governor of Syria.  All went to their own towns to be registered.  Joseph also went from the town of Nazareth in Galilee to Judea, to the city of David called Bethlehem, because he was descended from the house and family of David.  He went to be registered with Mary, to whom he was engaged and who was expecting a child.  While they were there, the time came for her to deliver her child.  And she gave birth to her firstborn son and wrapped him in bands of cloth, and laid him in a manger, because there was no place for them in the inn.”  Luke 2:1-7 NRSV

 

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Weekly NP Strategy – 12/30/2011 Expiration

Posted by mounddweller on December 22, 2011

Fellow Traders,

The screener only returned 40 possible trades for the 12/30/2011 expiration period.  As usual I will post the list of possible trades out on the Yahoo Weekly Option Group board which you can access here: http://finance.groups.yahoo.com/group/weeklyoptions/files/.

Only 1 of the 40 possible trades was the least bit interesting to me.  That one trade is the YHOO put at the $15 strike price.  It has a bid price of $0.19.  This equates to a 1.27% ROIC with 8 days to expiration.  DSP is 7.44%.

YHOO has been bouncing between approximately $15 and $16 since August.  I feel YHOO is a decent trade right now because activists are once again pressuring the board of directors to take action to unlock value in the company.  The latest news is that YHOO is considering selling off their equity stakes in Yahoo Japan as well as internet properties in China.  Doing so could generate up to $14B for Yahoo which today has a total market cap. of $17B.  After subtracting out Yahoo’s substantial cash reserves this effectively values the US portion of the company at ZERO.  Clearly Yahoo is worth more than zero.  I believe this speculation about possible asset sales will act as a support to Yahoo’s stock price.

May you and yours have a very MERRY CHRISTMAS!

Regards,

Troy

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New Trade – AMAT

Posted by mounddweller on December 21, 2011

Fellow Traders,

I have a new trade to tell you about.  Earlier this afternoon I executed the following:

STO 5 AMAT JAN ’13 $10 puts at $1.57.

I haven’t executed a trade like this in the entire 3 years I have been publishing my blog.  However, I have done similar trades a time or two prior to beginning my blog.

Before I begin discussing why I executed this trade let’s take a moment to get you familiar with Applied Materials (AMAT).  Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide.   It was founded in 1967 and is headquartered in Santa Clara, California.

As you can see from the financial data provided below AMAT operates in a highly cyclical industry.  It is either feast or famine.  Lately, it has been a feast but as we’ll see when we look at the price chart, Mr. Market believes a famine is right around the corner.

The cyclicality of the business is evident in the sales numbers.  Sales were low during the recession in 2002/2003.  They accelerated rapidly coming out of the recession in 2004 and expanded along with the economy until the financial crisis in 2008/2009.  Then it was back off to the races again in 2010.  That has continued into 2011.

You’ll also notice AMAT enjoys fat profit margins when times are good but can fall into negative territory when the economy slows down.  However, AMAT being the well managed company it is plans for the lean times by keeping debt low and cash levels high.  Debt to Equity is a very reasonable 22.00% and cash, net of debt, is $4.29B or $3.27/share.

Now, let’s take a look at the 3-year price chart.

As I mentioned earlier Mr. Market is anticipating a slow-down in the economy and thus is dumping cyclical, high tech companies like AMAT.  In addition, AMAT generates a portion of its revenue from the solar photovoltaic industry, which has been decimated in recent months.  Both of these factors have combined to knock AMAT down from a 52-wk high of $16.93 to the 52-wk low of $9.70 which was hit on October 4.

On the 3-year price chart you can see AMAT hasn’t been this low since March 9, 2009 when it closed at $8.58.  If you take a moment to look at a longer price chart you’ll notice that AMAT prior to March 2009 hadn’t been under $10 since 1998!

So, by now you’ve surely determined one of the primary reasons I like this trade.  AMAT is trading at historic lows!  The risk/reward ratio is solidly in my favor.

Here’s another reason.  Back in 2005 AMAT began paying modest quarterly dividends.  Every year since then they have increased the dividend.  It is now $0.32/year.  Hence, it is currently yielding 3.2%.  Not bad for a cyclical tech stock.  That is on par with MSFT and INTC.  If they continue their recent pattern the dividend will go up again in May 2012.

Last, but not least, another reason I like the trade is of course the size of the premium.  I sold the JAN ’13 $10 puts for $1.57.  My annualized ROIC is 14.51%.  At that rate I am able to double my money every 5 years.  Note also that my net cost if I have the stock put to me next year will be $8.43.  This is below the March 2009 market lows!  And, assuming AMAT continues paying the current dividend of $0.32 my dividend yield would then be 3.80%.

Well, there you have it.  One final point, you may have noticed I only sold 5 contracts.  My strategy here is to sell more if AMAT continues to drop.  I will keep an eye on the premiums for the JUL $8 or $9 strikes.  If, at some point in the year I can sell either of those for a 15% annualized ROIC I will do it.

Regards,

Troy

 

Posted in Portfolio Updates, Troy's New Picks! | Tagged: , , | 2 Comments »

New Strategy – New Selection

Posted by mounddweller on December 18, 2011

Fellow Traders,

As I mentioned in an earlier post, I am in the process of developing a new strategy for trading covered calls (CC)and naked puts (NP).  Options will be selected from a limited universe of companies which have increased their dividends annually for a minimum of 10 consectutive years.  The strategy will hinge on identifying companies in this list which have fallen out of favor on Wall Street and consequently are trading near 52-wk lows, or better yet, multi-year lows.  I will establish a position in these ‘out of favor’ companies via the sale of NPs.  After having the stock put to me I will begin collecting dividends, and will sell OTM covered calls.  The objective will be to eventually sell the stock after substantial capital gains have been achieved.

You may have gathered from my lack of specific criteria that I don’t have this strategy fully developed yet.  You would be correct.  However, I’m willing to ‘go out on a limb like this’ because of the stocks I’ll be trading in.  All have been around for many, many years and thus have survived all manner of economic downturns and adverse business conditions.  I have no fear that any of these companies will go out of business.  Also, because I’m buying at an already discounted price the risk/reward ratio is in my favor.  Now, does that mean that I don’t think any of these selections will not drop any further after I acquire them?  No, certainly not!  Anything is possible, especially in these volatile times.  However, I am confident that I’m buying closer to the bottom than the top.  And, I’m confident that if the stock does continue to head south after I buy it, it will eventually recover.

So, without further ado, let me give you my first selection from this new strategy.  The company is Avon Products, Inc. (AVP).   AVP engages in manufacturing and marketing beauty and related products in worldwide. Its beauty products consist of color cosmetics, fragrances, skin care, and personal care; fashion products include fashion jewelry, watches, apparel, footwear, accessories; and children’s products; and home products consists of gift and decorative products, housewares, entertainment and leisure products, and nutritional products. Avon Products Inc. markets its products through direct selling and independent representatives, as well as through distributorships. The company was founded in 1886 and is based in New York, New York.

So, let’s begin our due-diligence by looking at the price history of AVP.  As I mentioned above one of my key criteria is to begin selling puts when the stock is at or near yearly or multi-year lows.  AVP fits that criteria to a ‘T’.  First, let’s look at a 1-yr price chart.

Friday, AVP closed at $16.72.  It’s 52-wk low is $16.09 which was hit on November 25.  Now, let’s look longer term.  Here’s a chart going all the way back to 2000.

As you can see AVP is rapidly approaching its March 2009 lows.  On March 9, 2009 it hit an intra-day low of $14.40 before closing at $15.20.   Prior to March 2009 AVP hadn’t been in the $15 range since 1999.

Now, as I also mentioned, each stock in my investing universe must have paid steadily increasing dividends for a minimum of 10-years.  AVP fits the bill in this regard as well.   AVP has increased its quarterly dividend from $0.09 in 2000 to $0.23 in 2011.  As a matter of fact AVP has been steadily increasing its dividend since 1989 when it was $0.0234.  That’s 22 straight years of dividend increases through all kinds of market conditions.  That, coupled with the fact that the company has been in existence since 1886, gives me a lot of confidence that even if I don’t perfectly time the bottom I’ll be fine at the end of the trade.

Now let’s look at a few other fundamentals before moving on to the specifics of the trade.

First, let’s discuss some of the more positive metrics.

(1) P/E Ratio – the trailing P/E ratio is 9.83.  This compares favorably with P/E ratios encountered over the past 10 years.

(2) Income – AVP is consistently profitable.  I’m not saying its profit is consistently increasing.  I’m saying they find a way to make a profit every year in all market conditions.  They have been profitable every year for the past 10 years.

(3) Dividend Payout Ratio – is currently 53%.  This means there is plenty of room for further dividend growth.

Now, let’s consider the negatives.

(1) Debt/Equity Ratio – is 178%.  This is higher than I generally like to see in a stock.  However, the company generates strong cash flow so the debt load can be supported.

Now before looking at specific trades let’s consider why AVP is currently out of favor on Wall Street.   It primarily is because of a lack of execution.  SG&A costs have far outpaced sales growth.  Evidently, the board of directors finally had enough of this under-performance because they recently announced that Andrea Jung would be replaced as Chief Executive.  Finding someone who can rein in costs and run a tight ship is key to AVP’s recovery.  I am confident AVP can regain Wall Street’s confidence.

Now, finally let’s consider some possible trades to establish a position in AVP.  With a dividend rate of 5.5%, and a dividend increase announcement likely before the next ex-date on or around February 15 I am leaning towards structuring my trade such that I acquire shares at January expiration.  However, given the recent market weakness I’m also concerned that AVP might have further to fall so acquiring shares now may be premature.

Here are two possible trades with January expirations.

(1) STO JAN $16 puts at $0.40.  If the put finished ITM I would own AVP at a cost basis of $15.60 and be in position to earn the next dividend.  This trade has a ROIC of 2.5% with 5.2% DSP.

(2) STO JAN $15 puts at $0.15.  If the put finished ITM I would own AVP at a cost basis of $14.85 and again be in position to earn the next dividend.  However, this trade only has a ROIC of 1%.  DSP is 9.8%.

As I mentioned above, given the overall market conditions, I’m not totally convinced AVP has found a bottom and is trying to carve out a base.  Thus, I am going to work my way into this position over time.  I eventually would like to own 1,000 shares of AVP.  So, I am going to start by entering this trade by only selling 3 option contracts.  This lets me ‘have my cake and eat it too’ so to speak.  I can possibly acquire some shares now at what I think is a fair price and begin collecting the ample dividend.  Then, if the market continues to fall I can dollar cost average down by selling another round of puts at a lower strike price.  However, if AVP does find a bottom and begins to rise I will at least have been able to acquire some shares at a great price.

Well, that’s it for this post.  I hope to have another one or two trades to consider in the very near future.  WAG and SYK are on my radar screen.

Regards,

Troy

Posted in Potential Trades | Tagged: , , | 3 Comments »

Deep OTM NP Strategy – DEC Results

Posted by mounddweller on December 17, 2011

Fellow Traders,

Our results this month are as follows:

(1) 262 trades met our selection criteria, 6 of which I singled out as recommendations warranting your further review.

(2) 27  trades (10.3%) finished ITM.  One of the 27, RSH, was one of my 6 recommendations.  This failure rate is higher than normal.  In most months 5% or less of the selections finish ITM.

(3) Premiums received, net of commissions, for the 262 trades was $36,175.10.  Entering all of these trades would have required a capital commitment of $1,970,070.00.  Net ROIC was 1.84% (23.94% annualized).

(4) Capital losses significantly ate into the net premiums received.  Losses from the 27 trades that finished ITM were $18,995.25.

(5) Net profits thus totalled $17,176.85.  This yields a ROIC of 0.87% (11.37% annualized).  This is a little bit below our normal rate of return.

Now I’d like to present a summary of our 2011  total results.

(1) This year the selection criteria produced a total of 2220 possible trades.

(2) 244 (10.99%) of the 2220 trades finished ITM.  Thus, 89% of the trades were successful.

(3) Net profits for 2011 totalled $165,899.95 using an average capital commitment of $1,437,182.92.  This resulted in an annualized ROIC of 11.54%.

Well, there you have it.  That’s it for 2011.  Which leads me to my next topic of discussion, namely 2012.  I have decided not to continue producing the Deep OTM NP Strategy.  I made this decision for the following reasons:

(1) The strategy consumed a considerable amount of my time each weekend.

(2) The results obtained by the strategy were not commiserate with the amount of time it took me to analyze and produce them.

(3) The underlying stocks of the selected trades were not ones with which I was comfortable commiting my own money.  I can not in good conscience continue to recommend trades for you that I’m not willing to commit my own money.

However, I am developing a new strategy.  This new strategy revolves around trading a select list of solid blue-chip, dividend-paying stocks.  I will be rolling it out soon.

Wishing all of my fellow traders the very best holiday season.  MERRY CHRISTMAS!

Regards,

Troy

 

Posted in Deep OTM NP Strategy | 3 Comments »

Weekly NP Strategy – DEC 23 Expiration

Posted by mounddweller on December 16, 2011

Fellow Traders,

This week our selection criteria returned 94 possible trades.  Of these I found 3 that were worthy of further review and analysis.

(1) CF Industries (CF) $120 strike price with a bid of $0.60.  The stock closed Thursday at $130.16.

(2) Halliburtion (HAL) $28 strike price with a bid of $0.15.  The stock closed Thursday at $31.26.

(3) Walter E (WLT) $57.50 strike price with a bid of  $0.41.  The stock closed Thursday at $62.71.

My schedule precludes me from doing much more for you in the way of due diligence.  I will tell you all three of these selections are strong, dividend paying companies with some level of support at or above the selected strike prices.

You can find the complete list of selections out on the Yahoo Weekly Options group board.  The URL is:

http://finance.groups.yahoo.com/group/weeklyoptions/files/

Best of luck to everyone this week.  Merry Christmas!

Regards,

Troy

 

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Weekly NP Strategy – DEC 9 Exp. Results

Posted by mounddweller on December 11, 2011

Fellow Traders,

This will be short.  Please recall last week I recommended AA at the $9 strike.  Friday, AA closed at $9.64.  I also recommended CREE at both the $22 and $23 strike prices.  Friday, CREE closed at $23.79.

Thus, all three puts expired OTM and worthless.

Regards,

Troy

 

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