The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘BBY’

Dividend Superstars – Potential Trades

Posted by mounddweller on January 28, 2012

Fellow Traders,

As you know I recently announced a new strategy centered around strong, large-cap, “dividend superstar” companies.  Today I want to begin a series of posts which highlight stocks from the dividend superstar list which currently appear to have trade potential.

I will be selecting stocks using Ron Groenke’s VISIONS software.  Specifically, I will be looking for stocks which VISIONS has rated “Take Action” (TA).  This week the VISIONS scan of my dividend superstars list returned three possibilities, Best Buy (BBY), Infosys (INFY), and Tiffany (TIF).

Let’s first look at BBY.   Regular readers will remember I just recently successfully closed out a position in BBY.  You can read about it here: https://troysmoneytree.wordpress.com/2012/01/24/update-bby/

Friday, BBY closed at $25.44.  It has recovered from its 52-wk low of $21.79 which it hit back in October 2011.  It last reported earnings in December so it won’t report again until late March.  The trade which most appeals to me for BBY right now is the FEB $24 covered call.  The premium is $1.66.  Thus, the ROIC if assigned at expiration is 0.86%.  If unassigned the ROIC is 6.53%.

Next let’s look at Infosys (INFY).  INFY closed Friday at $54.31.  INFY has a 52-wk low of $46.12 which it hit back in September 2011.  Like BBY it has already announced quarterly earnings so we don’t have to worry about that.  For INFY, the best trade in my my opinion is the FEB $52.50 put.  It has a premium of $0.60.  This gives a ROIC of 1.14% with 3 weeks to expiration and down-side protection of 4.43%.

Last, but not least is Tiffany (TIF).  On Friday TIF closed at $63.49.  TIF has a 52-wk low of $54.58 which occurred in March 2011.  Like BBY and INFY, TIF has already announced quarterly earnings.  For TIF I like the FEB $60 put which is at $0.61 bid.  This gives a ROIC of just over 1.00% and DSP of 6.5%.

A final not before I close; there was a fourth stock which VISIONS rated TA.  It is CHRW.  However, I eliminated it from further consideration because it reports quarterly earnings on Tuesday, January 31.

If any of these selections interest you please conduct your own due-diligence.

Regards,

Troy

 

 

Posted in Potential Trades | Tagged: , , , , , | 2 Comments »

Update – BBY

Posted by mounddweller on January 24, 2012

Fellow Traders,

I want to update you on my naked put trades in Best Buy (BBY).  You’ll recall back on December 28th I opened two positions in BBY.  In one I sold 2 JAN $22.50 puts at $0.56.  In the other I sold 3 MAR $20.00 puts, also at $0.56.  You can read more about these trades and my rationale for making them here: https://troysmoneytree.wordpress.com/2011/12/28/new-trade-bby/.

Like most of the market, BBY has gone up in the new year.  It was $23.06 when I placed my trades in late December.  Today it closed at $25.36.

The JAN $22.50 puts expired OTM this past weekend.  Over the past few days I had been keeping track of the premium on the MAR $20 puts.  I was looking for an opportunity to ‘take my money and run’ without leaving too much on the table.  That opportunity came yesterday.  I was able to buy back the MAR $20 puts for $0.11.  This allowed me to capture over 80% of the value in the puts in about one-third of the total time remaining prior to expiration.

Below are the results of my BBY trades:

As you can see this trade turned out nicely.  With a holding period of 26 days or less I earned about 2.50% ROIC.   Annualized it works out to around 35%.  Wouldn’t it be nice if all my trades could work out this nicely!

Regards,

Troy

Posted in Portfolio Updates | Tagged: , | 6 Comments »

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 »

Deep OTM NP Strategy – DEC Week 1

Posted by mounddweller on December 11, 2011

Fellow Traders,

This week we have 8 possible trades which meet the week 1 selection criteria of our Deep OTM NP Strategy.  They are listed below.

Of these 8 the 2 large cap stocks, Adobe Systems (ADBE) and Best Buy (BBY) caught my attention.  On the surface they are remarkably similar trades.  Their closing price on Friday differs only by 7 cents, they share the same strike price, and the bid price of each differ by only 2 cents.  However, as is often the case, “the devil is in the details.”

When one digs a little deeper however, one sees there is no comparison.  BBY is a better trade.  Two facts led me to this conclusion.  First, BBY trades at very reasonable 9.4x trailing earnings and 7.2x prospective earnings.  ADBE trades at over 15x trailing earnings.  Yahoo does not provide an estimate of prospective earnings.  Second, BBY pays a regular and growing dividend.  In the past 5 years the quarterly dividend has been increased from $0.10 to $0.16.

These things are important to me because of the current market environment.  I only want to trade in the very best underlying stocks that I can find.

As you can see BBY has support at $24 which is just below our $25 strike price.  This isn’t an ideal situation and if this trade had appeared in Week 3 or 4 of the DEC expiration month I probably would think long and hard before committing capital to it.  However, it is Week 1.  We have only 5 trading days to expiration.  Another mitigating factor is that BBY is near its March 2009 lows.  While it was significantly lower in November 2008 it quickly recovered.  I would feel comfortable owning BBY at $25.

Well, there you have it.  Best of luck to everyone is this last week before expiration.

Regards,

Troy

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