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Deep OTM NP Strategy – AUG Week 1

Posted by mounddweller on August 13, 2011

Fellow Traders,

Well, here we are in the final week before AUG expiration.  Like last week, we have a plethora of choices in our Deep OTM NP Strategy.  This week there are 78 trades which passed our screening criteria.  Below are all of the trades which passed our screening criteria.

From the 78 possible trades I have selected 3 that I think are worth further consideration.  All three are reasonably well-known companies.  Two are large-caps and one is a mid-cap.

First up is AFLAC (AFL).  AFLAC, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance.  The company offers cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. It also offers accident/disability plans, cancer plans, short-term disability plans, sickness and hospital indemnity plans, hospital intensive care plans, fixed-benefit dental plans, vision care plans, long-term care plans, and life insurance products in the United States. Aflac Incorporated sells its products through sales associates, independent corporate/individual agencies, and affiliated corporate agencies. The company was founded in 1955 and is headquartered in Columbus, Georgia.

I have had my eye on AFLAC for several weeks now.  It is a well-known and well respected company.  However, because a large portion of its business is derived from operations in Japan, it had fallen significantly in response to the potential impact of the natural disaster which occurred earlier this year.  It looked like a bargain to me at $44.  It looks like an even better bargain now at $37.  However, what has held me back from making an outright purchase of AFLAC is its 5-year price chart.  During the financial crisis of 2008/09 AFL fell to as low as $14.58.

On the positive side of the ledger AFL trades at a forward P/E of 5.73.  Further, over the past 5 years AFLAC has consistently increased its quarterly dividend, from $0.13 to $0.30.

Below is a 1-yr price chart for AFL.  As you can see it isn’t a pretty picture.

With a chart like this I’m sure many of you are wondering why I would consider this as a potential trading opportunity.  For me it comes down to three things, (1) the stock is already at a depressed price, (2) the strike price of $33 is below the lows encountered last week during the huge sell-off in the market, and (3) I really wouldn’t mind owning AFL at $33.

Next up is DELL.  Dell Inc. provides integrated technology solutions in the information technology (IT) industry worldwide. The company designs, develops, manufactures, markets, sells, and supports mobility products, including laptops, netbooks, tablets, and smartphones; desktops PCs; and servers and networking products.   It was founded in 1984 and is headquartered in Round Rock, TX.

What I like about Dell is it’s fundamentals.  It trades at 7.7x prospective earnings.  Over half of it current market cap of around $28B  is in cold, hard cash sitting in the  bank.  While it does have over $7.6B in long-term debt this is easily covered by very strong cash flow.   Free cash flow for the trailing 12-month period is a robust $2.34B.

In the 1-year price chart we can see that Dell has support at our strike price of $13.  Also, the strike price is just below the recent low of $13.49 recorded last week.

My last featured selection for this week is Sotheby’s (BID).  Sotheby’s, together with its subsidiaries, operates as an auctioneer of fine
and decorative art, jewelry, and collectibles primarily in the United States, the United Kingdom, China, and France. The company operates in three segments: Auction, Finance, and Dealer. The Auction segment functions as an agent offering authenticated works of art for sale at auction. It also involves in brokering private sales of artwork. The Finance segment provides collectors and dealers with financing, which is secured by works of art that the company has in its possession or permits the borrower to possess. The Dealer segment invests in and resells artworks. It also operates as an art dealer for Dutch and Flemish Old Master paintings, as well as French impressionist and post-impressionist paintings. In addition, this segment sells works of art directly to private collectors and museums, as well as acts as a broker in private purchases and sales of art. Additionally, it operates a retail wine shop in New York City, as well as offers a range of wines online. The company was founded in 1744 and is headquartered in New York, New York.

Did you catch that last sentence?  Sotheby’s was founded in 1744.  It has been around forever, and has survived the Revolutionary War, the Civil War, the Great Depression, two World Wars and countless other crisis.  Therefore, it seems highly unlikely to me that the current economic turmoil in Europe and the US will cause it much harm.

It currently trades just under 11x forecasted earnings and has strong operating margins.  It also has around $3/share in net cash on it’s balance sheet.  Like our other selections this week the chosen strike price is below lows encountered last week during the huge sell-off.  Here is the 1-year chart for BID.

Well, there you have it.  78 possible trades and three featured selections.  Best of luck to everyone in their trading this week.  I feel we could be in for another rough ride so buckle up tight.

Regards,

Troy

 

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