WHY DO COVERED CALLS WORK
We ended the last blog with thoughts on "Assets Producing Income." This is a solid way to get "cash flow wealthy." Think of the alternative: You trade your time for money. What about getting your money working harder for you? Getting your money to carry a bigger share of the load? Many people do not know how to do this. Let me state it in a way that just might make sense to you.
We buy an asset, in this case a stock, and then sell a fluffy option against our position. When I say against our position I mean it's like a lien on a property. Someone has the right to buy our stock. Built into the option price is all the speculation and future growth possibilities.
Say, you buy a great piece of real estate. It's in a very desirable neighborhood, one that many think will grow in value. You not only rent it for more than normal, but what if you gave the renters the right to buy the property at a fixed price, say within a year or two. Question: Will people pay more in rent if they have the right to buy the property down the road? Will they pay more now to lock in the price? Understand this and you understand the power of writing covered calls.
The asset is the stock, you know exactly what you paid for it. There is no fluff. A stock price today is based on the anticipation of future earnings. Take that last sentence to the bank. However the option is loaded with speculation, along with the time to expiration. Think of Bank of America's stock at $7.05. It's solid right now, look at the investments of Warren Buffett. It is at $7.05 and the current book value is over $20. What a bargain. Now, what do investors think of the price and the direction it will move. The October call options are 55 cents to sell (Wednesday price). If you owned 1,000 shares, you could sell 1,000 of these options for $550. Yes, if you actually sold the stock you'd have to give back the 5 cents, or $50 (.05 X 1,000), but you take in $550 now. That's cash you can use. It's your money. The market gave it to you. Think of purchasing 1,000 shares for $7,050, or half of that on margin, $3,525. Now, by selling the option you take in $550 cash. Wow.
DOUBLE DIPPING.
From time to time in these blogs I mention the buy-back. I believe the buy-back is the most powerful strategy in the stock market. It's a wonder so few people know about it, and fewer yet use it. When you sold the option you opened a position on your stock. If you buy the same option now---same month, same strike price, same quantity---you would close the position.
Let's say the stock goes down to $6.95 and three weeks have elapsed. The option premium has gone down. Think how this works. You sold the fluff---including the time to expiration. Now the stock didn't move exactly like someone thought it would. The option is now going for 10 cents. After you check out the options for the next month out, and you like the new price, you decide to buy back the October's for 10 cents and sell the November's for 50 cents. You spend $100 to buy back, and take in another $500. What if you can do this every month? It's easier to do than you think. It's an awesome way to make repetitive income.
As I traveled the country, many students not only extolled the virtues of writing covered calls and how it "saved their fannies," but many told me how they were double- and triple-dipping. I set out the beat my own students at this process. Twice, once with Qualcom and once with Netflix, I was able to do five, read that 5, times in one month. I've tried since then and have not been able to do so. Twice, piece of cake. Thrice, tough but doable.
What you need to do this several times a month is three things:
1) An understanding of how the buy-back works.
2) Working knowledge of how to use orders and alerts to notify of stock movements and target prices.
3) A volatile stock, say one that moves 50 cents to $1 every few days. This is for stocks between $2 and $8.
For more expensive stocks, the movement must be $2 to $5 every few days.
It's not that tough. It's even easier than you think. With internet access, a good broker, you are in the drivers seat.
The next blog will be about why we use cheaper stocks, instead of Google and Apple. We'll also continue with more inside secrets on how to excel at this process.
Friday, September 23, 2011
Sunday, September 18, 2011
Covered Calls Batch #1A
I would like to continue the educational process about using the stock market as a way to generate income. I firmly believe it makes a great part-time, home-based business. I will share a few covered call basics, then give a batch of stocks that generate around 10% cash this month, and even 20% if you use margin. At the end I'll give a few helpful hints and then make more useful techniques in Batch 1B.
Covered Call writing is a way to use an asset to sell a position against it for income. Rental real estate readily comes to mind. Or licensing something. You use an asset, keeping it intact to generate income. In the stock market, this works well because you are buying a fixed price asset, like a stock. At least it was fixed when you bought. Now you sell an option against your covered position.
Call Options usually give a person the right to buy a stock at a fixed price, called the strike price, on or before a certain date, called the expiration date. This type of investment has an added level of risk - that of the expiration date. Whenever an investment ends, say an option for six months to buy a piece of real estate, the clock is not your friend. Time works against you. Also, the option is very risky, so one should be very careful.
Let's look at the riskiness of the stock option. The option premium is made up of several components. One is the time to expiration. Another is a constant, built into the formula for pricing. But the fun begins with this third component, called the speculative value, or the implied volatility. We call all of these the time value.
Before we move on let me give one example of time value, or the speculative value. It is someone's guess, someone'e speculation. You could have an $18 stock with the $20 call option at 40 cents. Another company's stock price is also $18, but the option at $20 is $1.20. And our third stock at $18 has a $20 call going for $2.80. Why the difference? Aahh, there is the $64,000 question. Basically and simply, the 40 cent option says the stock is flat, it's not going anywhere. The $1.20 option says there is a slight amount of volatility. It's moving. The $2.80 says we have a mover. The option is expensive (the puts are probably expensive, too).
Expensive options do not necessarily make them better, or the stock better. A cheap option is not better or worse. The prices tell a story. Think of the process in reverse. Think like an option salesman, or think like a seller of the option. If you sell a call against stock you own, you are selling the right to let someone buy your stock at $20, in our example. If your stock is dead in the water, going nowhere, you're not going to get very much for selling the option. No one will pay you much. But if you have stock in a tremendous company, and the immediate future looks good, or there is good news everywhere, then the option is expensive. From your point of view, if you are giving up everything above $20, and that possible future looks good, don't you want to get paid well? That's why you get $2.80.
If we put real numbers to this trade, you would buy 1,000 (or any amount in lots of 100 shares), for $18,000, or $9,000 on margin. Now you sell the $20 call (ten contracts at 100 shares each) for $2.80, or $2,800. That's right, someone is willing to give you $2,800 cash now, and tie up your stock for the next four weeks. Now, as time moves forward, the stock will go up, down or sideways. If it's above $20 you will sell the stock, and keep the $2,800 and the new capital gains of $2,000. If it does not go above $20, you get to keep the stock and the $2,800. And you write the calls out for the next month, for say $2,900, or whatever you can.
HERE'S OUR SAMPLE BATCH #1A:
We'll take $20,000 and buy some stocks on margin, spending close to $40,000. We're looking for 5% to 10% option returns. This means our cash returns will be double this on margin.
FAS is going for $13.84, 1,000 shares cost us $13,840. We sell the $14 calls for October for $1.63, Or $1,630.
MU (Micron Technology---one of my favorites) is $6.98, or $6,980. We sell the $7 calls for 65 eents, or $650.
EK is $2.80, and we buy 1,000 shares for $5,600 and then sell the $3 call for 41 cents times 2,000, or $820
JDSU is going for $13.17, or $13,170. We then sell the $13 calls for $1.18, taking in $1,180.
We sold some of these in the money and some out of the money. I didn't do the calculations for the extra.
CONCLUSION
We invested $39,590 and took in $4,280. That's over 10% on the whole amount, but about 20% on our original $20,000.
And think of this: We have $4,280 in the account. We can pull it out and pay the bills. We could buy more stock with it. We could leave it there in the account to help with the margin. It's just cash in the account.
We did this with only one trade per stock. In real life we could do buy-backs and double dip. We can buy back and sell out the next month. We're in the game, putting time to work for us. We're in the game, selling the fluff of the options. We have assets producing income, helping us retire better.
______________________________________________________________________________________________________
Copyright 2011 All Rights Reserved. Please see your own financial professional for trade suitability.
All prices and transactions are a snap-shot in time. Your results will vary.
Covered Call writing is a way to use an asset to sell a position against it for income. Rental real estate readily comes to mind. Or licensing something. You use an asset, keeping it intact to generate income. In the stock market, this works well because you are buying a fixed price asset, like a stock. At least it was fixed when you bought. Now you sell an option against your covered position.
Call Options usually give a person the right to buy a stock at a fixed price, called the strike price, on or before a certain date, called the expiration date. This type of investment has an added level of risk - that of the expiration date. Whenever an investment ends, say an option for six months to buy a piece of real estate, the clock is not your friend. Time works against you. Also, the option is very risky, so one should be very careful.
Let's look at the riskiness of the stock option. The option premium is made up of several components. One is the time to expiration. Another is a constant, built into the formula for pricing. But the fun begins with this third component, called the speculative value, or the implied volatility. We call all of these the time value.
Before we move on let me give one example of time value, or the speculative value. It is someone's guess, someone'e speculation. You could have an $18 stock with the $20 call option at 40 cents. Another company's stock price is also $18, but the option at $20 is $1.20. And our third stock at $18 has a $20 call going for $2.80. Why the difference? Aahh, there is the $64,000 question. Basically and simply, the 40 cent option says the stock is flat, it's not going anywhere. The $1.20 option says there is a slight amount of volatility. It's moving. The $2.80 says we have a mover. The option is expensive (the puts are probably expensive, too).
Expensive options do not necessarily make them better, or the stock better. A cheap option is not better or worse. The prices tell a story. Think of the process in reverse. Think like an option salesman, or think like a seller of the option. If you sell a call against stock you own, you are selling the right to let someone buy your stock at $20, in our example. If your stock is dead in the water, going nowhere, you're not going to get very much for selling the option. No one will pay you much. But if you have stock in a tremendous company, and the immediate future looks good, or there is good news everywhere, then the option is expensive. From your point of view, if you are giving up everything above $20, and that possible future looks good, don't you want to get paid well? That's why you get $2.80.
If we put real numbers to this trade, you would buy 1,000 (or any amount in lots of 100 shares), for $18,000, or $9,000 on margin. Now you sell the $20 call (ten contracts at 100 shares each) for $2.80, or $2,800. That's right, someone is willing to give you $2,800 cash now, and tie up your stock for the next four weeks. Now, as time moves forward, the stock will go up, down or sideways. If it's above $20 you will sell the stock, and keep the $2,800 and the new capital gains of $2,000. If it does not go above $20, you get to keep the stock and the $2,800. And you write the calls out for the next month, for say $2,900, or whatever you can.
HERE'S OUR SAMPLE BATCH #1A:
We'll take $20,000 and buy some stocks on margin, spending close to $40,000. We're looking for 5% to 10% option returns. This means our cash returns will be double this on margin.
FAS is going for $13.84, 1,000 shares cost us $13,840. We sell the $14 calls for October for $1.63, Or $1,630.
MU (Micron Technology---one of my favorites) is $6.98, or $6,980. We sell the $7 calls for 65 eents, or $650.
EK is $2.80, and we buy 1,000 shares for $5,600 and then sell the $3 call for 41 cents times 2,000, or $820
JDSU is going for $13.17, or $13,170. We then sell the $13 calls for $1.18, taking in $1,180.
We sold some of these in the money and some out of the money. I didn't do the calculations for the extra.
CONCLUSION
We invested $39,590 and took in $4,280. That's over 10% on the whole amount, but about 20% on our original $20,000.
And think of this: We have $4,280 in the account. We can pull it out and pay the bills. We could buy more stock with it. We could leave it there in the account to help with the margin. It's just cash in the account.
We did this with only one trade per stock. In real life we could do buy-backs and double dip. We can buy back and sell out the next month. We're in the game, putting time to work for us. We're in the game, selling the fluff of the options. We have assets producing income, helping us retire better.
______________________________________________________________________________________________________
Copyright 2011 All Rights Reserved. Please see your own financial professional for trade suitability.
All prices and transactions are a snap-shot in time. Your results will vary.
STALE POLITICS
Doing the same thing over and over again, and expecting . . .
I thought I'd weigh in with a few thoughts about the new so-called jobs bill, which is nothing but a taxing bill, with two massive new government agencies to steal away more of our freedoms.
I suggest we need growth. To get this we need stable taxes, ones we can count on, base decisions on and then get on with our businesses. We need a complete repeal of ObamaCare. It's a dangerous, destructive and dubious enterprise. It is fraught with stupid ideas. In fact, we need less government regulations---like the Dodd-Frank bill, a bill almost as bad as ObamaCare.
What we don't need is top-down government control. I vote for freedom. It always works. George Gilder, quoting technologist Carver Meade said: "We depend on innovations of the citizens of a free economy to keep ahead of the bureaucrats and the people who make a living on control and planning. In the long term, it's the element of surprise that gives us the edge over more controlled economies."
He goes on: "Almost everything Mr. Obama consists of bets on 'bureaucrats and people who make a living on control and planning." He states we have: "BUREAUCRATS BOSSING AROUND TAX DOLLARS."
Recently in Investor's Business Daily the editors opined, "Club for Growth executive director David Keating stated after phone conferences with numerous corporate CEOs: "They see job creators being viewed as just targets, sources of government revenues." Mr. Keating replies, "And so, their money is frozen on the sidelines."
I thought I'd weigh in with a few thoughts about the new so-called jobs bill, which is nothing but a taxing bill, with two massive new government agencies to steal away more of our freedoms.
I suggest we need growth. To get this we need stable taxes, ones we can count on, base decisions on and then get on with our businesses. We need a complete repeal of ObamaCare. It's a dangerous, destructive and dubious enterprise. It is fraught with stupid ideas. In fact, we need less government regulations---like the Dodd-Frank bill, a bill almost as bad as ObamaCare.
What we don't need is top-down government control. I vote for freedom. It always works. George Gilder, quoting technologist Carver Meade said: "We depend on innovations of the citizens of a free economy to keep ahead of the bureaucrats and the people who make a living on control and planning. In the long term, it's the element of surprise that gives us the edge over more controlled economies."
He goes on: "Almost everything Mr. Obama consists of bets on 'bureaucrats and people who make a living on control and planning." He states we have: "BUREAUCRATS BOSSING AROUND TAX DOLLARS."
Recently in Investor's Business Daily the editors opined, "Club for Growth executive director David Keating stated after phone conferences with numerous corporate CEOs: "They see job creators being viewed as just targets, sources of government revenues." Mr. Keating replies, "And so, their money is frozen on the sidelines."
I agree. From my earliest real estate days I learned that "confusion means no." We're getting "NO" from around the country and around the globe. No more taxes. No more regulations. No more government control. No more loss of our freedoms. In fact, there's a good campaign slogan for 2012:
"NObama."
Friday, September 16, 2011
SUPPLY vs. DEMAND
It is really difficult to get a handle on the effect government has on our everyday lives without understanding a few underlying principles, including the jargon that accompany them. One such grouping of words that comes up frequently is "Supply-Side Economics," and "Demand Side Economics."
And then the party that destroys words consistently attacks and pins a epithet on a word---like "Trickle Down Economics"---and it confuses people even more. Guess which of the two types of economics has this negative appellation attached to it? We'll get to that in a minute.
Let me share a few ideas about each type of economic activities---especially those imposed by government---and then you judge, you decide which is best for the country.
DEMAND SIDE
This theory tries to increase demand with government infusion of money. Some call it stimulus. Lately, the Liberals are calling it investments. Demand Side uses government controls to control and manipulate production.
There are three ways they do this:
1) They borrow money, if needed. And it's always needed. Margaret Thatcher said;
"Liberal always fails because sooner or later they run out of other people's money."
This increase in deficits and debt causes inflation. They think they can pay off the debt with cheaper money.
2) They raise taxes, especially on the high earners.
3) They "Redistribute Wealth." They do not promote growth, except in government.
SUPPLY SIDE
This strategy incentivizes production, the supply side, by lowering restraints (read regulations at every level). Their emphasis is on expansion of business and investment.
They do this by:
1) Slash tax rates (especially at the margin---the next dollar).
2) Eliminate regulatory high hurdles. Make sure laws are passed by our representatives, not bureaucrats like the EPA.
3) Rein in inflation with tighter monetary policy.
One is proposed by the Keynesians who are Socialists, Big Government types. One is by Free Market Enthusiasts and Constitutionalists. Funny thing, that "Trickle Down Wealth" works. But the most amazing thing is that such a failed, stale, destructive concept as "Keynesian Style Demand Side Economics" gets the time of day. It should be abandoned, repealed and thrown in the trash-bins of history.
More on Keynes and the President's Destruction machine coming up in a few more blogs.
Wade
And then the party that destroys words consistently attacks and pins a epithet on a word---like "Trickle Down Economics"---and it confuses people even more. Guess which of the two types of economics has this negative appellation attached to it? We'll get to that in a minute.
Let me share a few ideas about each type of economic activities---especially those imposed by government---and then you judge, you decide which is best for the country.
DEMAND SIDE
This theory tries to increase demand with government infusion of money. Some call it stimulus. Lately, the Liberals are calling it investments. Demand Side uses government controls to control and manipulate production.
There are three ways they do this:
1) They borrow money, if needed. And it's always needed. Margaret Thatcher said;
"Liberal always fails because sooner or later they run out of other people's money."
This increase in deficits and debt causes inflation. They think they can pay off the debt with cheaper money.
2) They raise taxes, especially on the high earners.
3) They "Redistribute Wealth." They do not promote growth, except in government.
SUPPLY SIDE
This strategy incentivizes production, the supply side, by lowering restraints (read regulations at every level). Their emphasis is on expansion of business and investment.
They do this by:
1) Slash tax rates (especially at the margin---the next dollar).
2) Eliminate regulatory high hurdles. Make sure laws are passed by our representatives, not bureaucrats like the EPA.
3) Rein in inflation with tighter monetary policy.
One is proposed by the Keynesians who are Socialists, Big Government types. One is by Free Market Enthusiasts and Constitutionalists. Funny thing, that "Trickle Down Wealth" works. But the most amazing thing is that such a failed, stale, destructive concept as "Keynesian Style Demand Side Economics" gets the time of day. It should be abandoned, repealed and thrown in the trash-bins of history.
More on Keynes and the President's Destruction machine coming up in a few more blogs.
Wade
The Goose that lays the Golden Eggs
Okay my friends, I'm going to try be less controversial when I post political blogs. You know of my passion for freedom, and that comes from limited government. But, I'll try to avoid getting personal about the people in office. The message of truth and freedom will ring true.
For example: There seems to be two philosophical distinctions between left and right on the governance of our freedoms, including taxes and the very view people have about the machinations of government.
In regards to taxes:
Brit Hume said it best (I'm paraphrasing): "Republicans want to protect the Goose that lays the Golden Eggs. Liberals want to divide up the eggs---income redistribution."
Again, measure the real life effect with each approach.
More later, Wade
For example: There seems to be two philosophical distinctions between left and right on the governance of our freedoms, including taxes and the very view people have about the machinations of government.
In regards to taxes:
- Liberals want TEMPORARY, TARGETED taxes and an INCREASE IN SPENDING to solve all of our problems.
- Conservatives want PERMANENT, BROAD-BASED tax cuts, and a DECREASE IN SPENDING (In other words, limited government).
Brit Hume said it best (I'm paraphrasing): "Republicans want to protect the Goose that lays the Golden Eggs. Liberals want to divide up the eggs---income redistribution."
Again, measure the real life effect with each approach.
More later, Wade
Sunday, September 11, 2011
Revised blog address
The blogs previously viewed on wadecook22.blogspot.com will now be available on this page.
Please revise your bookmarks to reflect this change.
Thanks for reading and we would love to hear your comments.
Thanks,
Wade and family
Friday, September 9, 2011
STOCK MARKET, IS THE TIMING RIGHT NOW?
I've done a lot of reading and thinking lately. I think I can explain why the market hasn't moved up a lot in the last ten years. In fact, Microsoft might be a microcosm of the "why" behind this schlerotic market. I've stated repeatedly the observation that Microsoft (MSFT) is flat. It's been between $24 and $28 steadily for over this ten year stretch. Why?
So I'm reading everything I can get on this topic. I'm interested because the main focus of my endeavors is to write covered calls to generate income. If a stock is flat--perceived as going nowhere--the options are weak. To sell them you generate very little in premium. For example, a robust stock at $25 might have an October premium at $1.80. Even some stocks have option premiums near 10% of the stock price. Microsoft's option is 25 cents or 40 cents. That says no one thinks the stock is going anywhere. And for the time being, they're right. What would drive Microsoft up? It's one of the best run companies in the country. They make millions. I mean tens of millions---everyday. More on this after I make a macro case for the market.
One could look at the market in general---either the Dow 30 or even the S & P 500---over the last 5 years and it looks like one of my rolling stocks.
Right now there are 22 of the S & P 500 with stocks at a lower price than where they were ten years ago. Look at just a few of them:
This is amazing group of stocks. Let me weigh in on a few possible reasons for this and a few possible plays:
1) These are huge companies. They are worth billions of dollars. They have billions of shares outstanding. For example, anyone who wants to own Microsoft already owns it. What could they do to make more people want to buy their stock? Could they make another deal, say with some Chinese companies? That they are doing. Could they make more profits? That they are doing, quite robustly. Stocks are subject to rules, one being the law of supply and demand. They have a lot of supply, but right now the demand is not there.
2) One reason these stocks have not gone up is that they were too high ten years ago. We were at the end of the dot-com bubble. P/E ratios back then were 37 times, 68 times and 124 times earnings. I remember one stock at 2200 times earnings. Some were at N/A. There were no earnings. P/E is a division formula. You can't divide by zero. In a way E-Commerce took the E out of P/E. We've come a long way, but the stock prices lag.
3) Speaking of high and low P/Es. Look at the right hand column. Traditional P/Es, even for these high rollers is around 20 to 30 times earnings. A quick one sentence lesson on P/Es. The P/E number states how much money it costs to buy one dollar of earnings. If a company today has a P/E of 9.3, like Microsoft, it means you're paying $9.30 to get at $1 of profits. I remember when MSFT had a P/E of 35. And that was considered okay.
4) Everything returns to the NORM---meaning normal. If stocks typically trade at 19.2 times earnings, then sooner or later that ratio will return. Earnings will either go up to match up and justify the high ratio (making it normal) or the stock price will come down (making it normal). If you have $100,000 in the bank and earn a 3% interest, or $3,000 for the year, you have a P/E of 33 plus. It costs $33 to get at one dollar of earnings. If you get 5% interest, your P/E is 20 ($100,000 divided by $5,000 equals 20). See how simple it is. This bank example is important, because in some ways it's a good measuring stick. The hope of stock investing is not always to capture the income, but to have the stock increase in value.
5) Scan your eyeballs down the right column and you'll see some tremendously low P/Es. These stocks still may take years to go up substantially, but they are making money---lots of it---and even today a higher price is justified. For example, Microsoft could have a P/E of 27 (Three times nine) and the stock would be at three times its current $25, or $75. If it were there it would seem natural.
6) I think there are some good prospects. Now I'm going to look at book value, and see if any of these have a negative book value, making them even more tempting. Whirlpool, Gap and Computer Sciences look like good takeover candidates.
7) I like covered calls, in the 6% to 10% monthly cash flow range. Most of these are in the 5% range, and though good, there might be better cash flow stocks. Dell was at $14.02 today. The September $14 calls were 39 X 40 cents, 39 cents to sell. The October $14 calls were 88 cents to sell, or $880 if you had 1,000 shares. The $15 calls were 44 cents to sell.
8) Many of these stocks have a 2% plus dividend yield. They also have stong balance sheets, with most holding $4 to $6 per share in cash.
Years ago these stocks were firmly in the growth sector. Today they are defined as value stocks. I like the future of these companies, and I love the future of America, no matter the Liberal machinations to devalue our country and economy.
So I'm reading everything I can get on this topic. I'm interested because the main focus of my endeavors is to write covered calls to generate income. If a stock is flat--perceived as going nowhere--the options are weak. To sell them you generate very little in premium. For example, a robust stock at $25 might have an October premium at $1.80. Even some stocks have option premiums near 10% of the stock price. Microsoft's option is 25 cents or 40 cents. That says no one thinks the stock is going anywhere. And for the time being, they're right. What would drive Microsoft up? It's one of the best run companies in the country. They make millions. I mean tens of millions---everyday. More on this after I make a macro case for the market.
One could look at the market in general---either the Dow 30 or even the S & P 500---over the last 5 years and it looks like one of my rolling stocks.
Right now there are 22 of the S & P 500 with stocks at a lower price than where they were ten years ago. Look at just a few of them:
STOCK/TCKER PRICE 8-29-01 PRICE 8-29-11 RECENT P/E
BestBuy/BBY $26.86 $25.43 7.3
Nvidia/NVDA 14.05 13.36 13.3
Cisco Systems/CSCO 17.08 15.74 9.2
Texas Inst/TXN 34.05 26.16 11.2
Capital One/COF 56.68 45.39 6.3
MIcrosoft/MSFT 27.11 25.84 9.3
Xilinx/XLNX 37.95 31.21 14.5
Kla-Tencor/KLAC 49.75 36.86 9.0
JPMorgan Chase/JPM 39.57 37.64 7.5
Dell/DELL 21.80 14.97 7.4
H & R Block/HRB 19.45 14.95 9.1
Gap/GPS 19.70 16.74 11.0
Intel/INTC 28.1 20.30 8.5
Others include: FRX, AMGN, KSS, MDT, DOW, TSS, WHR, PAYX. (Source: Bespoke Investment Group)Nvidia/NVDA 14.05 13.36 13.3
Cisco Systems/CSCO 17.08 15.74 9.2
Texas Inst/TXN 34.05 26.16 11.2
Capital One/COF 56.68 45.39 6.3
MIcrosoft/MSFT 27.11 25.84 9.3
Xilinx/XLNX 37.95 31.21 14.5
Kla-Tencor/KLAC 49.75 36.86 9.0
JPMorgan Chase/JPM 39.57 37.64 7.5
Dell/DELL 21.80 14.97 7.4
H & R Block/HRB 19.45 14.95 9.1
Gap/GPS 19.70 16.74 11.0
Intel/INTC 28.1 20.30 8.5
This is amazing group of stocks. Let me weigh in on a few possible reasons for this and a few possible plays:
1) These are huge companies. They are worth billions of dollars. They have billions of shares outstanding. For example, anyone who wants to own Microsoft already owns it. What could they do to make more people want to buy their stock? Could they make another deal, say with some Chinese companies? That they are doing. Could they make more profits? That they are doing, quite robustly. Stocks are subject to rules, one being the law of supply and demand. They have a lot of supply, but right now the demand is not there.
2) One reason these stocks have not gone up is that they were too high ten years ago. We were at the end of the dot-com bubble. P/E ratios back then were 37 times, 68 times and 124 times earnings. I remember one stock at 2200 times earnings. Some were at N/A. There were no earnings. P/E is a division formula. You can't divide by zero. In a way E-Commerce took the E out of P/E. We've come a long way, but the stock prices lag.
3) Speaking of high and low P/Es. Look at the right hand column. Traditional P/Es, even for these high rollers is around 20 to 30 times earnings. A quick one sentence lesson on P/Es. The P/E number states how much money it costs to buy one dollar of earnings. If a company today has a P/E of 9.3, like Microsoft, it means you're paying $9.30 to get at $1 of profits. I remember when MSFT had a P/E of 35. And that was considered okay.
4) Everything returns to the NORM---meaning normal. If stocks typically trade at 19.2 times earnings, then sooner or later that ratio will return. Earnings will either go up to match up and justify the high ratio (making it normal) or the stock price will come down (making it normal). If you have $100,000 in the bank and earn a 3% interest, or $3,000 for the year, you have a P/E of 33 plus. It costs $33 to get at one dollar of earnings. If you get 5% interest, your P/E is 20 ($100,000 divided by $5,000 equals 20). See how simple it is. This bank example is important, because in some ways it's a good measuring stick. The hope of stock investing is not always to capture the income, but to have the stock increase in value.
5) Scan your eyeballs down the right column and you'll see some tremendously low P/Es. These stocks still may take years to go up substantially, but they are making money---lots of it---and even today a higher price is justified. For example, Microsoft could have a P/E of 27 (Three times nine) and the stock would be at three times its current $25, or $75. If it were there it would seem natural.
6) I think there are some good prospects. Now I'm going to look at book value, and see if any of these have a negative book value, making them even more tempting. Whirlpool, Gap and Computer Sciences look like good takeover candidates.
7) I like covered calls, in the 6% to 10% monthly cash flow range. Most of these are in the 5% range, and though good, there might be better cash flow stocks. Dell was at $14.02 today. The September $14 calls were 39 X 40 cents, 39 cents to sell. The October $14 calls were 88 cents to sell, or $880 if you had 1,000 shares. The $15 calls were 44 cents to sell.
8) Many of these stocks have a 2% plus dividend yield. They also have stong balance sheets, with most holding $4 to $6 per share in cash.
Years ago these stocks were firmly in the growth sector. Today they are defined as value stocks. I like the future of these companies, and I love the future of America, no matter the Liberal machinations to devalue our country and economy.
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