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Thursday, March 28, 2024

Phil on Money Talk (Updated)

Here's Phil on BNN's Money Talk (yesterday):

Phil has an interesting discussion with Kim Parlee on Japan, the "tipping point" on Japan's massive debt, the country's unsustainable situation, interest rates, helicopter money to people, the velocity of money, growing the economy, putting people to work. What happens at Japan's tipping point?

 

After the break, Phil provided some trade ideas.

Trade ideas:

Baker Hughes (BHI) is very interesting as we're likely at a lot point for CapEx spending in the energy sector and, at $45.50, BHI's market cap is down to just $20Bn and they are about to get a check from Haliburon (HAL) for $3.5Bn, which is over 15% of their entire market cap.   They are using $1.5Bn of the money to buy back stock and another $1Bn to pay off debts and that will leave them with $1Bn in cash to play with while many of their competitors are going bankrupt and leaving assets lying around that BHI can pick up for 10 cents on the Dollar. 

So we like them for a long-term turnaround and we can take advantage of the heavy premiums with this spread:

  • Selling 10 BHI 2018 $35 puts for $3.50 ($3,500)
  • Buying 10 BHI 2018 $40 calls for $11.40 ($11,400)
  • Selling 10 BHI 2018 $50 calls for $6.50 ($6,500)

That's net $1,400 on the $10,000 spread that is starting off over $5,000 in the money at $45.  The potential return on cash is net $8,600 for a 614% profit in 19 months and all BHI has to do is be over $50 for the full payout.  To the downside, if BHI is below $35 (23% below the current price), in addition to losing the $1,400 cash, we will be obligated to buy 1,000 shares for $35 ($35,000) for a total cost of $36,400 or $36.40/share – still 20% below the current price – and that's the worst case! 

Although it seems like we talk about AAPL all the time – that's because it's the best stock in the World and, whenever it's on sale, we should buy it. Don't you wish someone had told you to do that with AT&T (the old best stock) back when you were young?  Well, we're not going to make that mistake with AAPL so, whenever it's cheap, we remind people to buy. 

Apple just reported an $18.4Bn profit in January for the previous 3 months and that was the most money made by a company in one quarter EVER.  At the time, they guided Q2 significantly lower, to around $10.7Bn and they missed and came in at "just" $10.5Bn, which is the 34th best quarter of any company EVER. Meanwhile, the stock dove from $112 back below $95 (15%) and the market cap has now fallen to $520Bn for a company that has $260Bn in cash (50% of its value) and makes over $50Bn a year.  Even if they had no cash, the p/e of 10 should be enough to bring in the bargain hunters!

Our long-term spread for AAPL is more aggressive than BHI:

  • Sell 5 AAPL 2018 $90 puts for $12 ($6,000)
  • Buy 10 AAPL 2018 $90 calls for $15 ($15,000)
  • Sell 10 AAPL 2018 $120 calls for $5 ($5,000)

Here, due to the price of AAPL, we are only obligating ourselves to buy 500 shares for $90 ($45,000) if AAPL drops 5% more into Jan, 2018 expirations. On the upside, if AAPL gets back over $120 in 19 months, the spread pays $30,000 against a net cash outlay of $4,000 for a $26,000 profit (650%) and we're starting out $5,000 in the money at $95. With a spread like this, you can stop out of the short puts at $16 if AAPL falls about $10 and that would be a $2,000 loss rather than buying the stock and then you'd have the $30,000 spread for net $12,000 and then, if the net of the spread fell below $6,000 (now $10,000), you could take a $6,000 loss and be done so consider that the risk vs the potential $26,000 reward.

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