Two weeks ago we began compiling our 2017 Watch List.
A Watch List is not a Buy List, a Watch List is a list of stocks we'd LIKE to buy – IF they get cheaper. Of course that's true of every stock but these are stocks we consider good values where they are now and are ALMOST cheap enough for us to want to get in and we want to be ready when they do give us a good entry – so we watch them!
I like the Finviz charts because they constantly update, so any time you refresh this post, the charts will be updated to the day. I've also put dates on the last round of picks because we've had a lot of movement since 2/17 and some of the stocks have gone higher (we are not chasting) and a couple have gotten cheaper and those we are likely to move on.
The trading notes are the best idea we have AT THE TIME the stock is added to our list – our goal is to get a BETTER trade set-up than the one we highlight, NOT the one we are discussing – those are for reference purposes. For example, Target (TGT) took a nice dive on earnings and are much cheaper now ($57.35) than the $65.55 we were watching them at. $55 was our target for short puts but NOW you can sell the 2019 $55 puts for $7.25, $2 (40%) better than they were pre-earnings.
Even better, we can collect the $5.20 we wanted by selling the 2019 $50 puts and we will sell 10 of those in the LTP (buying back our 5 short Jan $67.50 puts) and now we can add 10 2019 $55 ($7.60)/65 ($3.60) bull call spreads for $4 which, as a new trade, is a net credit of $1.20 per contract ($1,200) which means the worst case is owning TGT for net $48.80 – THOSE are the kind of trades we love to be in!
"The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they're on the operating table." – Warren Buffett
Or, as I like to say: "If you are not going to buy low – when are you going to buy?" With that in mind, let's take a look at two dozen stocks that are worth strongly considering:
AFL (2/17) – I always forget to buy AFL. Super-solid company that trades in a channel good enough for the Butterfly Portfolio and should do better as rates tick up (insurance companies have huge reserves they have to keep in "safe" accounts). They have $102Bn in long-term investments (bonds) that are paying them nothing – a 1% rise in rates drops $1Bn to their bottom line ($2.50/share). You only have to pay $70.67 for a stock that threw off $6.45/share last year (p/e 11) and though they project flat – flat is just fine when you are returning 9% a year. They pay a 2.5% ($1.72) dividend while you wait but not worth owning the stock as we can sell the 2019 $65 puts for $5.50 and buy the $60 ($13.50)/70 ($7.10) bull call spread for $6.40 for net 0.90 on the $10 spread that's 100% in the money.
BMY (3/5) – Last July, BMY took a huge hit because Opdivo (late-stage cancer) failed in trials and the stock collapsed. On Jan earnings, they missed estimates by 0.03 but earned 0.63 per $60 share so on track for $2.50 and a p/e of 24. There were, however, still extra expenses as they try to get Opdivo back on track (for wider acceptance – it's already being used for some cancers) and I think their guidance of $3/share will ultimately hold up. Too bad we missed them at $46, now $57.26 but volatility is good for put prices and we can sell 2019 $50 puts for $5.20 for a net $44.80 entry (below the lows) and that can be paired with the $50 ($11.50)/60 ($6.25) bull call spread at $5.25 so net 0.05 on the $10 spread and ALL BMY has to do to make a $9.95 return (up 19,900% return on you nickel!) is make it back over $60 in two years.
DAL (3/5) – Our theory here is that Delta spends close to $10Bn a year on fuel and the new planes they are starting to get from BA are 15% more effienct so, sometime in the Future, earnings will rise $1.5Bn (33%) over time. Unfortunately, they buy the planes up front so earnings in 2017 are projected down to $3.7Bn (still a p/e of 10) and then $4Bn in 2019 and, following hat, we can expect enough of the fleet to have rolled over to give us solid gains going forward. Since low-cost carriers tend to rely on used planes, the majors who buy new planes will have a fuel advantage for years to come – it's a new paradigm in the industry and that's why Buffet bought in after decades of hating airline stocks. Clearly we'd like to see them come back to $40 before pulling the trigger. At the moment, the 2019 $45 puts can be sold for $6.10 and, if we can get that price for the $40 puts (now $3.80), I'd take a net $38.90 entry for sure.
ESRX (2/17) – Another beaten-down Pharma that is worth owning. They made $2.5Bn last year, up from $2Bn the year before and they did $1.4Bn in the last two Qs so pacing towards $3Bn yet you can buy this company for $42Bn (trailing p/e 17) at $70. We can promise to buy them for $65 and get paid $8 to do it, which is net $57 which is 18.5% off the current price. In the LTP, I'm just going to do those but you can be aggressive and add the $60 ($17.50)/75 ($9) bull call spread for $8.50 and then it's net 0.50 for the $15 spread that's $10 in the money to start. ESRX was added to the Long-Term Portfolio (LTP) on 2/17, selling 5 2019 $65 puts for $7.50 ($3,750) to start.
FCX (3/5) – This os one I picked last year at $4 and now they are $13.20 but I still like them! They might actually make $1/share this year and much more if copper and gold tick up in price and yes, I'd rather buy them at $10 so no hurry here but you can already sell the 2019 $10 puts for $1.65, which nets you in at $8.35 or, if you want to be more aggressive, you can sell the $12 puts for $2.60 for net $9.40. I think I'd be more aggressive on the puts and sell perhaps 10 ($2,600) and use that to buy 20 $10 ($5.50)/17 ($2.50) bull call spreads for $3 ($6,000) so net $3,400 on $14,000 worth of longs if all goes well.
FMCC (5/9) – At $2.60 they seem silly cheap to me. They are currently turning most of the cash over to the Government but are in court fighting to retain more. $2.60 is an $8.4Bn valuation yet they made $8Bn last year! No options.
GCI (5/9) – Gannett's earnings were not as awful as feared and $8.31 has dropped their market cap to under $1Bn ($940M) but last Q they dropped $33M to the bottom line and they should earn about $1 per share this year and next. They also pay an 0.64 dividend (7.6%) with no cash-flow issues.
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Gannett (NYSE:GCI) is up 7.9% and reaching its highest point since early February after posting Q1 earnings where it beat on top and bottom lines and raised EBITDA guidance for the full year.
Revenues grew more than 17%; excluding unfavorable exchange-rate changes and $1.8M in exited operations, they grew 19.3%. Digital revenues of $234.7M made up 30.3% of operating revenue.
Net cash flow from operations of about $31.1M, vs. a year-ago $17.3M. Cash balance at quarter's end was $89.5M.
Revenue by segment: Publishing, $694.9M (up 5.6%); ReachLocal, $77.6M (new); Corporate and Other, $968,000 (down 30.3%).
It's boosted EBITDA guidance for the full year to $355M-$365M, up $30M at the midpoint. It's reiterated guidance for revenues of $3.15B-$3.22B, and sees capex of $65-$75M (excluding real estate); depreciation/amortization of $150M-$155M; and effective tax rate of 28-32%.
So, in the LTP, let's pick up 2,000 shares at $8.30 ($16,600) and cover them with 20 short Oct $7.50 calls at $1.10 ($2,200) and sell 20 short Oct $7.50 puts for 0.60 ($1,200) so we net into 2,000 shares for $13,200 ($6.60) so we're not going to mind being called away at $7.50 (+18%) and the dividend is over 10% while we wait. Worst case would be owning 4,000 at avg $7.05 – also not bad!
GE (3/5) – Forever $30 but talk about a safe place to park your money! They even pay a 3.2% dividend (0.89) while you wait for something to happen – and it won't. GE is a $262Bn company that pays no taxes ($464M refund last year on $9Bn in earnings!) and has tons of money overseas – what's not to love? Even better, you can sell the 2019 $28 puts for $2.50 and use that free money to buy the $25 ($6.10)/30 ($3.05) bull call spread for $3.05 and that's net 0.55 on the $5 spread for a near 10-bagger if GE simply holds $30. There's anothe interesting way to play this one and that's to effecively buy it by selling the 2019 $32 calls for $4.40 for a net $27.60 entry and then buy the $28 calls ($4.20) for a net 0.20 credit and then just sell 1/2 of the April $30s (0.75). That way, you are collecting 0.375 per long and each time you collect $1.70 (4-5 quarters) you can spend it to roll the long calls lower (the 2019 $25 calls are $6.10) to lock in the gains and work towards a lower, cheaper spread – it's just more work that way.
GILD (2/17) – Still priced like they are going BK even though they made $18Bn last year and should make $13Bn this year but that's still cheap when the whole company is $91Bn (p/e 7). This is a huge conglomerate with a 20-year pipeline and one drug went generic on them – there will be others. Selling the 2019 $60 puts for $6.30 is like free money, netting you in for $53.70 (23% off) and the $62.50 ($13.20)/77.50 ($6.85) bull call spread is $6.35 so net a nickel for the $15 spread is a very nice upside potential of $14.95 if GILD simply makes $77.50 by Jan, 2019.
HRB (2/17) – Replacing their workers with Watson in the next few years, so a good long-term play. Simplification of tax code may make them a good choice for more people (bad for accountants) and they are very cheap at $4.25Bn ($20.50) after dropping $400M to the bottom line in fiscal 2016. Should be a bit lower this year (cost of IBM project) but, down the road – vroom! 2019 $18 puts can be sold for $2.75 and you can use those to fund the $18 ($4.20)/22 ($2.30) bull call spread at $1.90 so you still have a net 0.85 credit and your worst case is owning them at net $17.15 (17% off) and best case is making $4.85 on the robot revolution.
JNS (3/5) – Janus Capital is where Bill Gross ended up after leaving PIMCO. Janus is an asset management company with about $170Bn under management and HNW clients don't generally move their money without good reason (as it's such a pain in the ass). Nonethless, they missed earnings in Jan and dropped 10% so now we like them as they test $12 again and the sharp drop has run the Sept $12 puts up to $1.05 so that's a no-brainer for a net $10.95 enty and these guys are another 3.5% dividend payer (0.44) but why buy the stock and wait for dividends and hope it holds $12 when we can collect 2.5x the dividend in 7 months and protect ourselves from a drop at the same time?
LB (2/17) – Victoria's Secret, Pink, Bath and Body Works… Girls need bras and they like candles and perfume too! So, assuming there will be girls in our future, paying $16.2Bn for a company dropping $1.2Bn to the bottom line is a p/e of 13.5 for a company that historically has grown 20% a year (flat this year). You can sell the 2019 $42.50 puts for $4 and that may as well be free money (net $38.50 entry is 25% off) so it can be paired with the $50 ($11.50)/$65 ($5) bull call spread and you know we must love this one because we're willing to pay net $2.50 for the $15 spread!
M (2/17) – We like M for a recovery story and, if not, as a real estate story. They have 900 big-box stores and a $9Bn market cap so $10M per store is not a lot to pay and, at $9Bn, it's a good size to be acquired by a foreign company looking to have a presence in the US. Meanwhile, they made $1Bn last year and maybe $900M this year so not like SHLD, who are losing $1.5Bn a year AFTER selling off land and brands yet still, for some reason, hold a $1Bn valuation. Anyway, back to M. The 2019 $25 puts can be sold for $3.10 and the $28 ($6.70)/$35 ($3.85) bull call spread is $2.85 so a net 0.25 credit on the $7 spread is the way to go.
PBI (3/5) – Pitney Bowes used to sell fax machines and now they sell information management services – a great adjustment but one that has caused many problems and they have missed EVERY SINGLE QUARTER for the past 3 years! Margin pressure in Digital Commerce caused them to take a $168M impairment charge that led to the horrific drop since Nov. Still, cut guidance is for $1.75 per $13.57 share and that makes them well-worth taking a chance on, since they also pay an 0.75 (5.5%) dividend. The 2019 $13 puts can be sold for an awesome $2.50 for a net $10.50 entry and that's 3 years worth of dividends paid to you for NOT owning the stock. I don't think they will recover much but the 2019 $13 calls are only $2.40 – because no one thinks they are recovering and if you sell the $17 calls for $1 it's net $1.40 on that side, so a nice net $1.10 credit on the combo, if you are so inclined.
PSA (3/5) – I generally don't like $226.61 stocks but this one pays an $8 dividend and is a good value at $220, so I am interested. $200 should be a very solid floor so not much risk in selling Sept $210 puts for $9 because your worst case is owning them at net $201 and, if they head higher – $9 by Sept is far ahead of the dividend anyway. I like this space as they are a REIT but no single tenant can break them and more people renting apartments means more need for extra storage space (plus retirees who can't let go of their stuff when they downsize).
QCOM (3/5) – This is a big deal for me as I've always liked BRCM better than QCOM but BRCM is now AVGO and hasn't been cheap in ages. QCOM, on the other hand, at $56.44 is "only" $83Bn and they made $5.7BN last year so a 14.5 p/e is very cheap for tech and yes, QCOM is in a down cycle for their chips but then they will be in an up cycle so now is when we buy. It makes them much more attractive that we can sell the 2019 $50 puts for $6.35 for a net $43.65 entry. In our LTP, we jumped right in on the dip on 2/10 and sold the $55 puts for $10.50 and I would like those better but they already dropped to $8.50 so now I like the lower ones better for just $2 less. The high volatility of the stock has also made the $50 ($10.75)/$65 ($4.40) bull call spread at $5.35 a good bargain but we're waiting and seeing in the LTP with just 5 short puts for the moment.
SEE (5/9) – Just reported a quarter that took a loss on a unit they sold for $3.2Bn but CONSERVATIVE financials did not include sales for the unit or profits so they missed expectations and, of course, they wrote down whatever they could to avoid taxes and that made them look bad. Good solid long-term company otherwise and the big dip let's you sell Jan $40 puts for $2, so let's sell 10 of those in the LTP so we can keep an eye on them.
SUN (3/5) – At $25.27, they get little respect considering they pay a very reliable $3.30 dividend (13%) and should earn about $1.50 per share (p/e 16.8). SUN is a refiner and seller of gasoline, not an oil company and it makes little sense that VLO is trading near all-time highs while SUN is down 30% from last year. They should and probably will cut the dividend to pay down debt so possibly more downside to come but you can sell Sept $22.50 puts for $1.85 for a net $20.65 entry and that's all the risk I'd take for now. A long spread can always be added once things stabilize.
SVU (2/17) – One we picked at the Seminar. Supermarket profits are thin and they come and go – that's why you can buy a company that made $178M last year for $1Bn ($4) – that's just silly! Even if they have a bad year, I'd be thrilled to catch 2 good years out of 5 and it's the bad years that are unusual. You can sell the 2019 $3.50 puts for 0.70 and buy the $2.50 ($1.85)/$5 (0.70) bull call spread for $1.15 so net 0.45 on the $2.50 spread is a very exciting upside!
AAXN (was TASR) (3/5) – Our Stock of the Decade has pulled back to only 350% above our $5 entry so we're interested again. A combination of widespread civil unrest and too many cameras (which TASR sells too) makes it impolitic to shoot protestors (though beating grannies seems fine). There's a lot of competition in the body camera biz but TASR owns the stun gun market and those relationships give them a big advantage over the competition. Sales are not a problem for TASR – camera sales were up 150% from last year with overall growth at 46% – it's a margin issue ("only" 60%) and margins can be fixed quickly in electronics. This one is a buy for us as we took $29 and ran last year and now, getting back in is a must near $22. We already have 5 short 2019 $20 puts in the OOP at $3.20 and they are still $3.20 so now is the time to double those down to 10 and add 10 2019 $18 calls ($7.50) and sell 10 2019 $27 calls ($3.30) for net $4.20 less $3.20 is $1 per $9 spread.
TGT (2/17) – At $65.55 they earn $5+ per share so p/e about 13 is very reasonable. Having trouble passing on inflationary prices but that's just a cyclical thing and this is a great opportunity to own them cheap. The 2019 $55 puts can be sold for $5.20 – that's great as a stand-alone sale as it nets you in for 23% off. You can pair it with the $60 ($10)/$72.50 ($5) bull call spread and the whole thing is net free(ish) with a nice $12.50 upside.
VZ – All the telcos have been beaten down but who doesn't have a phone? More and more companies are looking to put TV on your phones and tablets and TVs are turning into big tablets and your refrigerater needs web access now – it's the same logic as buying a pipeline company when demand for oil is up – these are the guys who make all that happen and VZ is the leader in installed fiber-optics (FIOS), which is very important for bandwidth-hogging virtual reality. Almost as boring as GE but with bigger swings, VZ pays a nice 4.6% ($2.31) dividend while you wait. The 2019 $45 puts can be sold for $4 and that's net $41 and as much(ish) as you would collect for owning the stock at $50.09 for 2 years so no-brainer there.
WFM (2/17) – Nowhere near as cheap as SVU but WFM made $500M last year and is selling for $10Bn so p/e 20 but I like the fact that they are pushing into Europe and I like the rollout of their less-expensive 365 stores – though they are cannibalizing sales and eating into the bottom line for now. Since it's a slow roll, I would just plant a stake by selling the 2019 $30 puts for $4.50 and see how things go with a break-even at $25.50.
XOM (2/17) – Still cheap at $81.50. You can sell the 2019 $80 puts for $9 and buy the $70 ($14.25)/85 ($5.75) bull call spread for net $8.50 and you get an 0.50 credit on the $15 spread that's $11.50 in the money to start.
So we're off to a good start, I may add a few more as time goes by but here's a nice, diversified set of stocks that has something to fill every need a portfolio may have for balance. That's why keeping a watch list is so valuable for traders – we have premises and price targets and we'll see how they hold up along the way.
To be continued…
