Turnaround Tuesday – What Recession?

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Remember last week?  

The market was melting down and everyone was freaking out – ah, good times…  This morning the Dow is back at 30,000 – up 1,350 points (5%) from Friday’s low.  This is why – as I urged people for the last two weeks, we have to take advantage of these bottoms when they come as they tend to be great buying opportunities, which don’t come around that often.  

Especially for us options traders, who benefit from the very high VIX that goes hand in hand with such panic – giving us fantastic prices in our premium-selling business.  We took full advantage in our Live Member Chat Room, including these trade ideas last Tuesday:

Turnaround Tuesday – Nasdaq Holds the Line

Don’t let fear and superstition (TA) stop you from buying perfectly good stocks at ridiculously low prices.  Last Thursday, for example, we discussed adding a long spread to our existing Alphabet (GOOGL) short puts and I said to our Members:  

We have 20 short 2024 $100 puts we sold for $10, now $14. The 2025 $75 puts are $7 so we can always roll our losses there so I’m not worried. I think the big issue for them is all the privacy suits and the effect they will have on their business model going forward. $1.3Tn at $100 isn’t too bad as they are making $68Bn so call it 19x earnings and they are growing 20% top and bottom and were $30Bn in 2018 and it’s only 2022 and more than double.

They will get dragged down with the economy though as they already have 4.3Bn active users and that’s vs 3Bn for META, who “only” make $28Bn but they are down to $382Bn so 13x but MSTF trades at 22x with 3Bn users (which is less than I thought). AAPL is about 2Bn and AMZN already drops off to 300M (less than I thought).

So, if you want eyeballs, it’s GOOGL or UGH! Zuckerberg so GOOGL is the better choice for many reasons. It’s a little hard to grow when you already have half the World (ask KO) – especially when that is REALLY beginning to concern global governments. Still, GOOGL warned us of the “Law of Large Numbers” in 2007 and they’ve grown 10x since then.

I’m sure you’ve noticed already that when you look up a restaurant or a destination, GOOGL jumps in with airfares and reservations – that’s a nice developing revenue stream. They have to be subtle because they are so dominating but I can see it creeping in.

So yes, for the LTP, let’s add to our GOOGL short puts the following:

      • Buy 20 2025 $90 calls for $30 ($60,000)
      • Sell 20 2025 $120 calls for $17 ($34,000)

We collected $20,000 for the short puts so we’re in for net $6,000 on the $60,000 spread with $54,000 (900%) upside potential at $120. You can see I’m still a bit tentative, assume we’ll spend $10 ($20,000) to roll down to the $70s if we go lower and then we’ll be in a $100,000 spread for $26,000.

So we’re already planning for what to do if it goes lower but, if it doesn’t, we’ll make a boatload of money if the stock just manages to get back to $120 in the next two years.  If GOOGL is not worth $120, then every single person who bought the stock for the last 12 months has been wrong.  While that’s possible, it’s not likely and we’re doing our own valuation of 19x with 20% growth so down to about 16x next year and 13x in 2025 if they stay at this price ($100)?  Not likely, is it?  

And, as I said, even if we are disappointed, we simply spend $20,000 to roll to the $70 calls and I’ll certainly be THRILLLED to own GOOGL until 2027 at that price.  You can still make that play today, by the way – the short puts sold for $16.50 yesterday, which is $33,000 for $20 and that coupled with the $90/120 spread (same price) at $26,000, would give you a $7,000 CREDIT on the $60,000 spread – you’re welcome!  

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HON – Here’s someone no one thinks about anymore but at $170, they are a $114Bn company making over $6Bn a year so less 18x is very fair but $10Bn in debt will cost them 10% of earnings at +5% so call it 20x, realistically. There’s not much growth but they barely lost a step in 2020 so it’s a very nice safety play. As it turns out, they make a nice Butterfly candidate so let’s add them to the Butterfly Portfolio:

    • Sell 10 HON 2025 $150 puts for $15.50 ($15,500)
    • Buy 15 HON 2025 $170 calls for $33 ($49,500)
    • Sell 10 HON 2025 $200 calls for $20 ($20,000)
    • Sell 10 HON Jan $180 calls for $7.50 ($7,500)

That’s net $6,500 on the spread and we have 8 more quarters to sell after the Jans expire (if they are in the money, we’ll be $15,000 in the money first) and if we can sell $7,500 8 times in the next two years – that would be $60,000 back plus whatever we net on the $45,000 spread. This is why the Butterfly Portfolio is such a money machine!

MGM – Macau is opening back up and Vegas is booming (despite the lack of water). $31 is $12Bn in market cap and they made $2Bn in 2017 and 2019 ($500M in 2018). Being shut down in 2020 cost them $1Bn and this year and next they expect about $430M as they look to get back on track. It’s one thing to invest in a stock and HOPE the potential is there to get from $400M to $2Bn but MGM has PROVEN they can make $2Bn and the revenues are about 50% from gaming and 25% from Hotels (attached to the gaming) and they’ve already built all that stuff. If they just get back to $1Bn then the P/E is 12 so I like them down here for the LTP:

    • Sell 10 MGM 2025 $30 puts for $6.50 ($6,500)
    • Buy 20 MGM 2025 $30 calls for $10 ($20,000)
    • Sell 20 MGM 2025 $45 calls for $5 ($10,000)

That’s net $3,500 on the $30,000 spread and, when they pop back by $40, we can start selling short-term calls for income while we wait. The Jan $40s are 0.80 and the $35s are $2 so if we sell 5 for $2 and pick up $1,000 each quarter, that’s $8,000 back on $3,500 and the rest of the spread is a bonus.

We made a lot of trades last week as we began building a new Watch List that will guide many of our future trades this quarter.  These were merely some of the trade ideas that were so compelling that we thought we HAD to grab them before they got away from us. 

Simba Stampede GIF - Simba Stampede Lion King - Discover ...You can read my posts from the past two weeks to see WHY we called a bottom while many, many analysts were telling you it was the end of the World.  It’s very hard to be the only wilderbeast who’s stopping to pick up some gems while the rest of the herd is stampeding all around us.  That’s what Fundamental Investing is – you have to make your own decisions and not simply follow the herd.  

To put it simply, gold is gold.  A diamond is a diamond and it doesn’t matter if it’s buried in a pile of rocks – it’s still a diamond and still worth more than all the rocks around it.  Even in the worst market conditions you can find good stocks to trade and I said when we started this project that we’d be looking for stocks with low P/E ratios and low Debt levels

You might say “Duh!” to that and I’m not claiming any copyright on buying sensible value stocks.  The real trick is sticking to your guns and doing it when everyone else is selling – throwing out the proverbial babies with the bathwater – as people are prone to do when they panic.  

We scooped up a lot of value stocks in the past two weeks and now we’re back to watching and waiting into Q3 Earnings Reports, which begin a week from Thursday.

 

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Good Morning.

Phil Good news a rising tide rises all ships. SKT I do have but with a PE of 37 ???? I am not to happy. Thought you sade WBA gone up 5$

Credit Suisse (CS) bonds maturing on June 9 2023 have a yield to maturity > 10%. Coupon of 3.8% on an ask of 95.9.

Happy Tuesday all! Phil, did CLF not make the watchlist? If so, did you post the analysis as to why? I enjoyed last week’s webinar with the walk throughs of the watchlist.

good point! thank you.

Phil,
Would like your considered opinion/gut feeling as to this rally. There is an understandable element of a mechanical, reflexive upside reaction to the recent significant drop (action and reaction in physics). Fundamentally, there seems to be a hint of ‘hope’ in some quarters that the FED will relent in its battle with inflation and cease rate increases – very unlikely at this time in my opinion. What do you feel is behind this rally and is it sustainable?
TIA

Hi phil what do you think of a play on TLT?
Something like:
Buy 10 2024TLT 100 CALL x 13.50
sell 10 2024 TLT 120 CALL x5.50
Sell 5 2024 TLT 100 PUT x7
Sell 5 GEN2023 110 CALL x 2.80

the 2025 are not traded that much
the idea is that interest rate will go lower in the future due to the high US debt. (interest can be raised but not that much and for too much imo)

in the meantime the short call can decrease the cost of the spread

May be it is too soon? And better wait for a further drop of TLT?
Or may be is better to do this trade on shorter term treasuries etf?

Thanks

Phil,
Thanks for the great response to my earlier question. If I’m understanding your perspective, by your valuation, 4000 is the correct value for the S&P “if” earnings stay where they are. However – and you knew that was coming – if the Fed continues to raise rates to tame inflation and sends the economy into a recession, then earnings will not stay where they are and the fair value will drop. I guess what my question behind my question is – what do you feel the chances are that earnings drop an additional 10 or 20% due to recessionary activity?
Thanks … again

BRK/B BRK/A last week someone asked when is Berkshire going to buy their own stock. I believe the next day they BRK actually did. Now Greg Able, their CEO, just bought $66M worth. You can see it on Finviz.

Phil,
Thanks again for the detailed rationale re the trading range.