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Top Trades for Fri, 15 Feb 2019 11:32 – AXL, T and F

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Top Trades for Fri, 15 Feb 2019 11:32 – AXL, T and F
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T/Rookie – The 5G rollout will be very destabilizing for Telcos so I wouldn't have high expectations but I do like T whenever they are around $30 as that's $220Bn and they pretty reliably make $20Bn so a nice, comfortable p/e.  At $2.04, the dividend is 6% so you might want to own the stock.  I'd sell the 2021 $30 puts for $4.25 and consider that free money (as I don't mind owning T at $30) and if you buy the stock and sell the $28 calls for $2.75 you net in for $23/26.50 (if assigned), called away at $28 with a $5 profit (21.7%) and a $4.08 dividend (17.7%) for 39.4% profit over two years so there's a great case for owning T with the short puts and calls.  As an option alternative, you can:

  • Sell 10 T 2021 $30 puts for $4.20 ($4,200) 
  • Buy 20 T 2021 $25 for $5.80 ($11,600) 
  • Sell 20 T 2021 $32 calls for $1.90 ($3,800)

Here we're netting in for $3,600 and the same $5,700 in margin in hopes of getting $14,000 back for a profit of $10,400 (288%) or, at $30, $10,000 for a $6,400 profit (177%) and the worst case here is owning 1,000 shares at net $31.80 (assuming the entire bull call spread is wiped out).   

So 1,000 shares of T with the short puts and calls would cost you $23,000 + $5,700 in margin and pay back $29,080 for a $6,060 gain (26.3% on cash) or the bull call spread uses $3,600 cash, $5,700 in margin and makes $6,400 at $30 up to a potential $10,400 at $32.  I'd rather have the option spread…

DAN/Dawg – Nice call.  AXL looks very good as they are a totally boring company that makes $300M but you can buy them for $1.8Bn at $16.50 – very nice.  I love it when a company doesn't even need to grow to gain in price once the value is realized.

Year End 31st Dec 2012 2013 2014 2015 2016 2017 TTM 2018E 2019E CAGR / Avg
Revenue $m 2,931 3,207 3,696 3,903 3,948 6,266 7,310 7,252 7,242 +16.4%
Operating Profit $m 136.6 203.5 267.6 357.3 380.7 539.5 649.5     +31.6%
Net Profit $m 367.7 94.5 143 235.6 240.7 337.1 410.6 381.8 368.8 -1.7%
EPS Reported $ 4.87 1.23 1.85 3.02 3.06 3.01 3.38     -9.2%
EPS Normalised $ 5.05 1.55 1.85 3.03 3.33 4.27 3.94 3.25 3.10 -3.3%
EPS Growth % +160.8 -69.3 +19.3 +64.0 +10.1 +28.1 -7.8 -23.8 -4.84  
PE Ratio x           3.44 3.73 4.52 4.75  
PEG x           n/a n/a n/a 1.03
Profitability

They were down with Manufacturing in Nov/Dec and it was right after the bought MPG for what people thought was too much ($1.6Bn) in the first place in a deal that was 50% dillutive to AXL shareholders and now they have about $5Bn in debt to service ($200M a year at 4%) but MPG also has solid earnings and a low multiple so I think it's worth a toss.  For the OOP, let's:

  • Sell 15 AXL 2021 $15 puts for $2.50 ($3,750)
  • Buy 30 AXL 2021 $13 calls at $6 ($18,000) 
  • Sell 30 AXL 2021 $20 calls for $2.60 ($7,800) 

That's net $6,450 on the $21,000 spread so the upside potential at $20 is $14,550 (225%).

DB/Dawg – Too many issues and they are guilty of money laundering, market manipulation, etc.  I wouldn't be so sure they get out of this.

TSLA/Albo – I'd be very careful at the moment as they have those bonds that convert soon if the stock is below $360 so you can expect all the stops to be pulled out to make that happen.   If it does, THEN I want to be short.

As to your spread, you are selling the $350 calls and buying the $420s and collecting $20 so you win below $370 up to $20 but you can lose up to $50 at $420.  Risk outweighs reward.  If I were going to make that bet, I'd rather buy the 2021 $420 puts for $150 and sell the $340 puts for $100 so net $50 on the $80 spread and you don't lose until it's over $370 but still too risky with this silly stock.

F/Jeff – It's a solid strategy but my suggestion is, since you are doing a 1/2 entry, you could buy 500 shares at $8.21 and sell the 2021 $7 calls for $2 and the $10 puts for $2.55 so your net is $3.66 and you still get your dividends and, if called away at $7 that's up $2.34 (64%) and, if less than $10 you would be re-assigned shares at $10 and you just start the process again but your average – on anything over $7, is $6.83 into the next cycle – and you are still collecting your dividends.