Trades for Torquio (also a good Watch List):
AFL – 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.
ESRX – 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.
GILD – 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 – 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.
LB – 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 – 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.
SVU – 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!
TGT – 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.
WFM – 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 – 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 there's a good start to the 2017 Watch List from various sectors to fill in our portfolios. IFF the market keeps going up, then every week we can add another from the list to offset our underperforming hedges.
As noted above, I'm inclined to add ESRX and sell 5 2019 $65 puts for $8 in the LTP and we'll consider some more next week.
