By Robert Hauver
Basic Materials had been getting pummeled in 2012, for a number of reasons, chiefly the slowdown in the world economy, particularly China, and a strong dollar. This sector is the worst performing sector so far, down 0.6% in 2012:
However, over the past month, this sector has outperformed all others, thanks to a falling dollar, and renewed stimulus from the Chinese government. Click here to read more…
By Robert Hauver
Looking for undervalued dividend stocks? Energy stocks have emerged as the Rodney Dangerfields of the market in 2012, being the only sector that’s still down, (-2.92%), after this new summer rally. However, the sector has pulled an impressive reversal, gaining over 8% since the June 4th lows. Halliburton, however, hasn’t joined in the fun yet, losing -1.52% since June 4th, and is now down almost 14% year-to-date, as of 7/6/12:
In addition to being in an out of favor sector, Halliburton’s 2012 earnings are flat, but, if you look to 2013, the picture gets brighter – HAL’s EPS is estimated to grow at over 10%. Couple this with its historically low range P/E of 8.72, and you have undervalued growth. We also ran a discounted model for future Earnings growth, with a risk-free rate of 13%, and came up with an intrinsic value of $61.00 for Halliburton.
Option trading strategies vs. dividends: Although HAL isn’t listed in our High Dividend Stocks By Sector Tables, it does have some high options yields.
The covered call trade listed below expires in October, and offers a call option premium of $1.68, over 18 times the dividend amount. Since the $30.00 strike is $.93 over HAL’s current strike price, there’s an additional potential assigned yield of over 11% annualized.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
It’s been a rainy April for the market thus far, with the S&P down almost -3.00% through 4/19/12. Being optimistic, we went searching for dividend paying stocks that are bucking the new market pullback. We found 2 contenders, Caterpillar, (CAT), and Home Depot, (HD), that have held their own in this month’s market decline, and have also done well in recent rallies:
HD beat CAT in the Nov. 2011 pullback, and has also had stronger share performance year to date and during this month’s decline.
Valuations & Earnings Growth: CAT derives a lot of its profits from overseas, vs. Home Depot’s mostly domestic focus on the US home market. Subsequently, CAT has had stronger earnings growth in its most recent quarter and fiscal year, as the hobbled US consumer slowly picks up spending, and the home market remains weak. Although it’s up over 18% this year, CAT still looks more undervalued on a PEG basis than HD.
We’ll find out if CAT’s current EPS projections hold, when it reports earnings, on its upcoming April 25th morning conference call next week. (Judging by how far off analysts have been in their CAT estimates in recent quarters, it should be an interesting report.)
Dividends: Although CAT and HD aren’t high dividend stocks, both firms have a 5-year dividend growth rate that’s above their industry avgs.: CAT’s is 9.62%, and HD’s is 9.03%. CAT’s dividend payout ratio is more conservative than its industry avgs., while HD’s is much higher than its industry’s low avg. of 26.4%:
Covered Calls: Combining covered call options with dividend stocks is a powerful way to create much more immediate income than many stocks’ dividends offer over 1 – 3 quarters. The increase in income is particularly high in a stock like CAT, which has high options yields that dwarf its dividend yield. The tradeoff is that you may forgo potential future price gains, in return for being paid a call option premium now. CAT has a higher beta and more volatility than HD, which gives it higher options yields.
In this trade, CAT’s August $110.00 call options pay well over 12 times its $.46 quarterly dividend.
If CAT is above $110.00 at or near expiration in August, your shares will be sold/assigned for $110.00, no matter how much higher CAT rises. You’ll receive an additional $2.64/share in price gain, for an additional assigned yield of 7.54% annualized, and the total potential assigned yield is 25.86%. ($110.00 strike price – $107.36 stock cost = $2.64/share.)
How does this compare to just buying CAT outright at $107.36? Since you received a call premium of $5.95, at a strike price of $110.00, your maximum price point potential is $115.95. If CAT doesn’t go as high as $115.95 during this 4-month term, you’d be ahead by selling this covered call.
(Each option contract corresponds to 100 shares of the underlying stock.)
The 3 income streams in this covered call trade are, (for 1oo shares of stock bought and 1 call option sold):
1. Call premium of $5.95/share, (paid within 3 days of the trade): $595.00
2. Quarterly dividend of $.46/share, (paid in August, ex-dividend date in July): $46.00
3. Potential assigned price gain of $2.64/share, if CAT is above $110.00 at or near expiration: $264.00
(You can see more details for over 30 other high options yields trades in our Covered Calls Table.)
Technical Data: CAT and HD have been two of the best stocks to buy for price gains over the past year:
As the table above shows, both of these stocks are quite close to their 52-week highs, which leads us to another, more conservative options strategy – selling puts.
Cash Secured Puts: By selling cash secured puts below a stock’s current price, you’ll achieve a lower break-even price, and also get paid within 3 days of making the put sale. However, you won’t qualify for any dividends, but, as you can see, the put options listed below pay out over 6 to 14 times what these quarterly dividends pay.
For every put option that you sell, your broker will secure enough cash in your account to purchase 100 shares of the underlyng stock, at whatever the put option’s strike price is, hence the name “cash secured puts”. In the CAT put option trade below, the broker would hold $10,500.00, (100 times the $105.00 strike price).
There are more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Financials: Both firms’ metrics are far above their industry avgs, except for CAT’s higher debt load. However, CAT has an interest coverage ratio of 6.4.
Disclosure: Author is short Caterpillar put options.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
Although the market has had a large rally over the past few months, the Dow 30 still lags the NASDAQ significantly in 2012, (the DOW is only up 6.78% YTD vs. NASDAQ’s 17.59% gain as of 3/22/12), This led us to look for undervalued Dow dividend stocks with low PEG ratios, and strong earnings. Our search produced these two familiar stocks, Boeing, and Microsoft:
Boeing has gained nearly 7% in 2012, (there’s a Performance table at the end of this article), but it’s still only up less than 3% over the past 12 months. Meanwhile, BA has grown its earnings substantially, so that it now has a much lower P/E than its industry peers.
With its strong growth forecast for its next fiscal year, BA has the second lowest PEG ratio of all the Dow 30 stocks. Although BA has a very high Price/Book, this is partially explained by its very high Return On Equity, (ROE), of 127.72%. (See Financials table further on in article.)
After being range-bound within the $20′s for around two years, Microsoft has risen into the low $30′s. However, it still looks fairly cheap on a PEG basis, coming in at .97. Even though its earnings and sales growth trail its industry averages, MSFT is one of the few dividend paying stocks within its industry, and offers a fairly good dividend yield, and a very good dividend growth rate.
Dividends: MSFT increased its quarterly dividend by 25% in 2011, from $.16 to $.20/share. Boeing increased its quarterly dividend in Feb. 2012, to $.44/share from $.42/share. Both stocks have a conservative dividend payout ratio:
Covered Calls: Income investors wanting to hedge their bets often sell covered call options, creating additional immediate income by receiving call options premiums, and thereby lowering their break-even cost.
As the table below illustrates, in these 2 covered call trades, the call options pay you 3 to 6 times what the dividends pay during the 4-5 month period. What’s the catch? By selling a call option, you’re obligated to potentially have to sell the shares at the call strike price by expiration time. (Generally, your shares will get assigned/sold if the stock goes above the strike price at or near expiration.)
There are 2 strategies in the trades listed below – the BA call has a higher strike price than BA’s share price, which gives you some room for potential price gains- (BA $75 .00 strike price is $1.08 above BA’s $73.92 share price). Conversely, the MSFT call strike price is right “at the money”, meaning the $32.00 strike price equals MSFT’s $32.00 share price. This leaves no room for potential price gain, but gives you a higher call option premium.
More bullish covered call sellers sell at higher strike prices, earning a lower call premium, whereas less bullish call sellers would sell calls with strike prices that are closer to the share price, and would get paid a higher call premium.
(You can see additional details for this and over 30 other high options yields trades in our Covered Calls Table.)
Cash Secured Puts: An alternative option trading strategy is to sell cash secured puts, which obligate you to potentially have to buy the stock at the strike price, if the stock goes below the strike at or near expiration. Generally, call and put options don’t get assigned until sometime near the expiration date, since call and put buyers don’t want to forfeit too much of the options’ time value.
Why would you sell cash secured put options? If you want to buy a stock at a lower price than its current price, the put premium $ that you receive lowers your break-even cost, so that, even though you may end up being assigned/sold BA at the $72.50 strike price, your net cost is only $68.70, the difference between the $72.50 strike price and the $3.80 put premium you received. Meanwhile, you have the use of that put premium $.
Investors are often surprised to hear that Warren Buffett has been known to sell put options, via private off-market deals, on companies he’s interested in buying, sometimes pocketing millions in put premiums now on expiration dates that go out a few years – it’s a very good cash flow deal.
These put options pay out 4 to over 7 times what the dividends pay out during this 4-5 month term. (You can see more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Financials: BA and MSFT both have mgt. efficiency ratios that far outshine their industry averages. BA’s debt load is higher than avg., but their interest coverage is very strong, but not as high as MSFT’s very high interest coverage of 77. BA’s ROE of 127.72% is currently the highest of any stock in the Industrials sector.
Performance: Although MSFT has been one of the best stocks to buy in 2012 for price gains so far, it’s still has a moderate Relative Strength of 55.55. With its RSI of 43.33, BA is closer to the sub-40 oversold area:
Disclosure: Author holds no shares of any stocks mentioned in this article at this time, but may sell cash secured puts during future market pullbacks.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
This week we’re focusing on 3 high dividend paying stocks, from 3 different industries, sectors, and countries – all of which have strong growth over the past year, past quarter, and also have good growth forecasts for their next fiscal year. This diverse group contains a large cap, mid-cap, and a small cap, all of whom are listed in our High Dividend Stocks By Sector Tables:
(All Company Profiles are listed at the bottom of this article)
Growth & Valuations: All 3 firms had robust earnings growth in their most recent fiscal years, and quarters. Next fiscal year growth is also projected to be good. CTEL and NUE both have low PEG valuations, (P/E to Earnings Growth).
BGS rose 69% over the past 12 months, and is currently trading near the high end of its 5-year P/E range. CTEL is much closer to its 5-year P/E low of 6.21 than its high 5-year high P/E of 39.65. NUE is also in the low end of its 5-year P/E range, which was very wide: 7.72 to 104.86. All 3 of these dividend stocks currently have above-average Price/Book ratios for their industries.
Dividends: NUE is one of the stocks in the Dividend Aristocrats group, and has increased its dividends every year for the past 27 years. CTEL pays semi-annual dividends, and had ex-dividend dates in May and December in 2011, with equal payments of $0.386/share, a 53% increase over 2010′s dividend. BGS also increased its dividend in 2011, from $.21 to $.23.
Covered Calls: All 3 of these stocks have options available , which offer an opportunity to improve upon your dividend yields and improve your cash flow.
The options listed in the 2 tables below have the following expiration months:
BGS: August; CTEL: Sept.; NUE: July.
Frequently, selling covered call options can offer you much higher, short-term payouts than just collecting dividends. The covered call strategy will give you a second, immediate income stream, since you get paid within 3 trading days when you sell options. NUE’s call options pay over 5 times the dividend payouts in this 5-month trade listed below. BGS’s covered call options pay over 3 times more than its dividends pay over the next 6 months.
(You can discover more details for these and over 30 other lucrative option trades in our Covered Calls Table.)
Cash Secured Puts: Selling cash secured put options is another options trading strategy that also has high yield, quick cash payouts, such as those listed below. The put options for NUE outpay the quarterly dividends by over 7 to 1 in this 5-month trade.
The annualized yields below are based upon a 100% Cash Reserve, which is the amount your broker will set aside in your account when you sell put options. This amount equals 100 shares times the Put Strike Price. We covered more of the specifics of put selling in last week’s article. Unlike call sellers, though, put sellers don’t collect dividends.
(Note: There are more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Financials: Even though Nucor’s mgt. ratios look lower than these other 2 firms’, they are actually much better than its steel industry peers. Nucor’s website also says that its “5-year 371% return to shareholders beats all other S&P 500 firms”. CTEL’s ratios are much higher than its telecom industry peers, plus it’s debt-free, and BGS has a superior ROE and in-line ROA and ROI to its food industry peers.
Performance & Technical Data: Although these stocks are way above their 52-week lows, CTEL and NUE are still down vs. 1 year ago, even though they both greatly improved their earnings.
However, investors have been rewarding CTEL and NUE this year, and they’ve been among the best stocks to buy in 2012 for price gains so far:
Company Profiles:
BGS: B&G Foods and its subsidiaries manufacture, sell and distribute a diversified portfolio of high-quality, shelf-stable foods across the United States, Canada and Puerto Rico. B&G Foods’ products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, marinades, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style sauces, taco shells and kits, salsas, pickles and peppers and other specialty food products. B&G Foods competes in the retail grocery, food service, specialty store, private label, club and mass merchandiser channels of distribution. Based in Parsippany, New Jersey, B&G Foods’ products are marketed under many recognized brands, including Ac’cent, B&G, B&M, Brer Rabbit, Cream of Rice, Cream of Wheat, Don Pepino, Emeril’s, Grandma’s Molasses, Joan of Arc, Las Palmas, Maple Grove Farms of Vermont, Ortega, Polaner, Red Devil, Regina, San Del, Sa-són Ac’cent, Sclafani, Trappey’s, Underwood, Vermont Maid and Wright’s. (Source: B&G Website)
CTEL: Established in 1992, City Telecom (H.K.) Limited provides integrated telecommunications services in Hong Kong via its own self-built fibre network. City Telecom’s wholly-owned subsidiary, Hong Kong Broadband Network Limited (HKBN), is the fastest growing broadband service provider in Hong Kong. HKBN offers a diversified portfolio of innovative products that service over 1,240,000 subscriptions for broadband, local telephony and IP-TV services. CTI participated in the investment for construction of submarine cables, including Japan-US Cable to connect the US and Japan across the Pacific Ocean, as well as Asia Pacific Cable Network 2, connecting us to eight districts in Asia and allows direct connection with the major fixed network operators in China. (Source: City Telecom website)
NUE: Founded in 1940, Nucor is the largest steel producer in the US, and is the largest recycler of scrap steel in the world. Nucor produces many steel products, such as structural steel, sheet steel, plate steel, cold finished steel, and wire mesh, and also acts as a raw materials broker in the steel industry. (Source: Nucor Corp. website)
Disclosure: Author is long BGS and short BGS call options.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
Institutional buyers have increased their purchases of Textainer (TGH), by over 12% over the past quarter, pushing its share price up by over 8% thus far in 2012. Thanks to institutional support, TGH has also been one of the best stocks to buy for price gains over the past 6 months, having risen nearly 40% from its summer lows:
TGH’s institutional support is in stark contrast to its container-leasing industry peers, especially SeaCube, (BOX), which has seen a huge decrease in institutional buying in the past 3 months. The stocks in this group are mostly small caps, ranging in size, from $330M Seacube (BOX), up to $2.04B mid-cap, GATX Corp. (GMT), which is also in the railway business.
Judging by TGH’s industry-low Institutional Ownership, it may have quite a bit of room to gain further support:
Company Profile: Textainer has operated since 1979 and is the world’s largest lessor of intermodal containers based on fleet size. TGH has a total of 1.7 million containers, representing 2.5 million TEU, in its owned and managed fleet, and leases containers to more than 400 shipping lines and other lessees. TGH leases standard dry freight, dry freight special containers, and refrigerated containers. They are one of the largest purchasers of new containers annually, and believe that they’re also the largest seller of used containers, selling up to 100,000 containers per year to more than 1,000 customers. (Source: TGH website)
One reason for Textainer’s popularity with the institutional trade is its hefty 98.6% fleet utilization rate, which increased from 98% in the 3rd quarter of 2011. TGH also increased its net income/share for the first 9 months of 2011 by 40%, and raised its revenue by over 43%. Container rates have been at historic highs, and, while the company thinks that they may have peaked, they feel that these rates will still remain at a high level for the immediate future. Container demand has been very strong, especially for refrigerated containers, which is a result of the expanding global food distribution business.
Dividends: TGH has had a 75% dividend growth rate since 2007, and also raised its dividend every quarter in 2011, going from $.29, to $.35. TGH is currently listed in the Industrials section of our High Dividend Stocks By Sectors Tables.
Note: TGH’s next ex-dividend date may be later than Feb. 17th, due to the fact that they normally announce their quarterly dividend info at each quarter’s earnings call, and their next earnings call will be on Feb. 14, 2012:
Covered Calls: Although TGH doesn’t have the high options yields that we’ve written about in many other articles, you could still double your dividends on TGH, via selling covered call options. The call option and put option trades listed in the tables below both expire in August 2012. Selling the Aug. $35 covered call would also leave room for big potential price gains, if your shares are assigned/sold.
This is a breakdown of the income from this 6-month covered call trade:
1. Dividend income: $1.05
2. Call option income: $1.10
Total Static Income: $2.15 This is your income if TGH doesn’t rise past the $35.00 strike price, giving you a Static Yield of 6.82% for approx. 6 months, or 13.17% annualized.
3. Potential Price gains: $3.47 This is the difference between the $35.00 strike price and the $31.53 stock price.
4. Total Potential Income: $5.62 This gives you a nominal yield of 17.82% during an approx. 6-month term, or 34.42% annualized.
(You can see many more details for these and over 30 other trades in our Covered Calls Table.)
Cash Secured Puts: Selling cash secured put options can be a lucrative way to “sneak up on a stock”, in that you get paid now to wait. Although put sellers don’t collect any dividends, put options often pay 2 or more times what a stock’s dividends may pay during a short term.
Example: In the put option trade below, let’s say that you sell one Aug. 2012 $30.00 put for TGH. You’d get paid $2.05/share, or $205.00 within 3 days of the trade, or often even the same day. (1 option contract corresponds to 100 shares of the underlying stock, be it puts or calls.)
When you sell this put option, your broker will reserve $3000.00 in your account, until expiration, to insure that you have enough funds to buy 100 shares of TGH at $30.00. By selling the put option, you’re obligating yourself to potentially have to buy 100 shares of TGH at $30.00 at or near expiration. In general, most option contracts aren’t assigned until around expiration time, since most option buyers find it more profitable to just buy and sell the options rather than the underlying stock. However, time works against the option buyer, and works in your favor as an option seller, since it steadily erodes the value of an option, the closer it gets to expiration.
Potential Outcomes:
Assignment: If TGH goes below $30.00 at or near expiration, you’ll likely be assigned/sold 100 shares of TGH at $30.00, BUT, your net cost is only $27.95, the $30 strike price, less the Put premium of $2.05. Therefore, if TGH is anywhere above $27.95, you still can sell it at a profit, or hold onto it.
Static: If TGH doesn’t fall below $30.00 at or near expiration, you won’t get assigned any TGH shares, and your broker releases your $3,000.00 cash reserve.
(Note: You can find more details on these and over 30 other Cash Secured Puts trades in our Cash Secured Puts Table.)
Valuations: The industry avgs. below for Most Recent Fiscal Year Growth are skewed higher by the 2 smaller firms, BOX and CAP, both of whom had wild, triple-digit EPS growth gains. However, their projected growth for their next fiscal year is much more calm, at 9% to 10%, which may be why the institutional buyers aren’t buying these stocks as much as they had in the past.
Financials: TGH has better management and financial metrics than its peer industry avgs. Two other negative factor for BOX is that it has Debt/Equity of over 5, and Interest Coverage of only 1.8, both worse than industry avgs.
Disclosure: Author is short TGH put options.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
Whether its theme parks, movies, or TV – we all love to be entertained, and modern society rewards greatly those who entertain us. This week we’ve found 3 dividend stocks which profit handsomely from the endless demand for entertainment. These may be some of the best stocks to buy in 2012 for undervalued growth and income within the Entertainment Industry:
Valuations: Compiling meaningful Industry Avgs. is complicated for these companies – although they all operate within the Cable TV industry, Disney and Viacom also are active in the film industry.
Viacom and Time Warner Cable both look very undervalued on a Next Fiscal Year PEG basis, (P/E dividend by EPS Growth), while Disney is close to the 1.00 undervalued PEG threshold. TWC also looks undervalued on a cash basis – its Price/Free Cash/Share is only 3.15 vs. the 10.05 industry avg.
High Options Yields: These firms have modest to avg. dividend yields, but by using options, you can achieve much higher yields, as seen below.
Covered Calls: Disney’s next annual ex-dividend date isn’t until December, but you can create a much higher “virtual” dividend by selling covered call options, plus, you won’t have to wait until December to get paid – option sales are credited to your account within 3 days of trading, often the same day. However, unlike qualified dividends, which receive a 15% tax treatment, options are taxed as short term capital gains.
The TWC and VIAB call options now yield over 4 to 6 times the amount of their dividends over the 5-6 month period for these trades. (The call and put options listed for Disney and Time Warner expire in July, and those listed for Viacom expire in June.)
You can see additional info on over 30 high yield Covered Calls trades that we’ve discussed in recent articles in our Covered Calls Table.
Cash Secured Puts: What can you do if you’d like to own a stock, but you feel that the stock’s price is too high? You can sell cash secured puts at or below the stock’s current price, get paid your put premium $ now, and have a lower break-even – essentially, you’ll get paid to wait.
If you want to be more conservative, you could sell put options at strike prices even further below a stock’s current price and get an even lower break-even. The catch is that the further “out of the money” you sell, the less put premium $ you’ll receive. The key with selling cash secured puts is to only sell puts on a stock that you’d like to own, so that, even if the stock gets assigned/put to you, you end up owning it at a price you’re comfortable with.
Some options skeptics argue that, if you just wait for a market pullback, you can end up owning the stock cheaper anyway. This may or may not happen, but meanwhile you wouldn’t receive any income by just waiting.
TWC’s puts have a break-even closest to its 52-week low. Similar to the call options, these put options pay 4 to 7 times the dividend payouts during this term:
(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Financials: TWC’s Debt/Equity ratio of 3.5 is higher than the industry avg. of 2.16, but its 1.44 Current ratio is better than its industry peers’ 1.06. Viacom has the best ratios of this group:
Performance: Although DIS and TWC are just about flat for the past 12 months, they’ve gathered momentum in the past month. VIAB h,as been the most loved of the group, having made impressive gains during the past year, quarter, and month, and continues to have its fans thus far in 2012:
Disclosure: Author owns no shares at time of publication, but has always been a fan of Jiminy Cricket.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
Searching for undervalued dividend paying stocks with strong growth? The Tech sector offers some of the best stocks to buy in 2012 for growth and dependable income. The cash-rich Tech sector gained just 1.03% in 2011, in spite of sector earnings growing by over 18%. However, Standard & Poors is projecting the Tech sector to achieve the largest 2012 EPS increase, and Tech’s P/E is also currently below its 4-year average:
(Data Source: Standard & Poors)
3 Large Cap Tech Dividend Paying Stocks - Although Tech isn’t normally known for high dividend stocks, there are now dependable dividend stocks in this sector, including these iconic firms, all of whom sport low dividend payout ratios. Better yet, their dividend growth rate is on the rise – all 3 companies had big dividend increases in 2011- MSFT: up 25%; INTC: up 16%; IBM: up 15%.
Covered Calls: Want to double or triple your dividends? Selling covered call options is a strategy that allows you to vastly improve upon the dividend yields of a stock. These 3 trades have call options that pay from 3 to 11 times what the dividends pay during their approx. 3-month terms. (All options mentioned in this article expire in April 2012.) Another bonus is that you receive your option premium $ within 3 days of selling a put or call option. In fact, many brokers, such as Schwab, credit your account the same day. The covered call strategy also helps you to hedge gains in a stock that you own, as we’ve detailed in previous articles. This strategy is also used for locking in income and/or lowering risk when buying new stocks.
You can find additional details on over 30 high yield Covered Calls trades we’ve discussed in our recent articles in our Covered Calls Table.
Cash Secured Puts: Selling cash secured puts below or close to a stock’s current price is an alternative strategy to use, if you want to buy shares below the current market price, and have a lower break-even cost. Your break-even is the difference between the put premium and the put strike price. In the table below, the break-even for MSFT is $23.65, which equals the $27.00 Put Strike Price, minus the $1.10 Put Bid Premium. As with the call options, these April put options pay many times over what the quarterly dividends pay.
(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Valuations: MSFT and INTC both currently have P/E’s close to their 5-year low P/E’s.
INTC, however, recently warned that their 4th quarter revenue and earnings will be negatively impacted by the floods in Thailand: “The company now expects fourth-quarter revenue to be $13.7 billion, plus or minus $300 million, lower than the previous expectation of $14.7 billion, plus or minus $500 million. Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012.” (Source: Intel website)
Will Intel regain these lost sales in the second half of 2012? Even with the supply issues, he current estimate of under 1% 2012 growth for Intel seems very low, especially since Intel has traditionally been very conservative in its earnings projections, and had 4 consecutive quarterly upside earnings surprises in 2011.
IBM’s new CEO, Ginni Romett, has already made a new acquisition, buying cloud software testing firm Green Hat. IBM also had 4 2011 consecutive earnings surprises, (low single-digits), while Microsoft had 3 much larger ones, (approx. 9% to 19%).
Financials: Although IBM carries the highest debt load, but they earn enough $ to cover their interest payments by 53 times – quite a cash machine, to say the least.
Performance: IBM and Intel both outperformed the Tech sector in 2011, but MSFT got no respect. However, MSFT is up the most so far in the first few days of 2012:
Disclosure: Author is long INTC and IBM shares, and short INTC calls at the time of publication.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved
By Robert Hauver
In last week’s article, we showed that the Industrial sector has the 2nd best record for beating & meeting 3rd quarter earnings estimates. It also has the 2nd highest EPS growth estimate for the next fiscal year, trailing only Tech. This week we searched for additional attractive dividend paying stocks in the Industrials sector, focusing on finding the best stocks to buy for growth, valuation, financial metrics, and high options yields:
Covered Calls: Although these aren’t high dividend stocks, you can easily earn a much higher overall yield from them, by combining their dividends with high call options yields.
These call options pay up to 11 times more than the dividends during these 4-5 month trades.
The Static Yield refers to the combination of the call option and dividend yields, which represents your total income if the underlying stock isn’t If the stock doesn’t rise above the call strike price at or near expiration. The Total Potential Yield includes the potential price gain that you’ll realize if the stock’s price does rise above the call strike price. For example, for ETN, you’d receive an additional $1.07/share, if the stock rises above $45.oo and gets assigned/sold away from you at expiration.
(You can see more details on these and more than 30 other high yield covered call trades in our Covered Calls Table.)
Cash Secured Puts: This is a more conservative approach to take: Sell cash secured puts at a strike price below the stock’s current price, so you achieve an even lower break-even price.
As an example, selling ITW $45.00 March put options gives you a $42.20 break-even, which is approx. only 8% above ITW’s 52-week low, as opposed to being over 18% above its low, where it was at the time of publication.
Of course, there’s no guarantee that the stock won’t ge lower than your break-even price, but using this put strategy will decrease your risk more than if you’d just bought the stock outright. As with the call options, there’s a big payoff disparity between the quarterly dividends and the options in these put trades, with put option premiums that are as high as 12 times the dividends.
(You can find more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)
EPS: The EPS growth for the most recent fiscal year, quarter, and next fiscal year looks solid for all of these stocks:
Valuations: All of these firms have low Price/Sales and Next Year PEG’s that are right around the undervalued threshold of 1.00.:
Financials: These firms’ all have low debt loads, and their mgt. ratios are generally in line or better than their peers.
Technical Data: As their Relative Strength is in the low 50′s, all 3 stocks are in the neutral, “not oversold/not overbought” region.:
Company Profiles:
Eaton (ETN): Founded in 1911, Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuels, hydraulics and pneumatic systems for commercial and military use; plus truck and auto drive-train and power-train systems for performance, fuel economy and safety. Eaton has approx. 73,000 employees and sells products in over 150 countries.
Illinois Tool Works (ITW): Another multibillion dollar firm with nearly 100 years of history, ITW designs and manufactures fasteners and components, equipment and consumable systems and a large array of specialty products and equipment for its worldwide customer base. ITW owns more than 840 small businesses, which are decentralized, and operate in various markets, such as: industrial packaging, power systems/electronics, food equipment, and construction products, among many others.
Tyco Int’l (TYC): Tyco is a leading provider of security products and services, fire protection and detection products and services, and industrial valves and controls. Tyco had 2011 revenue of more than $17 billion and has more than 100,000 employees worldwide. Tyco owns the dominant US residential security firm, ADT.
Disclosure: Author has no positions in ETN, ITW, or TYC at the time of publication.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved
By Robert Hauver
Although Industrials are down approx. -4% year-to-date, this sector may hold some of the best stocks to buy moving forward. Standard & Poor’s ranks Industrials as #2 in projected EPS growth for 2012, right behind Tech, which gives it the 3rd lowest PEG ratio for 2012:
(Data source: Standard & Poors)
Thus far, 86% of S&P 500 Industrials have beaten or met their Q3 2011 Earnings Estimates, 2nd only to Tech.
(Data source: Standard & Poors)
Although this sector looks attractive, finding undervalued high dividend stocks here with strong metrics is still a challenge. A different approach would be to look for a lower-yelding dividend paying stocks, that have stronger growth and financials, and then utilize options to ramp up the dividend yields on these dividend stocks. Both Caterpillar and Cummins have less-than-avg. dividend yields, but you can greatly improve upon their dividends by selling options.
Covered Calls: Take a look at the big difference between these high option yields and the dividend yields during these 6-7 month trades.
CAT’s call options pay over 9 times their dividends, while CMI’s pay over 15 times.
(The call and put options listed in this article for CAT expire in May, and those for CMI expire in June.)
(You can find more details on this and more than 30 other high yield covered call trades in our Covered Calls Table.)
Cash Secured Puts: Another proven tactic is selling cash secured puts below the stock’s current share price, in order to achieve an even lower break-even price. The put trade listed here for CMI has a break-even only 3% above CMI’s 52-week low. These put options pay 9 to 16 times more than the dividends in these trades.
Your broker will secure a cash reserve in your account, equal to however many put contracts you sell, times the strike price of the put you sell. This amount is released once the puts expire or the trade is closed. Hence the term, cash secured puts. You’ll get paid for any puts and calls that you sell within 3 days of the trade, often even the same day. Note: put sellers don’t receive dividends, but call sellers do.
The best time to sell cash secured puts is normally when the stock is at the lower part of its range, which will give you an even lower break-even. Both CAT and CMI are higher-beta stocks, which fluctuate widely with the market, so check out their put prices during the next pullback. If you need to be even more conservative, you could also sell cash secured puts at a strike price further below the current share price. This will give you a lower premium, but a lower break-even also.
(You can see more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)
EPS/Sales Growth: Both CAT and CMI had strong EPS growth in their most recent fiscal years, and also strong sales and EPS growth in their most recent quarter:
Valuations: CAT’s PEG for its next fiscal year is very low, while CMI’s is consistent with the sector’s .87 PEG. CAT’s Price/Book and Price/Sales are consistent with its industry, while CMI’s Price/Book is a bit higher than its industry avg. of 2.58, but its Price/Sales is lower than the avg. of 1.30
Financials: Although CAT carries a heavier debt load, its interest coverage ratio is 5.9x.
Disclosure: Author is short puts on CAT and CMI.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved