Raised Guidance tag:www.raisedguidance.com,2007-11-08://1 2008-06-27T17:09:25Z An investing blog! Movable Type Publishing Platform 4.01 Demystifying the Options link on Yahoo! Finance tag:www.raisedguidance.com,2008://1.17 2008-06-27T16:54:50Z 2008-06-27T17:09:25Z Paul If you use Yahoo! Finance to get up-to-date investing information, perhaps you've clicked on that "Options" link when viewing a stock quote.

On that page you might see some familiar terms, but some might be mysterious.  Let's see what I can do to demystify that content.

I learn best with help from examples, so I'll walk you through one.  I randomly chose FCX - Freeport-McMoRan Copper & Gold.  See below for a screen snapshot from June 25, 2008 with numbered labels; sorry if they're a little confusing!

Labeled Yahoo! FCX options from 6.25.2008


1. Company name: Freeport-McMoRan Copper & Gold Inc.
2. Stock ticker: FCX
3. Recent trade information: time of trade, price per share, dollar change for the day, percent change
4. Expiration of options: Options "expire" or are only good until a certain date, since options provide the right (but not the obligation) to buy/sell at a certain price by a certain date.  That "certain date" is called the "expiration."  Only the month and year pairs appear in these links because, magically, options always expire on the third Friday of any given month.  If you want to see data on options that expire in Nov 08, for example, you would click the Nov 08 link.
5. Option type: There are two standard types of options: "call" and "put."  One call option contract provides the contract holder the right, but not the obligation, to purchase 100 shares of the corresponding stock at a certain price by the expiration date.  The top section shows data on call options; more on put options in (8).
6. Expiration date: This header area shows the exact date when the displayed options expire.
7. Advertisements: Horizontally across the top you'll find (typically broker) ads, and you'll find more ads on the right-hand side.
8. Option type: One put option contract provides the contract holder the right, but not the obligation, to sell 100 shares of the corresponding stock at a certain price by the expiration date.  This bottom section shows data on put options.
9. Strike: The strike price is the dollar amount at which the contract holder can buy or sell the underlying shares.
10. Symbol: Since options contracts can apply to different stocks (FCX in this case), have different types (call/put), strike prices (85, 90, ...) and expirations (Jul 08, Aug 08, ...), it's helpful to identify all that in one little symbol.  When you buy or sell an option, you'll need this symbol to identify what you're buying or selling.  For help decoding these symbols, check out this Investopedia page.
11. Last: Just like stocks, options contracts can have some monetary value. The last represents the price* at which that particular options contract changed hands.  *I say price, but remember that options contracts are good for 100 shares.  I like to think of the last as a per share price.  That being the case, to figure out the dollar value of an options contract you should multiply the last by 100 (or simply move the decimal point two places over).  So, for example, symbol FCXGQ.X last changed hands for $3,225 (32.25 * 100).
12. Chg: Options contract prices can move up and down, so the Change represents how much the last has changed since the trading day started.
13. Bid: The bid represents the highest price someone is willing to pay for at least one options contract at that moment.
14. Ask: The ask represents the lowest price at which someone is willing to sell at least one options contract at that moment.
15. Vol[ume]: The volume represents how many of that options contract have changed hands that trading day.
16. Open Int[erest]: The open interest represents how many outstanding contracts there are of a particular option.  Let me clarify what I mean by "outstanding contracts."  Go to the PUT OPTIONS section and look at the 85 Strike.  Now look at the Open Int column: 612.  That 612 means there are 612 put option contracts out there with strike price 85 and expiration in Jul 08.  If I were to write 10 new put contracts at the Bid price of 0.20, at that moment the Open Int number would rise to 622 (612 + 10 = 622).  If I were to buy 10 of those put options contracts and exercise them, the number would fall to 602 (612 - 10 = 602).  In a later entry I'll describe what it means to write options contracts.

There is plenty more to learn about even just Yahoo!'s options pages, but I hope that breakdown is helpful!  Options can be very confusing, complicated, and risky, so PLEASE do your own careful research before trading options.

Disclosure: I have no position, long or short, in FCX.

]]> Special Delivery - What to do with FedEx shares? tag:www.raisedguidance.com,2008://1.16 2008-06-20T16:41:14Z 2008-06-20T17:20:11Z Paul I have a hard time selling shares shares at a loss.  Being (an especially self-competitive) human, I hate accepting defeat.  I was mad at myself for not selling higher earlier, back when my gut told me to take some off the table.

Ever been in that spot?

I recently sold off half my position in FedEx (FDX).  I've been a shareholder for several years now, and I watched the shares make a healthy climb from sub-$100 to $120.  Then they fell back down, and then they fell even farther down.  I followed my own rules and bought some on the way down as I periodically re-evaluated the business, so where did I go wrong?

Fed Ex 2-yr chart


Initially I had bought into FDX as a relatively stable beneficiary of increased Internet commerce.  When people buy "stuff" over the web, they expect to receive it.  More and more people are buying more "stuff" online, so more and more "stuff" gets shipped.  I liked FDX's valuation at the time, and figured I could watch the shares rise steadily without worrying about the sometimes emotionally challenging and sharp fluctuations of the e-retailers (like Amazon).

Was my thesis wrong?  I'm not sure.  I don't think it was wrong, but I didn't foresee $130+ oil.  My macro-picture was off.  Like many folks, I have a diversified portfolio.  While I increased my weighting of energy holdings within the last year, I also bought more FDX as it descended.  Those energy holdings have seen some nice gains (and I've taken some profits in that sector), but FDX?

FDX can operate like a perfectly-oiled machine, but they can't do anything to make one of their significant input costs -- oil -- go down.  Honestly, I hope that the oil bubble will pop soon.  I don't know that it will, and so I decided to trade some FDX for cash.  Until oil gets cheaper, I don't see any catalysts to drive FDX's shares higher.

Am I accepting defeat?  I don't know, for sure, that I'm being defeated.  I hate selling for a loss -- even a small one.  I shouldn't feel too bad, because a lot of people didn't predict that oil prices would rise this high as quickly as they have.

Whatever you want to call it, I've reduced my exposure to FDX.  If the bubble pops, maybe we'll see a bounce and I can catch some upside.  In the meantime, I'm happy to have some cash on the sidelines.

Disclosure: I am long on FDX at the time of writing, but I recently cut my position in half.  I do not own any position, long or short, in AMZN.

]]> Why is Bear Stearns BSC trading higher? tag:www.raisedguidance.com,2008://1.15 2008-03-18T23:53:59Z 2008-03-19T00:17:11Z Paul
I've read several explanations today on why we're seeing that behavior.  Could be that:

1.)  Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.)  Short sellers are covering their shorts, which last week supposedly made up 54% of the float.

Dave was interested to find out more about reason (2), so here's what I told him.

First check out: http://finance.yahoo.com/q/ks?s=jpm

Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float.   The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.

As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC

Contrast that 18.7% to JPM's 1.3% short % of float.  Huge difference!  Lots of people were betting that BSC stock was going to fall, so they sold shares short.  The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!

Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small  period of time.  Short squeezes can cause crazy stock pops because they create an unexpected buying demand.  During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).

Not sure exactly what the scoop is, but it sure is interesting to follow!  (yep, I'm a geek like that)

[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.

I'll catch up with more PE discussions later!

Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
]]> Part 1: Price to Earnings ratio discussion tag:www.raisedguidance.com,2008://1.14 2008-03-08T17:23:47Z 2008-03-08T17:27:10Z Paul
The PE ratio magically incorporates the following three things in one number:

  1. how much profit the company makes in a year
  2. the stock price
  3. the number of outstanding shares

These three pieces of information can be important to consider because investors want to make money (??):

  • Profit is important: the more profit, the better for the shareholder.
  • Stock price is important: the lower I can buy the stock and the higher I can sell it, the better.
  • The number of outstanding shares is important: when the company makes a profit, how big of a slice do my shares represent in the profit pie?

Two simple ways to to calculate a PE ratio are:

  1. PE = (Stock price) * (Total # of outstanding shares) / (Annual net income)
  2. PE = (Stock price) / Annual Earnings per share (EPS)

Note that (Stock price) * (Total # of outstanding shares) is also called a company's Market Capitalization or Market Cap.


You end up with the same number in both (1) and (2), which you could prove by doing some simple algebra. But what does it all mean?

On Wall Street, people often look at the PE ratio to determine whether a stock is "cheap" or "expensive." Surprisingly, a $5 stock is not necessarily cheap and a $500 stock is not necessarily expensive. In general, lower PE ratios point to cheaper stocks and higher PE ratios point to more expensive stocks. Note that I prefer to use the terms cheaper and more expensive; reason being, I like to keep things relative where possible/appropriate.

There is no one perfect PE threshold that indicates stock cheapness. It's not so simple that we can say "Hey, this stock has a PE of 5 (or 10 or 15)... it must be a steal!!"

When evaluating if a stock is cheap, sometimes people just look at the PE number itself; sometimes they compare PEs among stocks within an industry or sector; sometimes people compare a stock's PE to the average PE of all stocks in the S&P 500 index.  Also, some people say that high PE stocks are too risky for them; others say that low PE stocks do not offer enough upside potential to be worth their time and money.

People use the PE ratio in all sorts of ways, and the list goes on and on, but the bottom line is that it relates the company's stock price, # of outstanding shares, and annual earnings all in one "simple" number.

I hope I've got you hooked, because there's more to come in the next installment later this week! ]]> What is "raised guidance"? tag:www.raisedguidance.com,2008://1.12 2008-02-15T01:05:32Z 2008-02-15T01:43:26Z Paul raised guidance anyway?

Let's start with guidance.  Google tells me that guidance means "something that provides direction or advice as to a decision or course of action."

When people buy and sell stocks, they're doing it to make money.  If you predict the direction of a stock's trading price and your prediction turns out to be right, chances are you can make some money.  Wall Street analysts make a living predicting what's going to happen to a stock's trading price, and they make their predictions based on a number of factors.  What a company's management -- for example their CEO, CFO, etc. -- indicates about future business is one factor they may consider when making a prediction or issuing a rating (buy, sell, hold, etc.).

If you ever have listened to a company's quarterly conference call (if you haven't then I suggest you find one and check it out -- very interesting stuff!) you may have heard the company's CEO or CFO provide earnings guidance.

For example, on a year-end analyst conference call the CEO may indicate that management expects the company to earn between $1.00 and $1.05 / share in the coming fiscal year.  Analysts then may take that earnings expectation or guidance range and incorporate it into their stock price prediction model/algorithms.  Chances are that the models crunch the numbers differently depending on how predictable management's estimates have been in the past.

Predictability and credibility are important concepts on Wall Street!

Long story short: although the analysts consider many factors when predicting a stock price, they now have made a prediction keeping in mind the company's guidance.

Suppose Q2 rolls around and Q1 was a better-than-expected, phenomenal quarter (maybe the company unexpectedly started selling Hannah Montana Krispy O's cereal?).  Keeping in mind that new information, the company's CEO and management team have re-evaluated the earnings guidance figure.  During the Q1 conference call, the CEO provides raised guidance of $1.15 to $1.20 / share (EPS) for the coming year.  With this updated, raised guidance (higher compared to the original EPS of $1.00 to $1.05) the analysts may go back to their drawing boards to come up with a new stock price prediction.

Commonly when a company raises guidance, the stock price goes up because the company is doing better than people had expected.  Raised guidance usually is a good thing for people who are "long" on a stock!

There you have it.  I hope the stocks in your portfolio provide some raised guidance soon!


]]> Stocks dropping at the start of 2008: how are you responding? tag:www.raisedguidance.com,2008://1.11 2008-01-11T16:17:27Z 2008-01-11T16:30:04Z Paul
I admit that as the market moves up or down, my brain goes through all sorts of scenarios that lead to riches.  

...if only I’d bought some January 7.50 Call options for Countrywide Financial (CFC) before news of Bank of America’s (BAC) CFC purchase was announced

...if only I’d sold short shares of Big Five Sporting Goods (BGFV) as it dropped from $25/share last summer down to $20/share and even farther down to the recent $11/share.

These are huge moves, so why didn’t/couldn’t I see them coming?

As I mentioned in a previous entry, the truth I’ve embraced is that predicting movement of any one stock is incredibly hard.  Predicting movement of a group of stocks is also incredibly hard.  I’ve heard wise investors preach that trying to “time the market” is a loser’s game, and I’m sure that holds true the far majority of the time.  Remember that even analysts, whose job is to rate stocks a buy, sell, hold, etc., are wrong a lot of the time.  Their full time jobs involve making educated guesses about where a stock price will go.

Consider the analyst opinions of Sirius Satellite Radio (SIRI).  Currently Yahoo! Finance’s Analyst Opinion page for SIRI shows:

  • 6 analysts rate SIRI Strong Buy
  • 6 analysts rate SIRI Buy
  • 7 analysts rate SIRI Hold
  • 1 analyst rates SIRI Underperform

So what, as the observer, am I supposed to do with this information?  I don’t own shares of SIRI, but should I buy a lot, a little, sell short, or do nothing in order to make money with SIRI?  Okay, so doing nothing to make money sounds a little nonsensical.  But to do nothing instead of buy a stock before it drops could be looked at as not losing money.

*head explodes*

I want to remind you that I’m not knocking analysts or what they do for investors, but my point again is that predicting stock behavior is damn hard.

Going back to my original question (Have you made any trades so far this year?), my personal answer is yes.  I haven’t sold anything; instead, I’ve bought more shares of two companies whose stock prices are lower than my cost bases.  I consider the companies to be solid.  In my mind they were worth buying in the first place, I’ve reevaluated, and I still feel like they’re worth buying.  I’m taking advantage of what I perceive to be sensible buying opportunities.  I bet sometimes even Britney Spears loves a good bargain (okay, maybe she doesn’t care at all, but that’s for sites like The Superficial to satirize).

Sure, these stocks might go lower.  Sure, there could be a recession coming.  Maybe we’re in one already?  Then again, one might not show up at all and the markets could make a strong rebound next week.  To make money as a market rebounds, it sure helps to be in the market.

I’m not suggesting that you immediately dump all your cash into stocks.  Many even consider it prudent to maintain extra cash right now as protection against continued declines.  If you’re a traditional investor committed to making money through buying stocks, though, then you’re probably interested in buying low and selling high (and/or by collecting dividends).  Given that’s the case, at some point you’re going to have to put some cash to work.  When and how that happens is up to you.

Long story short, many stocks have been dropping in 2008 and they might drop further.  Do your homework, buy/sell in increments, and most importantly make some moola.

Best of luck to you!

Full disclosure:  At the time of writing I have a long position in BAC.  I do not have any positions, long or short, in any of the other stocks mentioned in this entry.

]]> Buying and selling stocks in increments is rational tag:www.raisedguidance.com,2007://1.10 2008-01-01T01:11:25Z 2008-01-01T05:41:37Z Paul It turns out that Apple, Inc.'s stock (ticker: AAPL) was a stellar performer in 2007.  It also performed really well in 2006:




Perhaps surprisingly, the purpose of this entry isn't to pump AAPL.  Instead I'm going to explain how buying and selling stocks in increments is one of the most powerful money-making (and money-preserving) tools you can utilize as a stock investor.


Increments?  I want BIG gains!

What do I mean by "buying and selling stocks in increments?"  Have a seat on my hypothetical stock sofa.  Ask yourself, "What is my stock investing dream?"  If you're like me, it involves something along the lines of: buy 1,000,000 shares low and sell 1,000,000 shares high.  I'm a king!  Hooray... hooray... feed me grapes, dammit ... HOORAY! er... ah hem.

Let me clarify; that used to be something like my stock dream. 

Reality kicked in and I learned the hard way that I'm not very good at predicting what will happen to a stock price tomorrow or next week or even a month from now.  Ultimately I figured out that when I do thorough homework on a company/stock, my odds of making profit over the long term are a lot better.  Over the short term, forget about it.

Given that tomorrow my favorite stock could trade at a discount compared to how it's trading today, why not snap up that bargain tomorrow?  Then again, it could sky-rocket on a buy-out rumor, too.  Face it: without [probably illegal] insider trading information, you never really know what's going to happen to a stock price in the future. 

Accept it, learn it, live it.  Come up with trading strategies that embrace this philosophy.  Don't worry; I'm not going Plato on you, but check out the following scenarios that illustrate the advantages of buying in increments.  Small pieces... not big chunks.

Let's assume you have $300k to "play" with (ha!).



Example 1: The quickly skyrocketing stock

Suppose you buy 1,000 shares of a stock that's trading for $85 / share.  Within a few weeks the stock is trading around $98 / share.  Sweet!

You sell all and catch a net gain of $13k or 15%.  Yeah, you could have bought 3,500 shares and made a bunch more money... but you just made $13k in a few weeks!  If you're sad about making $13k in a few weeks, you may have other problems.

Example 2: The tanking stock

Suppose you buy 4,000 shares of a stock that's trading for $75 / share.  You're sure that conditions haven't changed, but the stock drops immediately after your purchase.  The next month it hits $60 / share.  The next month it hits $50 / share.

Ouch.  Now you're down $100k or 33%.  If only you had the power to see the future and had waited those two months... or realistically, what if you had purchased 1,000 shares at $75 / share.  You'd still be down 33%, but that 33% would translate into a loss of a more manageable $25k instead $100k.  I don't know about you, but if I absolutely had to choose between losing $25k or $100k then first I'd click my heels together three times and then I'd pick the $25k loss.

Example 3: The tanking stock that recovers

Suppose you buy 1,000 shares of a stock trading at $75 / share (look familiar)?  The next month it hits $60 / share.  You've done your homework, and you're certain the stock is worth owning.

You buy another 1,250 shares at $60 / share; same total cost of $75k, but this time you get more shares.  Good deal!  You've spent $150k so far and have another $150k in cash.

A month passes and the "impossible" happens: your stock sinks to $50 / share.  You're nervous, angry, and you've begun to consume your daily share of Top-Ramen noodles... but you're confident that your research and evaluation of economic conditions are spot on.  This time $75k buys you 1,500 shares.  You somehow remain calm.  You're left with $75k in cash and you've spent $225k purchasing stock.

Incredibly positive news comes out and within a month your stock shoots back up toward $75/share.  Nice!  If you had invested all your $300k @ $75 / share initially, you'd be breaking even and back to $300k.

Since instead you invested wisely and broke your purchase into three increments, your 3,750 shares are now worth $281k for a 25% gain.  Add that to your $75k cash and your portfolio has grown from $300k to $356k ($281k stock + $75k cash).  Again, you could have broken even but instead you're up $50k+.  Winner!

Conclusion

As you can see, buying in increments has its definite advantages while the disadvantages are few.  Yeah, yeah ... in Example 1 you could have made more money, but let's not be greedy.  Profit is profit is profit.

In a future entry I'll go through some examples to illustrate how selling in increments can also be very advantageous.  Sure, there are some situations where experts advise dumping all (for example when there's an abrupt executive management change), but even in those cases you never know beforehand if it's the most profitable thing to do.

In general if you sell in increments you can lock in gains while also giving your stock the chance to climb higher (while also shielding yourself from potentially more severe losses).  Craziness, a free lunch, the best of both worlds, and so on.  Woohoo!

If you can tell the future, disregard everything I've written in this entry today.  If you're like me and can't tell the future (go Packers!), consider buying stock in increments instead of in one big chunk  (this process is also known as dollar cost averaging). You just might thank yourself later.

Oh, by the way... all the above three examples track AAPL stock movement over some period in the last two years.  Check it out:



Full disclosure: I do not have any position, long or short, in AAPL at the time of writing.

]]> Employee stock option plans: a quick lesson tag:www.raisedguidance.com,2007://1.9 2007-12-09T00:07:28Z 2007-12-30T17:20:53Z Paul What are options, anyway?  A stock option represents the right, but not the obligation, to buy or sell stock at a specified price by a certain date.  In other words, with stock options you can choose to buy or sell stock at a given strike price, but you don't have to.

 

Individual companies grant stock options

I first became aware of stock options during the Internet Boom of the late 1990s / early 2000s.  I would read in the news that Wealthy McCEO and many other company executives were getting crazy rich thanks to stock options.  Companies can grant stock options to employees, which often encourages employees to stick with the company for an extended period of time.

 

How employee stock option plans benefit the company and the employee

How would stock options entice an employee to stay at a company?  Here’s an example.  Suppose Company XYZ is a public company and XYZ stock trades for $10/share.  Upon hiring a top-level manager (let's call the manager by Smarty Pants), XYZ might grant Smarty Pants the option to buy 10,000 shares of XYZ @ $10/share.

With shares of XYZ trading for $10/share, Smarty Pants probably wouldn't want to do anything with those options.  Why bother, since she could buy shares for the same price on the open market?  Typically companies don't allow the option holder to exercise the option (i.e., perform the purchase prescribed by the option contract) right away, anyways. 

Companies control when the employee stock options become vested (i.e., eligible for exercise).  XYZ might tell Smarty Pants that her options become 50% vested after two years and 100% vested after four years.  This would mean that after being with the company for two years, Smarty Pants could exercise the option to buy 5k of those 10k shares @ $10/share.  After four years she could exercise the option to buy the remaining 5k shares, still @ $10/share.

Suppose a year passes and XYZ stock becomes an increasingly attractive investment.  Shares of XYZ now trade at $20/share.  Ho, ho, ho - Santa Claus just came to town.  Just for sticking with the company, Smarty Pants could -- in a single transaction -- realize a gain of $10/share.  But wait… her options aren’t vested yet.  They become 50% vested two years (not one year) after the initial grant.  Bummer.  Now she’ll have to stick around for another year to realize that potentially saucy gain.

Suppose yet another year passes, and XYZ now trades for $25/share.  Hot dog!  Smarty Pants can buy 5k shares @ $10/share only to turn around and sell them on the open market for $25/share.  Putting this transaction into the numbers:

Purchase price = $10/share * 5,000 shares = $50,000

Sale price = $25/share * 5,000 shares = $125,000

Net gain = Sale price - purchase price = $125,000 - $50,000 = $75,000

Smarty Pants was rewarded for sticking with the company as the company's stock performed well.  During that time period, Smarty Pants also had incentive to help the company perform well.  If she were to help the company to perform better, in theory XYZ stock might trade at a higher price per share and she could end up with more dough for herself.

 

Employees won’t always make a profit on stock options

Of course, if investors had viewed XYZ stock as a decreasingly attractive investment then the share price might have dropped over that two-year initial vesting period.  If the stock performed so poorly then Smarty Pants’ options might have expired before she got a chance to exercise them in a profitable transaction.

What do I mean by expire?  Just as companies control stock options vesting periods, companies also control when that contract expires.  Like I mentioned above, stock options represent the right -- but not the obligation -- to purchase shares by a certain date.  If XYZ stock traded at no higher than $8/share between the time the options were vested and when they expired, then there would be no reason for Smarty Pants to exercise the options.  If she were to go through with it, she’d lose $2/share on the transaction (since her option was to purchase shares at $10/share, whereas the market was paying up to $8/share).  That sounds like a bogus deal because it is a bogus deal.

 

Impact of employee stock option plans on share price

Although employee stock option plans can be good for the company and good for the employee, investors should be aware of a company’s stock option granting practices.  These practices can add downward pressure to a company’s share price.  Thinking in terms of supply and demand, when an employee buys shares through a stock option plan then more shares all of a sudden become available for trading (and therefore supply increases).  More supply means more pieces to the same size pie, so each piece has to be a little smaller.  Following an employee stock option exercise, each outstanding share is worth some fraction less than it was before. 

Companies can offset the dilutive effects of option exercises by buying back shares on the open market.  If a company buys back more shares than are issued into the trading pool, the number of outstanding shares decreases and so each share -- in theory -- becomes worth a little more.  Something to consider!

 

Insider activity

When employees of a public company buy or sell shares of that company, that’s commonly referred to as insider activity.  Insider activity is completely normal, and you can investigate insider transactions yourself.  This information is available online, and one site I visit to obtain information on insider transactions is Yahoo!’s insider activity area like this one.  On that page we can see that on 25 October 2007, a Yahoo! Directory named Terry Semel exercised options to net more than $8 million in a single swoop.  Not too shabby.

Some people take into account insider activity when constructing opinions on a company or a company’s share price.  People buy and sell shares all day, but presumably directors know more about the company than the average investor does.  If a director buys shares on the open market, that’s often interpreted that the director has faith in the company. 

When an insider dumps a lot of shares, some believe that demonstrates lack of faith in the company.  While that may end up being the case sometimes, remember that insiders are individual people.  Insiders have their own financial wellbeing to consider, and sound principles like diversification apply to them, too.  Just because an insider sells shares or exercises options, that doesn’t necessarily imply upcoming problems.  Some insiders participate in stock option exercise plans that force regular, periodic exercising of options and selling of shares at predetermined time intervals.  This allows insiders to sell stock in a way that some consider less predictive.

Insider activity is interesting to look at, but it doesn’t necessarily imply anything.  It can be a useful piece of information when evaluating a stock, but I strongly would advise against using it as the sole indicator of whether to buy or sell shares.

 

Summary

Stock options can be good for the company, good for the employee, and good for the investor (for example, if the company ultimately spends less on hiring since their employees stick around).  Stock options can also be a negative for a stock, so be aware of what's going on and you'll have a more informed and complete view of a company and that company's valuation.

Long story short, I hope you and I get rich off of stock options ...  Cha-ching!

]]> Housing, interest rates, yadda yadda... tag:www.raisedguidance.com,2007://1.8 2007-12-07T07:59:05Z 2007-12-07T08:55:31Z Paul
  • The price of oil escalated to nearly $100/barrel
  • The US dollar reached an all time low vs. the Euro
  • Major financial institutions announced write-down after write-down, due to losses from mortgage-backed securities
  • The media spread stories on the "credit crunch" and the "housing slowdown"

Today the S&P 500 reached a high of just over 1508.  What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec?  The recovery might have to do with the following:

  • Oil is trading for less than $90/barrel, with perhaps more downside since I figure some of the price increase was directly related to perceived risk of an American invasion of Iran (said risk has decreased after the much-discussed National Intelligence Estimate [NIE] was released earlier in the week)
  • The dollar has recovered somewhat vs. the Euro
  • The value of the write-downs may have been priced into the shares of financial institutions during the "correction"
  • The media has been spreading word of a 25-50 basis-point rate cut at the upcoming Fed meeting on 11 December 2007
  • President Bush outlined a plan to reduce the number of potential foreclosures by freezing some interest rates for certain mortgage holders

Let's talk about the interest rate freeze for a moment.  What short-term effects will that produce?

  • Fewer people will lose their homes to foreclosure, but some are still out of luck.  These folks may have to negotiate to refinance at [ideally] lower rates*.
  • More home-owners will feel better about their financial situations.
* The plan's details seem to add pressure to the Fed to continue cutting interest rates.  If interest rates go down, refinancing makes sense.  When interest rates go down, dollars shift from savings and money-market-esque investments over into stocks.  Stocks go up, and the bulls cheer!

Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season.  The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers.  It might be a good time to look into buying some of your favorite retailer...

All in all, to me it seems economic conditions look much better than they did a couple of weeks ago.  Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted.  Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.

I don't know about you, but I'm ready to dig my heels in and make $ome money.  I hope you do the same.  Good luck!
]]> Put me in, Coach? tag:www.raisedguidance.com,2007://1.7 2007-11-30T07:44:44Z 2007-11-30T08:18:19Z Paul I can’t believe how ubiquitous Coach products are.  Living in Southern California, I see so many Coach handbags, purses (how’s a purse any different than a handbag?), shoes, key rings, ... and the list goes on.  Have you ever looked to see how much these products cost?  I heard that key rings were a bargain, so I stumbled on over to the Coach web site.  Lucky for me, I found out that I can purchase a “BLEECKER CHARM KEYFOB” for $98.  Hot damn!

Okay, okay.  I’m not writing about Coach (symbol COH) to mock their pricing.  More important, is COH stock is a good buy right now?  It closed today (Nov. 29, 2007) trading at just under $36/share.

Let’s go through some cursory analysis.  According to Yahoo! Finance, here are some rounded-off COH stats of interest:

Market cap: $13.2 billion
Trailing P/E: 19.6
Forward P/E: 14.6

Revenue: $2.8 billion
Net income: $656 million

Total cash: $1.2 billion
Long-term debt: $3 million

52-week high: $54.00/share
52-week low: $30.52/share

Does anything stand out to you?  My first thoughts are:

  1. COH makes decent profit.
  2. COH’s P/E is reasonable (according to www.standardandpoors.com, the average P/E of S&P 500 stocks was 18.25 for the month ending Oct 31, 2007).
  3. COH has a chunk of cash on hand.
  4. COH’s long-term debt is trivial.
  5. COH’s stock price is near its 52-week low.

Looks good to me.  Let’s put more of the puzzle together.

EPS

For the most recent quarter ended Sept. 29, 2007, basic EPS was $0.42/share, up 24% from $0.34/share during the equivalent period in 2006.

Shares Outstanding

The average # of shares outstanding for the quarter ended Sept. 29, 2007 were 372.2 million, up 1.1% from 368.1 million for the equivalent period in 2006.  More shares = Dilution.  I’m not a fan of dilution, although granted in this case it’s not extreme.  I'd prefer to see the # of outstanding shares decrease, not increase.

When a company makes money and we own shares, we want those shares to represent bigger portions of the pie.  According to the most recent 10-Q filing with the SEC, COH has been using cash to buy back stock.  This is a good thing.  Had COH not bought back stock, the dilution would be worse.

Given that the company bought back stock within the last year, why were there more outstanding shares in the quarter ended Sept. 29, 2007 as compared to the equivalent time period in 2006?  It looks as though COH spent $132 million buying back stock over the year ending Sept. 29, 2007.  COH also grants stock options and share awards to its employees.  It would make sense, then, that the number of shares repurchased is smaller than the number of shares added to the pool through share grants and exercising of options over that time period.

Is COH going to repurchase any more stock and thus curb dilution?  According to the company’s 1Q2008 10-Q, in October 2006 the COH Board of Directors had authorized share repurchases totaling $500 million.  As part of that share repurchase program COH has spent $132 million thus far for approximately 3 million shares at an average price of $43.72/share.  That means $500 - $132 = $368 million remains available to repurchase shares.  Nice.

Given COH’s strong cash position, they won’t need to take out loans to complete the authorized repurchases.  I wouldn’t be surprised if, compared to what they’ve done so far under the current authorization, COH is more aggressively repurchasing shares at these near $30/share levels.

Keep in mind, too, that the COH Board of Directors has authorized six share repurchase programs since 2001.  As COH continues to grow and accumulate cash, I would expect more share repurchase programs to be announced and executed.

What are the insiders doing?

Although I wouldn’t ever base a stock purchase solely on insider trading activity analysis, sometimes insider behavior is worth considering.  According to Yahoo! Finance’s COH insider activity page, insiders sold shares pretty consistently throughout the year.  The most recent insider sale was at nearly $51/share back in September 2007.  Nothing since then.  What might that tell you?  It might be the case that COH insiders believe the stock has significant upside potential.  If they anticipated that COH would drop further, wouldn't they sell now to maximize their profits?  According to the 10-Q, there are options available to be exercised profitably.  Put a slightly different way, why should COH insiders sell now if they figure COH will trade higher in the near future?

Keep in mind that this insider activity analysis is pure speculation on my part, but it makes sense to me to consider it when trying to form a big-picture view of the company and the stock.

Coach falls into the retail industry.  What will happen if there’s a recession?

Lately, retail certainly hasn’t been the best-performing industry.  When recession fears kick in, people get out of retail stocks.  Although that macro situation likely will put some downward pressure on the stock, I think that COH is set up well to weather a recession storm like that.  Given how freakin’ expensive Coach products are, I would guess that today’s average Coach product buyer isn’t too concerned about conserving cash.  Coach product buyers are probably reasonably well off as it is, so I doubt their spending habits would change much in a recession.  That’s my [possibly bogus] assumption, anyway.

Conclusion

COH looks like a healthy company to me.  Sales and profits are rising year over year.  The balance sheet looks good.  Management is increasing shareholder value through stock repurchase programs.  Besides a dividend, what more could you ask for?  With the stock trading at a P/E that’s only slightly higher than the average S&P 500 stock, Coach at $36/share sounds good to me.  In fact, I figure COH will be trading back up to $50/share by March 2008.  If I were going to make a COH stock purchase I would buy a small portion (1/4th?) of a position first so that if the stock drops lower, I can pick up more shares at bargain prices.  If it goes up from here, there’s no sense pouting over profit!

Full disclosure: I do not have any position, long or short, in COH at the time of writing.

]]> Are you an eBay addict? tag:www.raisedguidance.com,2007://1.6 2007-11-20T19:40:44Z 2007-11-30T08:17:55Z Paul EBAY)?  For years now EBAY has been a pleasant epidemic for many, and EBAY’s business is far from grim.  In case you’ve been living in a damp cave with no electricity and haven’t seen the light of day in ages, EBAY runs the world’s most popular online auction site.  What you may not know is that EBAY also owns PayPal, Skype, Shopping.com, StubHub, Rent.com, and a percentage of craigslist.

Lately EBAY’s stock price has tumbled (down 20% since its mid-October high of just over $40/share), probably due to announcements regarding what some have termed “overpayment” for Skype.  It’s also worth noting that the S&P 500 index has dropped just over 7% in that time frame.  Sure, the purchase-Skype-move ought to be questioned, but does that make the stock not worth owning?  Let’s take a look.

Quick P/E analysis

One of the first items I like to inspect when evaluating a stock is the P/E ratio, which relates the stock price to the profit the underlying company takes in.  According to Yahoo! Finance, EBAY’s P/E sits at a whopping 273!  To find out the Earnings portion of the P/E ratio, check out their income statement or look at their 10Q filed with the SEC.  EBAY recorded a net loss of $935 million in 3Q2007, compared to many previous consecutive months of solid profit.  Without the Q3 net loss, EBAY’s P/E would come back down to Earth.

Time to dig a little deeper

I’m no accounting guru, but I’ll explain my personal analysis of why EBAY lost so many peanuts in Q3: Skype.  In the company’s 10Q for 3Q2007, they mention that upon analyzing their goodwill it was necessary to record a $1.4 billion goodwill impairment hit.  Some might interpret that information to mean that EBAY bought Skype at a price that was $1.4 billion too high than what was fair.  Ouch.

The 3Q2007 10Q explains that the final Skype-related payout will be recorded in 4Q2007, and that the payout amount is already reflected as a liability as of 3Q2007.  Fair enough; I’m impressed by EBAY’s honesty here.  I don’t care who you are, $1.4 billion is a lot of dough to “lose.”  On the plus side, I like that the financially negative aspects of the Skype purchase will be done and over with by the end of 4Q2007.  Whether Skype operations produce a profit is another issue, but the 10Q seems to indicate that, yes, Skype operations generate profit for EBAY.  In fact, revenues at EBAY’s Communications segment are growing at a faster rate than any other EBAY business segment’s revenues.  More numbers on this later.

What are EBAY’s business segments and how are they performing?

Speaking of business segments, what are EBAY’s business segments and how are they performing?

The 10Q breaks financial results down into three categories:

  1. Marketplaces (sites like www.ebay.com)
  2. Payments (Paypal?)
  3. Communications (Skype?)

Although the Communications segment lost $25 million in the 9 months Sept. 30, 2006, it generated $27 million in the 9 months ended Sept. 30, 2007.  As of the 9 months ended Sept. 30, 2007, all three business segments currently are generating profits.  Also, net revenues at the Marketplaces, Payments, and Communications segments are all increasing (by 25%, 33%, and 106%, respectively comparing the 9 months ended Sept. 30, 2007 vs. 9 months ended Sept 30, 2006).  All this has to be good news for EBAY and EBAY shareholders.  

Where does EBAY do business?

Given the recent weakness in the U.S. dollar, it makes sense to ask where – geographically – EBAY pulls in revenue.  Under these circumstances I like businesses that do ... business ... overseas.  According to the 10Q, as of the 9 months ended Sept. 30, 2007 international revenues made up over 50% of EBAY’s total revenues.  In contrast, as of the 9 months ended Sept. 30, 2006, U.S. was the source of over 50% of total revenues.  The 10Q directly states that their “foreign currency exposures have increased substantially and are expected to continue to grow.”  I dig the shift.

Does the balance sheet look healthy?

EBAY’s balance sheet looks very healthy.

Long-term debt?  Zero, zip, zilch.

Cash & cash equivalents + short-term investments?  $4 billion on Sept. 30, 2007 vs. $3.2 billion a year ago Sept. 30, 2006, up 24%.  Nice.  I like cash.

How do this year’s financials compare to last year’s?

Let’s look at how much money EBAY is collecting and how much they’re spending.

Total revenue for the 9 months ending Sept. 30, 2007 totaled $5.5 billion vs. $4.2 billion a year ago same period (29% increase).  Score.

Minus the Skype goodwill impairment charge, operating expenses for the 9 months ending Sept. 30, 2007 totaled $2.9 billion vs. $2.4 billion a year ago same period (20% increase).  

EBAY is also netting more profit as time passes.  According to Yahoo! Finance, analysts estimate 2007 EPS at 1.49 / share; for 2008 analysts estimated EPS of 1.66 / share.  Take those numbers with a grain of salt; analysts can be wrong and have under-estimated EBAY’s EPS for the last few quarters.

Of course there are other factors to consider, but I really like that EBAY is increasing revenues faster than it’s increasing spending (29% vs. 20% respectively over the periods mentioned above).  Oh yeah, and EBAY is making more profit.

Is management actively increasing shareholder value?

You bet.  One common way to increase shareholder value is for the company to buy back shares.  As of January 2007, EBAY’s board of directors had authorized share repurchases totaling up to $4 billion ($2 billion authorized in 2006; another $2 billion authorized in 2007).  As of the end of 3Q 2007, EBAY had spent $2.8 billion buying back stock.  $4 billion authorized - $2.8 billion spent = $1.2 billion: the amount the company may spend repurchasing shares through January 2009.  The average price per share paid during these repurchases is $31.63, but in 2007 the average price per share paid for repurchases was $33.31.

Remember that decreasing the number of outstanding shares generally increases shareholder value.  Think of shares as small slices that together make up a company ownership pie.  If the company makes money and reduces the number of slices, then each slice is bigger – i.e., each share becomes more valuable.

With this in mind, like most public companies EBAY provides its employees a stock option compensation plan.  In analyzing changes to the number of outstanding shares, we should also examine outstanding stock option grants.  According to the 10Q, as of January 1, 2007 options grants could add up to 136 million shares into the pool.  As of Sept. 30, 2007 options grants could add up to 125 million shares, with an average grant price of $10.51 / share, into the pool.  Throughout the year, new options were granted (for 20 million shares), some were exercised (19 million shares), and some were forfeited/cancelled/expired (12 million).  I find it interesting that so many shares were forfeited/cancelled/expired – only 7 million less than how many were exercised.  Go figure.

Anyways, what does it all mean?  It seems that the company has repurchased more shares than have been added to the pool in the form of exercised options, so overall there are fewer EBAY shares available now vs. a year ago (1.36 billion outstanding as of Sept 30, 2007 vs. 1.43 billion outstanding as of Sept 30, 2006 – a net reduction of 72 million shares).  I wouldn’t be shocked if we were to see another repurchase authorization by 1Q2008, but of course I have no clue if that will happen.

Management is increasing shareholder value.  Hooray!  

Conclusion

EBAY looks to be a solid company that’s doing more business and making more money over time.  With EBAY trading at just under $32 / share as I write this, is EBAY a good buy right now?

I could be wrong, but EBAY looks good to me, right here and right now.  Always use your own judgment and conduct your own analysis before making investment decisions; what I’ve written here are my personal thoughts.

A fun exercise?

How high will EBAY trade within a year?  I have no friggin’ clue and neither do you, but for fun I’ll take a guess.  I think analysts’ estimates for profit (EPS of 1.66) next year are a little low, in part because I think we’re going to see another share buy-back announced soon.  Solid profits + share buy back = increasing EPS.

Let’s suppose 2008 EPS is 10% higher than the predicted 1.66, which brings us to ~1.80.  

Suppose analysts are right that 2007 EPS will be 5% higher than the analyst-predicted 1.49 => 1.56 (not including the Skype goodwill impairment charges).  The EPS growth rate, then, could be (1.80 – 1.56) / 1.56 = 15% year over year.

Cramer (yes, I read Cramer’s insights and watch his show occasionally) often mentions that people pay a P/E of 2x the growth of a growing stock.  This in mind, 15 (% growth rate) x 2 = 30 predicted P/E.  Since EBAY has no long term debt and such a strong cash position, I think a P/E of 30 sounds reasonable.

EPS x P/E = share price.

1.80 x 30 = $54.00.  There you have it.  I’m probably wrong, but I’m officially guessing that EBAY will trade as high as $54.00 within the next year.  I have no shame and I’m ready to be wrong!


Full disclosure:  At the time of writing, I do not have any position (short or long) in EBAY.  Admittedly, after writing this article I’m seriously considering initiating a small position.


]]> Stop/Loss Orders - Are They Right for You? tag:www.raisedguidance.com,2007://1.5 2007-11-15T05:45:01Z 2007-11-30T08:17:23Z Paul Here's a scenario for you...

You've just bought a smokin' hot stock (ticker REDHOT) for $100/share, but you're a little nervous.  If you're like me, buying REDHOT shares today means REDHOT almost certainly will trade lower tomorrow.  Worse yet, will REDHOT tank?  Will you lose all your money?  JUMPING JEHOSEPHAT!!

Down to Business...

When you go to sell shares of a stock and you select your order type, you may notice "Stop Market" or "Stop Limit" order types.  The concept behind "Stop Loss" or "Stop" sell orders is this: if the stock price drops to the activation price, a sell order is triggered automatically.  By using a stop loss sell order you can, with some pre-planning, protect your capital in the event of a stock price drop (even if you aren't in front of your PC watching quotes all day).  Here's a situation where that might prove valuable...

You buy 100 shares of REDHOT for $100 / share because you're looking to make some crazy cash, but if the stock doesn't rise right away you're packin' your REDHOT bags.  You decide that if REDHOT drops to $98 / share, you want to sell your stock automatically for whatever the market is willing to pay at that moment.  After purchasing the shares, you immediately place a "Stop Market" sell order to sell all your shares if the stock drops to an activation price of $98.

Incidentally, REDHOT cools down and falls from $100/share to $92/share the next day.  That means that the stock traded at your activation price, which means your sell order got triggered.  Maybe your 100 shares sold for $97.98/share.

In this example, here's what happened in money terms:

Initial buy: 100 shares x $100/share = $10,000 invested
Sale executed: 100 shares x $97.98 = $9,798 left; => loss of ($10,000 - $9,798) = $202.
Value with no stop loss order: 100 shares x $92/share = $9200; => paper loss of ($10,000 - $9,200) = $800.

Not great, but not bad. The stock didn't rise right away and instead it tanked, costing you $202 instead of a more depressing $800.

Sounds like a dream come true?

Not so fast!

Depending on the type of investment you're making, using stop loss orders may not make the most sense.  One "stop loss" rule I keep in mind isn't right all the time, but I think it's reasonable:

If you're making what you consider to be a risky (quick? super-growth?) stock trade, consider using a stop loss order.  If you're smack-dab in the middle of a long-term value investment, stop loss orders might not be most sensible way to go.

Why do I like that general rule?

If I'm in the middle of a long term value investment, chances are I've put some thought into how much I think a stock is worth.  I'm owning the stock in the first place because I trust my judgment that the stock is headed higher.  If the stock has reached a point where I'm concerned it may drop lower (in other words, maybe it's reached a valuation I find fair or even rich), why sell lower when I could sell now for more profit?  Thanks, Grandpa Stan.

Time for another example.  Suppose I own a stock with ticker BESTVAL.  BESTVAL is trading at $50/share, and I had purchased the stock at $42/share. I figure $50/share is a high valuation, and I'm afraid BESTVAL is going to drop soon.  Since profit is the name of the game, logic tells me to sell BESTVAL at the highest available price (buy low and sell high, right?).  By entering a stop loss order with an activation price of let's say $48 / share, I could end up selling the stock at a price that's 4% lower than the current price.  What gives?  I'll take my $50/share, thank you very much.

Conclusion

How you approach your trades is 100% up to you, but you may want to consider these examples when making some order type selection decisions.

Happy investing!

Full disclosure: BESTVAL and REDHOT are not real stock tickers. So, yeah...

(P.S. for more information on order types, check out the wikipedia page on stock orders)

]]> A Quick Lesson on Buying Put Options tag:www.raisedguidance.com,2007://1.4 2007-11-13T01:23:48Z 2007-11-30T08:16:53Z Paul OPTIONS?  You better run for the friggin' hills, because -- yes -- I said options.

Options trading can be a powerful tool for either the speculator/trader or the risk avoider.  In this entry I'm going to provide you with a situation where you might want to buy (and later sell) put options.  As always, perform your own comprehensive research before making ANY investment decisions; do not make decisions based solely on content you gather at this site.

Quick Intro

Options can come in different flavors, notably puts or calls.  Options contracts represent the right, but not the obligation, to buy or sell a security by a certain date for a certain price.  For more in-depth info on options, check out the wikipedia options entry.

A put option provides the option contract holder the right, but not the obligation, to sell 100 shares of a security at a certain price.  How might you use put options to bring home some extra clams?

Put Option Example #1

You want to make profit off of a stock that you believe is going to sink soon.  Let's give that stock the ticker HOTSTOX.  You're not comfortable selling short.  If you sell short and the stock rises (maybe you're out enjoying fresh air instead of closely monitoring the streaming ticker?), the downside of your investment is limitless.  AKA you could owe a hell of a lot of money to your brokerage.  Alternatively if you buy a put option, the most you can lose is what you put in.

Wait a minute... how could owning (and then selling) put options make you money if the stock sinks?  Good question.  I mean, why would a put have any value at all?

Suppose you owned a stock that was trading for $30/share.  If someone offered to buy that stock from you for $50,  that's a pretty good deal for you.  You'd be pocketing a premium bonus of $20/share (on top of the $30 it's worth) all in one profitable swoop.  Not too shabby.

So the ability to sell your shares for a certain price might be worth something to you.  At a very basic level, that's one way I like to think of puts.  The ability to sell stock at a certain price -- if I want to -- is worth something to me.  If I were to pay $20 to sell my shares tomorrow at $50, I'd break even, so that doesn't sound too attractive.  But there is some price where it might be worth it to me.  That's one thing to consider when figuring out how much put options are worth to you.  Some refer to that difference as the intrinsic value of an option.

So now you see that put options are worth something to someone, here's an example of putting ... puts to use for you:

Suppose HOTSTOX is trading for $54/share, and here we are in early November.  You strongly believe HOTSTOX will drop by at least a few points by December.  You browse over to the HOTSTOX options listing on Yahoo! Finance to discover that DEC 55 puts (i.e., put options that expire in December and give you the right to sell 100 HOTSTOX shares for $55/share) are trading for $3.20.  Note that this $3.20 amount describes cost per share.  Since each options contract applies to 100 shares...

# of shares per contract: 100
option price per share: $3.20
total option contract price to you: 100 shares x $3.20 / share = $320 [+ commission]

You bite your upper lip and place a limit order to buy 1 put option contract for $3.20.  You sleep well that night.

The next day an OPEC bigwig stubs his toe while getting on a boat in the Persian Gulf, and HOTSTOX drops from $54 all the way down to $51.  You still hold the right to sell shares of HOTSTOX at $55, so the difference there just got bigger.  You check the options pricing for HOTSTOX and notice that the same put options you bought yesterday for $3.20 are trading for $5.00* now.  You jump up and down for joy and place a limit sell order for your put option $5.00.  Your profit on the transaction?

purchase price: $320 per contract (remember, 100 shares per contract)
sales price: $500 per contract
net change: $500 - $320 = $180! (minus some $ for commissions)

So that's one example of how you might buy and sell a put in order to collect some serious cabbage (+56% in that example).  Keep in mind that gains might not happen that quickly; gains might not be that sharply; and gains might not happen at all.

Also, remember that in this case you have to sell at some point in order to make money.  Picking a selling point might be tough, but you've got to come up with something that works for you.  I'd advise against buying/selling any securities/options/etc. until you've come up with a selling plan that you can stick to.

Good luck!

Full disclosure: HOTSTOX is not a real stock ticker, so I definitely don't own any position in HOTSTOX.  Proceed with caution when trading any securities, especially options.

* Note that an options contract price takes into account other things in addition to intrinsic value.  Visit the wikipedia options page mentioned above for more information on options.
]]> Time for Starbucks? tag:www.raisedguidance.com,2007://1.3 2007-11-09T15:20:37Z 2007-11-30T08:16:25Z Paul Would you care for a venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte?

These are serious questions that deserve serious answers.

I admit it: I like Starbucks coffee.  I buy the beans and I buy the fresh, hot coffee.  Would I buy the stock?  SBUX is trading for just around $23/share as I write this entry.

Summary/Recommendation

If my portfolio weren’t so heavy into stocks that rely on consumer discretionary spending, I’d consider making a small SBUX purchase today (by small purchase I mean 1/5th to 1/3rd of a total, ultimate position).  Since I’m a concerned about near-term financial results of consumer discretionary companies, the 1/5th number sounds attractive to me. 

(FYI there are many reasons why I buy / sell stocks in increments, or portions of a position.  It's taken some time, but I’ve come to terms with that I won’t be able to call an absolute bottom.  If the stock goes up, I’m happy because I made money.  If it goes down with no changes as to why I bought in the first place, I take advantage of the bargain and buy more.)

Growth Stock?

I think that SBUX, as of several years ago, was a premier growth stock.  Despite that SBUX continues to increase earnings annually, I think it no longer falls into the category of a premier growth stock.  When growth stocks’ growth slows, as legendary investor Benjamin Graham explains, it’s almost a sure thing that there will be P/E multiple contraction.  Keeping in mind P/E contraction is helpful when analyzing SBUX stock price behavior over the last several years.

Over the past several years, the P/E for SBUX has consistently dropped from nearly 70 down to around 28 where it's trading today.

When SBUX growth was higher, the stock tended to trade toward the higher end of that P/E range; however, as growth slowed the stock experienced P/E contraction and moved toward the lower end (note: although we see volatility and variation throughout the year, I’m alluding to an overall pattern).  By analyzing past income statements we can observe that the year-over-year % change for Annual Operating EPS from 2004-2007 went from 42% (2004) to 28% (2005) to 20% (2006) to 15% (2007).  The general rule is that when a growth stock's rate of earnings increase decreases, we often see P/E contraction.

It seems to me that SBUX is trending toward a value play.  Given that's the case, how low the stock goes depends on a lot of things (SBUX ability to deliver, general Wall Street sentiment, etc.).

Shareholder Value

A question worth asking is “Is SBUX management actively increasing shareholder value?”  In this case it seems that they’re making an attempt.  According to the latest 10-Q (for 3Q2007), SBUX has bought back 20 million shares for a cost of $671 million in 2007.  26 million shares remained available for repurchase under current authorizations.  Reducing the number of outstanding shares is a good thing for shareholders.  Keep in mind, though, the benefit is partially offset by the number of shares that may be added to the pool thanks to outstanding options that are exercisable: 45 million with a weighted average exercise price per share of $13.60 (vs. the recent trading price of $23/share).  Overall, the folks who control big money probably already factor in the potential dilution thanks to options when determining a fair value for this stock, so – depending on how the buy-backs are funded* – the buy-backs are a good thing because it means that over all there will be less net dilution.  Less supply makes each share more valuable.

*Some analysts frown upon buy-backs that are funded by debt (instead of cash).  In SBUX case the buy-backs seem to be funded by a combination of debt and cash, depending on how you look at it.  What I can say for sure is that SBUX has delivered historically uncharacteristic negative cash flows for the last 3 quarters (according to their statements of cash flows).  In the last 4 quarters their net income totaled $631 million; their buy-backs totaled $994 million.  Something to consider…

The Industry

When deciding whether to purchase SBUX stock, it also makes sense to consider what’s going on in the industry. Restaurants have been paying increased commodity prices (like dairy).  I think it's no coincidence that as commodity prices have gone up, and SBUX responded by recently raising in-store coffee prices across the board. 

Some analysts are concerned about slowing of consumer discretionary spending, or worse a recession.  These concerns probably increase the risk of pouring big money into the food/beverage industry.  My take is it's not that they wouldn’t put any money in, but maybe that they wouldn’t put in as much as if conditions were considered to be more favorable.

Conclusion

I think SBUX is a good company and their stock is getting cheaper.  In my estimation SBUX will continue to grow and earn more money each year in the years to come.  With no dividend, I imagine SBUX management will continue to increase shareholder value by buying back stock.  At some point Wall Street will decide that the prospects are good once again, which will be reflected in the stock price.  I can’t pinpoint when that reversal (if you want to call it that) is going to take place, so buying a small position now might make sense.

One venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte coming right up!

Full disclosure:  I do not own any positions in SBUX stock at the time of writing.
]]> Here goes nothing! An introduction... tag:www.raisedguidance.com,2007://1.2 2007-11-08T03:50:49Z 2007-11-08T04:27:31Z Paul
(did I really just type that?)  Ahem!

I really enjoy investing.  Unfortunately for me, I also enjoy many things that go along with investing, i.e., researching, paying attention to current events, and writing down my thoughts on investing and anything investing-related.  Sometimes I get this crazy idea that others might find my investing commentary valuable or insightful, so I decided I'd start posting investing material and research on my own site.  I admit that as a hobby I chat with and write to friends and family about investing.  Sick?  Maybe, but I enjoy it.  Now you, too, can share in the suffering!

With that horrible introduction out of the way, please pay attention to some disclaimers:

Disclaimer #1: What I write on this site is a collection of my personal thoughts only.  I encourage everyone to research carefully and thoughtfully before making any investment decisions, e.g., buying / selling stocks, mutual funds, bonds, options, deciding not to buy/sell, etc.  You cannot hold me accountable for any losses you may incur after reading content on this site!  If you want to thank me for gains, do me a favor and hold your thanks; instead, pat yourself on the back and enjoy the profit.

Disclaimer #2: I invest in stocks myself, and in each post I'll make clear my relationship with the stock (do I own it? do I have a short position? do I hold calls or puts? etc.).  aka "full disclosure."  Also, I promise you I'm not using this site to change the behavior of stocks.  Like I even have that sort of power, anyways!

Stay tuned, and I hope you enjoy what you find here!
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