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Archive for February, 2013

Posted by Martin February 28, 2013

A Year Old Wishful Thinking on Banning Menthol Cigarettes

A Year Old Wishful Thinking on Banning Menthol Cigarettes

This is just a quick thought on what’s happening with Lorillard (LO) recently and why the stock dropped so dramatically in last few days.

About a year ago and many times before FDA came out with an idea to ban menthol flavored cigarettes. Their reasoning was that such a ban would benefit to the public health. They claim that flavored cigarettes make it easier for beginners to start smoking and a lot more difficult to quit. I always thought that it was the nicotine which caused people being addicted to it and prevented them from quitting.

A few days ago Mitchell Zeller was elected a head of FDA. He is known as a great enemy of flavored cigarettes and he wants to go even further and ban any flavoring of cigarettes, so even strawberries flavor and other flavors.

Once again we see an example of a governmental agency telling us what’s good and what’s bad and in my opinion going the wrong direction – again.

I do not smoke and I have never smoked in my life. I hate smoking and whenever I enter a room or restaurant where people smoke, I can smell it right away and leave such place. Although I agree on having zones for smokers and non-smokers so we do not bother each other in public areas, I generally do not care and dare telling smokers what they can do. If they want to damage their body with flavored cigarettes as well as non-flavored ones and even pay for it, it’s their choice and they will deal with inevitable consequences later in their life or after life. It is their choice exactly the same one as I made when I was a lot younger than today. I also attended a college with almost-every-night parties, visited restaurants where everybody smoked, and so on. When I was young, there were no bans or restrictions and everybody smoked like a factory chimney. Even my parents smoked until one day my mom decided to quit and she did it. She didn’t need any ban on any sort of cigarettes.

Let’s take a look on another ban in history of the United States. In 30’s the US government imposed a prohibition on alcohol. Did it help? No. It didn’t. It created alcohol cartels smuggling alcohol into the US. It renewed the so called “wild west” in the streets of Chicago with a lot of blood on the streets.

I am not saying a new era menthol cigarette cartels will be recklessly riding their cars in the streets of major US cities and shooting machineguns killing their competition. I am saying that any sort of prohibition is a utopia and it will not work, but cause more damage than benefit.

If the menthol will be banned the government would probably lose 10 billion in tax revenue from this market. I have read an argument, that all menthol smokers won’t quit smoking the same day as the ban will be imposed, but they move into non-flavored cigarettes. They probably move into a different brand, but what about the whole chain of suppliers and manufacturers benefitting from this market? What about thousands of employees of Lorillard and its subcontractors, will they move too?

Will all the smokers move to non-flavored cigarettes? Those truly addicted to the menthol cigarettes will be buying from smugglers from Mexico and all that revenue will be lost. No prohibition ever in human history prevented or helped anyone. What is banned will be smuggled and the revenue will move elsewhere and it will be the government who would lose.

Last thing I want to add is that this should be a matter of education. First, education within families, second in schools and third in public. If you teach your kids from the very beginning that smoking is bad to their health and cause irreversible damage to their bodies, if you set your own example to them by not smoking (and if you smoke quitting), they will not smoke as adults.

Do you agree with FDA banning flavored cigarettes?


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Posted by Martin February 27, 2013

Trade Adjustment – Taser Inc. (TASR) covered call

Trade Adjustment - Taser Inc. (TASR) covered call

Today, after some thinking I decided to sell a covered call against the additional 100 shares I bought earlier. See the adjustment here.

 

 

Here are the trade details:

Bought 100 shares TASR: $6.90
Strike: $7.50
Sold 1 Covered Call: $0.45
Total Purchase: $645.00
Commissions: $8.78
Total purchase: $643.78
   
Expected Option Assignment: $750.00
Option Assignment Fee: $19.00
Expected Proceeds: $731.00
   
Expected Net Gain: $77.22
Expected ROI: 11.81%

Happy Trading!

Posted by Martin February 26, 2013

New Trade – Corning Inc (GLW) put selling

New Trade - Corning Inc (GLW) put selling

I had Corning in my watch list for some time. It was a featured company in Morningstar as a potential new gainer. I like the company what i have read about it so far.

It is a four star stock and Morningstar estimates the fair value at $15 a share. My own calculation indicates 17 a share with 28% safety margin and annual expected return at 26%.

The stock pays dividend at $0.36 annual rate, which provides 2.91% yield. The 5yr dividend growth rate is currently at 30%, the company pays the dividend since 1990 and increased the dividend for 2 consecutive years.

I decided to sell 1 put contract on this stock and i will be OK if I get assigned to the stock:

02/26/2013 15:10:03 Sold 1 GLW Aug 17 2013 12.0 Put @ 0.78

I’ll keep you posted if I get assigned or keep the premium and repeat the process.

Posted by Martin February 26, 2013

How to Buy More Shares With Timing Buy Points

How to Buy More Shares With Timing Buy Points

As I wrote yesterday how I enter stock positions, today Lorillard once again shows the example of why I like to time the entry into a stock. It is not necessarily timing the market, just timing the entry point, or buy point. Once I decide to to buy more shares I watch the stock carefully to see when I can enter and increase the profitability of the trade.

Lorillard

As you can see from the chart above the stock fell yet further down today. If you perform automatic investing and invest into stocks on regular basis but without waiting for the right entry point, you could buy your holdings when they price was high and as the stock reverses, you would be sitting on a losing position. For example, if you bought on Thursday last week (February 21, 2013) you would buy at $42.30. At today’s price, you would be down almost 6%.

Sometimes recovering such loss (even unrealized) may take several months.

I wanted to know, what difference entry timing can make to my investment. For that I created a hypotetical situation comparing a regular investing vs. entry timing. Let’s assume an investor A invests regularly every 1st day of a month and every 15th day of a month and buys 100 shares of Lorillard. Investor B, on the other hand is waiting for the price but buys more shares (and I adjusted that to be able to compare the results) but both investors had a plan to buy 800 shares in total. See the table below:

The result is staggering 2% difference. Both investors bought 800 shares, but the investor B spent $714.00 less than investor A. In a long run of 20 years, this difference can grow in a very significant gain on top of your dividend income as well as it may impact your dividends, because savings can be used to buy more shares.

That’s seen in the table below, where I assumed the investor A and investor B decided to invest a same amount of money:

Both investors had $24,000 available to invest and the investor A invested on regular basis 3000 every 1st and every 15th day of a month. Investor A invested all his allowance and was able to buy 609 in total. Investor B didn’t spent all his allowance yet, since the timing method didn’t trigger more buy orders yet, but if we assume, that he would be buying at average price $38.52 a share and realizes the two other missing trades, he would be able to buy 623 shares instead of 609.

In case of Lorillard, 14 more shares would bring the investor B $30.8 more in annual dividend than what the investor A would receive.

And lastly, let’s take a look at my current history of my contingency orders:

On February 22, 2013 I entered the following order:
If the last of LO is greater or equal to 41.77 Buy 24 LO at limit $41.77

On February 25, 2013 I lowered my order down as the price of LO dropped:
If the last of LO is greater or equal to 41.26 Buy 24 LO at limit $41.26

Today, as the price of LO dropped even lower, at the end of the trading session, if the price stays at 40.14 a share, I will adjust to the following:
If the last of LO is greater or equal to 40.65 Buy 24 LO at limit $40.65

The trade executes on Wednesday only if Lorillard recovers and grows above $40.65. What a difference buying at 40.65 instead of 42.30 just few days ago!

Posted by Martin February 25, 2013

Find a Good Entry Point or How to Buy Stocks to Increase Profits

Find a Good Entry Point or How to Buy Stocks to Increase Profits

A few stocks I own or plan to buy an initial position such as GLW provided a great opportunity today as the whole market ended down. I wrote on Friday last week that I wanted to add Lorillard (LO) to my positions but the trade would execute only if the stock goes higher.

Today it didn’t continue in the morning’s march into higher levels and ended down although my entry point got almost hit and I would pick up a losing position. Today’s high price reached $41.69 a share and my buy order was sitting at $41.77.

Later the whole market collapsed and took almost all stocks with it. A typical behavior which every investor knows or should know. Besides LO I would like to add AT&T to my current positions and open an initial position in GLW stock.

How I set my entry point into stocks

I will use Lorillard as my example how I entry into stock positions. Last week the stock got hit hard. It fell from $42.76 a share to $41.15 and today to $40.80 a share. The drop was 4% and almost another 1% today. After such a huge drop on Friday I would typically expect a recovery, but the overall market pushed the stock lower.

Lorillard

(Enlarge the picture)

I like to use FreeStocksCharts when not at home where I use Think or Swim or Strategy desk. I like to see all three time frames (6 months daily chart – the largest one, 5 minute 1 day chart and 5 year weekly chart) to see where the stock is to make a decision when to buy.

Three time frames

5 year time frame

After I screen for a dividend paying stock I take a look at the 5 year chart to see where the stock is related to the long term behavior. From the 5 year chart I can see LO trending up (see the yellow trend line), but recently during August 2012 and November 2012 the stock dropped down to its long term trend line (it touched the yellow line again). Although it doesn’t mean that the stock won’t go lower, I consider this as a good price position for adding the stock. It is on its long term uptrend support and most likely will continue up.

It can break the trend, for example when the Government tighten the regulation in tobacco industry. If that happens I will postpone adding new positions to my holdings and most likely wait for the bottom. I will not be trying to fish the bottom, but I will wait e.g. for the next possible support, which would be on 5 year 200 day MA where I would expect the stock to stop its fall. If that happens and the stock reverses I would pick up a few shares on the way up.

From the 5 year chart I can see that the stock is a buy (not extended as it was at the beginning of 2012).

Fair value

Then I take a look at the stock’s fair value. I use Morningstar.com to check their value. As of today, Morningstar is listing a fair value to be $43.00 a share. I run my own calculations and my calculated fair value is at $41.58 a share, which is about in line with Morningstar numbers. I also calculate annual expected return and LO is at 21%. Then I check the current price action. LO is trading as of this writing at $40.80 and thus providing a safety margin of 1% to my calculated fair value. Still a buy to me.

6 months time frame

The next step would be a look at 6 month daily chart to see the stock behavior from the short term perspective. Is there a potential for growth or will the stock fall? I briefly scan my holdings daily. If the stocks are running up unstoppable I am not interested in them and screen for another candidates or keep cash in sidelines. If however the stock fail making new highs and reverses like LO did last week, it gets my attention. The stock ran up after a good earnings report and dividend increase announcement 12 days ago. Would you buy in this hype rally? I wouldn’t.

The stock traded below 200 day MA (the red line) but above 50 day MA (blue line). I could pick up shares when the stock was at lower Bollinger Band below the trend line e.g. in January 2013, but at that time I didn’t have cash available (still struggle creating cash reserves). Then the stock ran up to upper Bolinger band and broke thru the 200 day MA with an extended bullish candle. A good sign, but I want to pick the stock at the lowest possible price, not this hype.

Daily chart

I do not use this time frame much, only in occasions when trying to enter the stock and trying to pick up a few pennies. Sometimes I use this when trading options, but very little when entering my portfolio core dividend positions.

Opening a trade order

I already wrote about this strategy. It is not my original strategy and many experienced traders apply it when entering a stock position.

If the stock which passed through my fundamental screening (dividend growth stock) behaves technically as described above I enter a contingency order with my broker. If you take a look at Lorillard’s chart, you can see the stock falling. I calculate what would be my activation price for the next day. Refer to my previous article how I do it. Also you can read Dave Landry’s book The Layman’s Guide to Trading Stocks where he describes this strategy in a very plain English.

There will be three possible outcomes:

  1. The stock will continue down as in LO case today.
  2. The stock will reverse and go up.
  3. The stock will gap up far beyond your limit price.

A contingency order

First let’s take a look at the contingency order. I open an order which would look like this:

If the last of LO is greater or equal to 41.77 Buy 24 LO at limit $41.77

If the stock continues down or even gaps down, the next trading day I adjust the price based on the new calculation:

If the last of LO is greater or equal to 41.26 Buy 24 LO at limit $41.26

if the stock reverses and goes up, the activation price is hit and the limit order becomes life. Usually this happens at the same time and it gets executed immediately (at the same time with activation of the order). In some occasions when the stock moves very fast up, you may be left behind, but this hasn’t happened to me yet.

The stock will gap up. If this happens, the activation process activates the limit order, but the order is not executed. Then I once again check the charts if I want to chase the stock, cancel the order or leave it alive as “Good-till-canceled” (GTC).

Since Lorillard dropped in price, I adjusted my entry limit order and will wait for tomorrow’s trading.

AT&T and Corning at the same boat

That said, the other two stocks popped up today as great candidates to buy. One stock is AT&T (T) and the other is Corning (GLW). I am not buying these stocks yet, since they didn’t fall far enough. I am however watching the stocks closely and if the trend reverses I may add a contingency order for AT&T. It broke 200 day MA down. The stock struggled to stay above it and may continue down to hit lower Bollinger Band along with 50 day MA (it can go to 34.5-ish price level from current $39.15) mainly if the market continues or speeds up its sell off.

As far as GLW goes, I will be applying a different strategy to buy this stock. I will apply put selling to get assigned. Most likely I will sell 12 strike put. But I haven’t analyzed this stock and trade yet, so I cannot say.

Conclusion

There are investors who do not care much about entry points into the stocks, some apply regular investing approach investing smaller amounts every month and averaging the stock cost basis. And that is a completely legit strategy and I am fine with it. Other investors apply the similar “cherry picking” strategy as described above and they are waiting for their price. I like such approach, because I believe using this way of entering the stock an investor can boost capital gains (although with dividend investing it is not an overly important aspect).

Posted by Martin February 24, 2013

My inspiration in last week #11

My inspiration in last week #11

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

 

This week I found the following interesting posts:

The Case For A Higher Minimum WageThe First Million is the Hardest

Minimum wage increase may backfire for blacksThe Grio

How To Double Your Return With Armour Residential REITSeeking Alpha

McDonald’s: Today’s Price Will Look Cheap 5 Years From NowSeeking Alpha

The Crowd Has Spoken: If It Doesn’t Pay Dividends, We Don’t Like ItDividends & Income Daily

Is It Time To Buy Gold Via GLD?Seeking Alpha

McDonald’s Corporation (MCD) Dividend Stock AnalysisDividend Growth Stocks

New Trade – GLWThe Money Tree

Heinz Deal Has Some Wondering Whether Buffett Is Still a Bargain HunterCNBC.com

Posted by Martin February 22, 2013

Is Lorillard offerring another buy opportunity?

Is Lorillard offerring another buy opportunity?

I think Lorillard is offering another buy opportunity. On Friday session the stock dropped by 4% and hit 200 day MA. That is the kind of a retreat I usually look in stocks of my interest to add more shares.

I am not buying yet, since the stock may continue sliding down, but I entered a contingency order. If the stock crosses above $41.77 a share I should be buying another 24 shares of this stock.

If the price won’t cross this level, but continues falling down, the trade won’t execute and at the end of the next down session I’ll move my contigency order down again as long as the stock reverses and pick me up on it’s way upwards.

If however the stock gaps up the next session the trade will activate my limit order at $41.77, but will not execute and stays in Good-till-canceled mode.

Look at today’s trading of this stock. The dip is deep and touched 200 day MA. Will this support hold or will the stock break down below 200 day MA?

Lorillard

(Click to enlarge)

If the trade executes, I’ll keep you updated.

Posted by Martin February 21, 2013

Trade adjustment – TASER International Inc (TASR)

Trade adjustment - TASER International Inc (TASR)

I hold TASR as my option play, but today’s frenzy selling compared to results of this company (50% better revenue which beat analyst expectations)makes TASR a good buy play. So I added another 100 shares to my current holding. As the stock recovers I will be selling more calls against the original and new holding.

In my opinion today selling is irrational and the stock will recover. I would like to participate on that recovery.

TASER International, Inc. (TASER) is engaged in development, manufacture and sale of electronic control devices (ECDs) designed for use in the law enforcement, military, corrections, private security and personal defense markets. Federal, state and local law enforcement agencies in the United States and globally represent the target market for its TASER ECDs. Its TASER devices are deployed in county correctional facilities, such as those operated by the Los Angeles Custody Division and the Maricopa County Sheriff’s Office (AZ). TASER devices deployed in support of strategic military operations in locations globally. Private security officers represent a range of individuals, including contract security patrol, healthcare, gaming, retail security employees and many others. During the year ended December 31, 2010, TASER C2 personal protection device with other consumer offerings, contributed approximately 5% its total net sales.

02/21/2013 15:26:16 Bought 100 TASR @ 6.8999

Posted by Martin February 21, 2013

Market correction

Market correction

The market finally truned into a correction. Hold your hats, we may be running low. My estimate is to pull back down to $145 – $146 level (SPY). Have you saved enough money to buy more stocks?

Posted by Martin February 20, 2013

Trade adjustment – Gold (GLD) addition

Trade adjustment - Gold (GLD) addition

Today I added a few shares of GLD into my portfolio as Gold suffered a huge sell off. As I wrote in my previous post I believe the today’s price action is an overreaction of investors, most likely responding to (outdated) report from Sorros Fund Management.

As I wrote I believe GLD indicated a bearish exhaustion as is due for reversal. Let’s take a look at charts:

First take a look at 5 year chart, which nicely shows the new support line formed in October 2011.

Gold 5 yr chart

(Click to enlarge)

The red horizontal line indicates the support at which I originally placed a trigger buy order ($151.60 a share) and honestly I haven’t expected the price ever touch this level again.

Following is the 6 months daily chart:

Gold 6mo chart

(Click to enlarge)

In this chart you can see a very extended bearish candle and trippled volume. In my opinion this is a bearish exhaustion and we may experience a rebound. This price action also triggered my buy order today and I added shares to my portfolio.

02/20/2013 14:05:43 Bought 6 GLD @ 151.6

This trade lowers my cost basis in GLD from $164 a share to $160 a share.

Do you invest in Gold?


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