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Posted by Martin January 26, 2015
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Legacy Reserves LP (LGCY) bull put spread trade


Recently one investor asked me a question whether I would consider selling covered calls against my recently purchased shares of Legacy Reserves (LGCY) or not. He was also concerned about the stock and its recent fall in price.

I reviewed my holdings as well as my original reasons for the trade and I must say, nothing has changed. I am even more convinced that my stock purchase will pay big in the future. It will only take time before it happens.

What was a premise of my trade? Buying LGCY was a play which will have a twofold benefit for me and those investors who are purchasing at the current price level:

 

  1. Capital gains when the price of LGCY recovers.
  2. While waiting for the recovery, you will be collecting juicy dividends.

 

Of course, conservative investors would probably skip this trade, but I see it as a great opportunity. A same opportunity I could take in 2008 have I known what I know today.

Will history repeat itself?

Today, people are claiming that price of oil is doomed and that we will be undergoing a long and painful recovery and many energy & oil companies will go belly up. Really? Are we seeing oil prices low forever?

Our society is energy driven and there will always be demand for oil. And oil prices will go up inevitably no matter what others say or think. It is not that far away when Saudi Arabia’s king Abdullah was bragging about not minding oil prices dropping as low as $20 per barrel and stay there for a long time.

Today, when oil was trading around $48 a barrel, the Saudis announced that they see oil prices bottoming. And El-Badri (an OPEC’s Secretary General) even claimed today that oil price may go as high as $200 a barrel.

But such low price of oil is painful for everybody, even for Saudis. Are their claims a sign of them preparing the world for the end this price war? Who knows? Nevertheless you will still find a bunch of pundits predicting all sorts of oil price movement in upcoming months (mostly contradicting each other). But there is one thing for sure. Oil price will start going up. When exactly that happens, how fast, and how high, nobody knows. But what goes down, must go up.

And that happened in the past already may be a guidance of a potential future development. Let’s take a look at the oil price to see what happened and what may happen again:

 
Crude oil in 2008
 

Now, let’s take a look at today’s price action:

 
Crude oil price in 2014
 

Will history repeat itself and will oil recover? I bet it will. It may be different movement as far as its magnitude and speed of course. It may take longer time, smaller price recover than before, it can continue falling forever (as talking heads want us to believe), or it can shoot up like a rocket and recover even faster than before. The price can also continue lower to reach 2008 lows. But at the end, the price will recover. I already took my bet on this by purchasing LGCY shares.

 
Will history repeat itself?
 

Will LGCY history repeat too?

I believe it will. There are a few clues from the company itself which make me an optimist and believe that LGCY will not only survive this price oil turmoil but also recover its price in full extend and continue paying its distribution without cuts.

In 2008 LGCY also took a huge hit caused by oil price collapse. It was a price drop of the same magnitude as we see today:

 
LGCY price in 2008
 

Let’s compare this chart with a price action today:

 
LGCY price in 2014
 

If history repeats itself again, we may see a nice recovery and great capital gains by the end of the year 2015. The price may reach up to $17.36 a share. And the best thing is that while waiting for the price recovery, I will be collecting extremely, nice, juicy, great, super, excellent dividends.

But the best LGCY has to offer is that even during the oil price collapse in 2008 LGCY didn’t cut its distribution and continued holding on.

Before the crash in 2008 the company paid and increased dividends from 1.64 up to 2.08 a share (9.90% yield). When the price collapsed, the yield skyrocketed to 32%. The company held the distribution thru the bad times until the end of 2010 when the price of the stock fully recovered. Then the company started raising dividends again. It went from 2.08 (9.90% yield) to 2.44 (8.41% yield). Today, at $9.94 a share the yield went up to 24.55%

 
LGCY holds dividends
 

Will history repeat itself here again? We do not know. What we know already is that management of the company in a recent presentation at USB MLP One-on-One Conference declared their determination of sustaining this same level of distribution and avoiding its cut as they did in 2008. At a Wells Fargo Energy Symposium COO Paul Horne expressed the new trend in Legacy’s navigation thru this low oil price environment by cutting expenses and making accretive acquisitions while focusing on preservation of shareholder’s distribution.

Will we see the company to sustain their distribution or will they follow their peers who already cut their dividends? So far LGCY announced its next quarterly distribution at 0.61 a share which is in line with the previous rate. So far the company holds the course.

New LGCY bull put spread 10/12.5

This is a strong enough evidence for me to believe that history will repeat itself this time again, like in oil price recovery, like in LGCY price and distribution pattern. And that the price of the stock recovers this year (although it may not be a full recovery to pre-crash level).

To give the company time to recover I decided to open a long term spread with expiration in September 2015 and sell ITM (in-the-money) strikes. This means that I speculate for the price to go above the strike prices. I see the following benefits and dangers in doing so:

 

  • A long time spread gives the stock time to get above ITM strikes making the trade OTM.
  • Selling a long time spread gives me a lot of time value to decay later on.
  • I also sold an intrinsic value which will disappear as soon as the trade progresses into OTM state.
  • If the stock recovers faster the spread may become worthless and bought back earlier than until September 2015
  • There is a danger of early assignment of the short put should the stock perform bad. This is unlikely in early stages of the trade.

 

Trade detail

 
SELL 1 Jul4 14 345 call
BUY 1 Jul4 14 355 call

@ 2.00 DAY (credit)

With this trade, the risk is relatively low (I only risk $50 per contract and have a chance to make $200 per contract). That’s a nice 400% profit!

Let’s see if this trade opens tomorrow and how it will progress during its life span.

Good luck and happy trading/investing!




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Posted by Martin January 23, 2015
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Armour Residential (ARR) Are Insiders Abandoning the Ship?


I once invested in Armour Residential (ARR) for high income. It was at the time when this stock traded at $8 – $10 range in 2009. Today, this company is down low at $3.40 a share and it looks like it is going to die after a long agony.

ARR

I invested in this stock excited about great dividends, but failed to see that this stock and company is a trap. At that time I didn’t know much about dividend sustainability. I didn’t know or ignored that high yield not always mean security and learned the hard way that dividend cuts may ruin your investment. The price drop will in all cases exceed your dividend income you received and you always lose in the end.

Although dividend investors do not care much about their portfolio value as they cherish income it produces, you still do not want to be sitting in a losing position and hoping that one day it may recover. Some investors even throw more money against their bad holding to cost average. But constant dividend cuts will catch them. Always.

I am not talking about stocks that are good dividend payers, increase dividends regularly and have a proven history of doing so. Then a large price drop of such stock is a life time opportunity. Unfortunately Armour Residential isn’t such a company.

In 2013 I decided to take a loss and walk away from ARR. Now, I am glad I did it. I closed my trades at around $6 a share at that time. Today, the stock is trading at $3.40 a share. Those who hoped for a recovery and great dividends are probably disappointed.

Although I do not invest in this company anymore, I still time to time look at it to see how my past assessment worked. Was I correct or wrong? I also time to time check discussion boards to see what other investors think. And I still receive news about this company into my inbox.

And today I received news that a company director Bell Marc (co-founder and member of the Board of directors) sold all his holdings in ARR on January 22, 2015:

ARR Holdings

When I was selling my positions in ARR, one of my reasons were that the managers showed in many occasions that they didn’t care about investors, but themselves only, unlike other dividend payers, compare it with Realty Income for example). If a co-founder and one of the directors liquidates all his position in the company, what does that tell you?

Are the rats leaving the ship?
 
 




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Posted by Martin January 20, 2015
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Realty Income: Why it is now a good time to sell as well as hold


Realty IncomeRecently, I enjoyed two articles at Seeking Alpha about Realty Income Corporation (O). One post was written by Casey Hoerth “Realty Income Corp: Why Now’s A good Time To Sell” and the second one by Achilles Research “Realty Income: Why Now Is Not A Good Time To Sell This REIT Nugget“.

While it was interesting to watch (read) the reasoning of both authors on why it is good or bad idea to sell or hold, I noticed that both authors missed one important point in this decision making process whether to sell or hold. I believe that both are actually right in their arguing. It just depends on what investing phase you are with your portfolio.

Casey is arguing in his article that Realty Income has fared way up and that it would be a good idea to trim some gains and reallocate to another equity, while Achilles is opposing it urging not to take a trading mentality with an income vehicle such as this stock.
 

Realty Income
On a daily chart Realty Income shot up from its almost 6 months long consolidation phase at $46 a share reaching previous all-time highs from April 2013.
 

These are crucial words in determining whether to sell or hold based on where your portfolio stands and how you should react.

What phase of your investing career your portfolio is?

You would agree with me that there are generally two phases in building and maintain your wealth. One phase is called accumulation, the second one is a maintenance phase. What do you do in each phase? During your accumulation phase you build your portfolio and accumulate your wealth. During the second phase you just maintain its health.

Accumulation phase

There are many opinions on how to build your portfolio and there are many legit ways to do it. But generally the accumulation phase should consist of selection of stocks you want to invest in and start building up your portfolio by purchasing your selected stocks. Time to time you prune your portfolio by weeding out stocks no longer meeting your criteria and reallocating funds into a new stock. But overall you try to keep your portfolio balanced.

I have seen many experienced long term investors having two approaches how to balance a dividend growth portfolio – one approach is income based allocation, the second is a simple percentage weight allocation.

The income based allocation maintains allocation based on a percentage of income in your portfolio – for example you allocate your funds in such manner that every stock produces the same percentage of income (i.e. 3% income of the entire portfolio). This approach protects your income. If any stock fails to deliver dividends, you only lose 3% of your overall portfolio income.

The second approach is simple, you keep allocating an equal percentage of funds into selected stocks, let’s say 5% of every stock you own and you keep it balanced that way for the entire life of your portfolio.

However, during the accumulation phase you do not rebalance your portfolio. It is also impractical to do so. If you can invest let’s say $1000 monthly, and every month you buy a stock, that stock will become overweight in your portfolio until the next month when you buy a different stock and start smoothing the misbalance of your holdings. As of today, there are not many brokers which would allow you to buy increments of stock the same way as you do in your 401k (if you have one) where you deposit your monthly amount and it is equally distributed among all mutual funds in your account.

Also during accumulation phase you may only hold a few shares, so selling a portion would make sense either.

For example, I once held 24 shares of Johnson & Johnson (JNJ) stock and I once tried to rebalance – now holding only 12 shares. What a nonsense.
 

 

I only know about one broker so far which can allow you to do that and that’s Motif Investing. Motif allows you to select 30 stocks of your own, create a portfolio (a motif) and invest an equal amount of cash every month, for example, and that amount will be equally (or as per your target allocation) distributed among those stocks.

By doing so, you can create your own mutual fund or 401 k equivalent and start accumulating. Motif Investing even offers a great bonus. If youstart investing with them you get up to $150 to start investing with when you open an account.

If you are investing in a regular taxable account (as a bridge for your early retirement), you will not have this option available and you will not be able to balance your portfolio. From this perspective, if you are in an accumulation phase, Achilles is right. It is not a good time to sell Realty Income. In this phase value doesn’t matter. You only do not accumulate in this phase and wait for the next correction to start buying this gem again. And while you are waiting, you collect precious dividends.

Maintenance phase

But what if you already accumulated enough to live off of your investments? You are done with buying and you just collect dividends? In this case I would agree with Casey when he says to trim your gains. It is a standard balancing procedure in every large portfolio. It is a method I first learned many years ago when my investing teacher basically told me:

“When a mutual fund (or stock, as he was primarily referring to 401k holdings) goes up and beyond your target allocation, you trim it by selling a portion of your holdings above your target allocation and buy those stocks which underperform.”

This sounds great to me and I use this approach in my 401k and I also plan on using this approach in my dividend portfolio once I reach my target. This method would be acceptable in my opinion even with an income based allocation due to different dividend growth, but is great with a standard percentage based allocation.

Not doing this rebalancing would cost you a great deal of money which you can boost your portfolio.

For example, today, Realty income fared way up and is overvalued (as this stock was always overvalued), but other stocks in energy sector are mostly undervalued. This is a great opportunity to take some cash off the table by selling a portion of your Realty Income and buy energy stocks such as Legacy Reserves (LGCY), Chevron (CVX). Tallgrass Energy (TEP), or some consumer goods, or technology stocks such as Ford (F), Microsoft (MSFT), etc.
 

Realty Income 5 year chart
Five year chart shows how far and steep the Realty Income moved compared to previous all-time high. Will we see a similar reductio0n in price as we saw in 2013? If so, trimming some gains makes sense. But only if you own enough shares to do it without significantly reducing your holdings. In accumulation phase rebalancing doesn’t make sense and it is better to just hold and suspend investing for some time until the stock retreats again.
 

As these stocks recover and get back up and Realty Income lags this move, you do the opposite and rebalance back to Realty Income. This approach will help you to generate some capital gains which you can reinvest and create more dividends. All you need to do is to avoid trading and do this once a year to avoid short term capital gain taxes, and I believe this would benefit you well.

In this case I agree with Casey and his call to sell a portion of Realty Income and reallocate to other dividend gems out there which lagged because of being out of investors favor, but still continue paying nice dividends and even increasing them.

Conclusion

Choosing whether to sell, hold or accumulate a stock could be a difficult task. Many investors claim that they would never sell a dividend paying stock and I agree with them, but it is not a good approach to fall in love with any stock. It is something we have to learn over time. But it is a good thing to learn to trim gains in one equity and buy another lagging equity to keep your portfolio balanced. With dividend growth stocks this is an easy task to do. You can treat them almost as mutual funds. But if you are still in accumulation phase, it would be wasting your energy and funds trying to reallocate mainly when your holdings are still limited. From this perspective it is a good approach to hold Realty income and do not sell. In a maintenance phase it is a good time to trim some gains and boost other sectors.
 
 




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Posted by Guest January 13, 2015
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Will Eurofins’ Acquisition of SF Analytical Boost Returns?


Analytical testing is currently an attractive area for investors around the globe upon which to focus their attentions. The fact remains, however, that a great deal of this investment capital needs to be utilized so that higher returns for investors will result. A major way in which testing firms are striving to put this $1.3 trillion in capital to good use is by consolidating their efforts. The Eurofins firm is on the forefront of this trend, as demonstrated by its recent acquisition of SF Analytical Laboratories.

Specializing in the testing of environmental elements, pharmaceutical products and food products, Eurofins Scientific operates in 36 nations and employs 16,000 individuals. Across more than 200 laboratories, Eurofins demonstrates superior technical and analytical methods when testing the composition, legitimacy and safety of their clients’ product samples. The lab maintains a streamlined process for acquiring samples via high-tech courier systems as well as upholds a solid reputation in working with clients on a regional and multinational basis. These strengths are viewed as a great benefit by Dave Kilber, SF Analytical’s CEO, who states that the opportunity to consolidate his company’s testing services with those of Eurofins’ enables client expansion and more diverse offerings.

Based in Wisconsin, SF Analytical brings a number of impressive credentials to its consolidation deal with Eurofins. The majority of SF Analytical’s laboratory testing is concentrated on food and drink products, dietary supplements and ingredients used by food manufacturers and processors. Because Wisconsin ranks third in the U.S. in regard to food production and first in the U.S. in regard to food ingredient production, SF Analytical has a strong regional client base for which to test the nutritional, microbiological and allergen profiles of samples. This firm also has the benefit of Wisconsin being a major water research area, as its lab offers water and environmental testing services. Boasting 2,900 clients, SF Analytical has an ISO 17025 accreditation, ensuring competent quality and validity standards in the testing of dietary supplements.

Eurofins’ acquisition of SF Analytical is to be completed by the close of November 2014. The Wisconsin location will retain all employees and will be renamed as Eurofins SF Analytical. This consolidation allows Eurofins to expand its presence in the Midwestern United States, and all of the current testing operations performed by SF Analytical will continue as usual.

This particular consolidation of analytical testing labs, as well as other potential consolidations within this sector, is intended to raise the overall profits of investors in technology and science. Current and future investors can be encouraged by the fact that analytical laboratory testing services will increase as the requirements for food and environmental safety become more stringent. Firms such as Eurofins and the newly formed Eurofins SF Analytical have an interest in proactively expanding their testing so as to ensure that their capabilities are in line with continually evolving regulations.




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Posted by Martin January 12, 2015
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Is S&P500 going to crash soon?


It may look like we are on the top and due for a correction. But are we really? I think we are not. Although Friday’s trading and even today’s price action shows weakness in the market we are still in uptrend.

We will see a correction at some point and the S&P 500 will turn down, but I think we are not there yet. Why?

Do you know how contrarian investing works? If so, then you would understand my reasons why we are still in good shape. There are still too many bearish investors out there.

According to Stocktwits about 44% of investors are bearish in today’s market. And we have seen this average bearishness since November 2014 with a few spikes lower and higher than that (i.e. up to 62% to 18% bearish investors and traders).

And now, if you ask me why I think we are still in good shape and how bearishness of investors can prove this I want you to review not too far distant example we already experienced a few years ago (people have really a very short memory).

Do you remember gold price action? In 2011 gold price spiked to $1,826.70 per ounce when it reversed and started its deep correction. When gold crossed over $1,600 per ounce my friend trader told me that we were topping the price of gold because his grandpa who has never invested in anything in his life (he had a defined benefit pension plan) suddenly became extremely bullish in gold and decided to invest in it.

Gold Price Action

In another foreign newspaper in Europe I read an article about people liquidating their savings and moving into gold. Everybody was suddenly bullish. Everybody wanted to buy gold.

My friend uses his “Grandpa Indicator” for this same reason to find out if we are really on the top of anything. Did his grandpa indicator told him to get out of the stocks? Well, not yet.

And yet the same trader uses another, similar indicator – put/call ratio. He once explained to me how that works. If so many people speculate for the market to go up buying calls, be alerted as we may be in trouble.

If too many people expect the market to crash they start buying put protection, we are still good and may expect another pull up.

And how are we doing? According to CBOE data, on January 9th 2015 the put/call ratio was at 1:2. In other words, we saw 6 million open put contracts vs. 3 million call contracts against SPX. No matter what you think, this is quite bullish.

CBOE Open Interest

People are extremely bearish, expecting the market to crash. Media and talking heads are warning us of an imminent market crash. Should we be worried? No, we are not there yet. Just check the chart below. We haven’t broke any trend yet. Yes, the price action is a bit shaky compared to all previous dip buys we experienced. However, we are still in an uptrend.

SPX

There are red flags coming out. I admit. One of the red flags was the Friday session. We received good economic data, but the market sold off. But also note that the market is dragged down by energy sector and oil price drop. Thus it is seasonal and there is no need to be extremely worried.

Yes, the market is and will be volatile this year as bulls will be fighting with bears. We may see pull backs. But crash? I do not think so. Our Grandpa indicator is still calm and doesn’t even know about SPX at all. Once he finds out, it will be the time to get out.
 
 




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Posted by Martin January 11, 2015
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My miserable performance in 2014 and goals for 2015


It is time to quickly review my performance in 2014 and set goals for 2015. I have a few accounts I use to deal with my finance. I have an account which I call TD account, ROTH IRA account, 401k account, Scottrade account, and Motif investing account.

I use each of the account for a different purpose and different investing strategy. Those taxable accounts are meant to help me with early retirement to bridge the time when I retire but yet will not be able to use 401k or ROTH accounts.

TD Account

In my TD account my primary strategy is trading options. The secondary strategy is then dividend investing. I trade options and use proceeds to invest into dividend stocks.

ROTH IRA account

In this account I use dividend growth strategy. I invest contributions and dividends into a commission free ETF as long as I save at least $1,000 which I then use to buy a dividend growth stock.

I use Motif investing to simulate mutual funds. I created a few dividend growth portfolios in my Motif account and now slowly continue investing into those portfolios (called motifs). In my Scottrade account I perform a compounding experiment. I will write about it later in my next post.

That was a review of my tools I use to get to my financial freedom. And now let’s review my 2014 performance.

These were my goals for 2014:
 

  1. Reduce my debt by 50% – FAILED
  2. Make $5,000 in options trading – FAILED
  3. Max. out ROTH IRA account – FAILED
  4. Reach $300 monthly dividends income in combined accounts (in TD and ROTH IRA accounts). – COMPLETED

As you can see I failed most of my goals last year. Next I will set my new goals and also explain my failures.

My Goals for 2015

My trading results were very good the first half of year 2014. I more than double my account. I started with $10,072.72 and soon I had almost $24,000 in my account. I was so excited about my success and I believed I was invincible. I overinvested my account and became greedy. I ended 2014 year with 17.42% gain only as I gave all my gains back. You may say it is still a good result, but I am not satisfied with it. My account dropped even below my original starting point. And yet my account is still overinvested. I am breaking my rules.

My goal for 2015 would therefore be to focus on money management and wealth creation and preservation.

I advise my readers to trade only 30% of available cash and keep the rest in reserves for trade repairs. I was constantly breaking this rule. This year my goal will be to strictly follow this rule.

My second goal will be to rebuild once again my account and keep it constantly growing.

My third goal will be to continue eliminating my debt. I was so excited about my trading results at the beginning of 2014 I stopped paying attention to my other goals. I stopped paying off my debt. This year I am determined to work harder than before on eliminating the debt.

Well, my overall year 2014 wasn’t a complete disaster. Only my trading account wasn’t going the way I wanted. My ROTH performed well. My 401k did the same and other accounts were great too. Just my trading account wasn’t that great. My plan is to change it this year.

AccountValue

I wish you a lot of success in the New Year and may your financial dream come true!
 




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Posted by Martin January 09, 2015
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Stocks to buy in January 2015


When trading options or investing into stocks I always wanted to develop a system which would tell me which stocks to buy and which to avoid. I wanted as manual and automated system as possible to avoid emotion in selecting stocks. I wanted something you can almost program into a computer and forget about it.

I tried many systems, but I was never satisfied with the results. Some were too tedious to work with and because I had to do most of the work manually I wasn’t able to eliminate the human factor which makes our decision making irrational and emotional.

And I didn’t like it.

I had a good system at some point. I called it a “Stock Picker Rank”. Based on selected criteria I assigned a rank to the stock and then based on the rank I could arrange stocks to buy or drop from my portfolio. I tested the system and it wasn’t bad. The results were nice and I last year my simulated account ended with 17% gain. Not bad, right?

But the work associated with the stock selection process, running it thru the filters and selecting the right stock was horrible and very discouraging. But I didn’t give up. I was looking for ways how to automate this system and also how to make my criteria focused more on the valuation to pick a stock which is deemed as undervalued.

I think I found a strategy which can do that. It is based on current price, current P/E, forward P/E, current EPS, and EPS forecast. Of course, there is slightly more to it, but this is all I am willing to reveal.

Then, I was able to code this into a Google Spreadsheet, insert my stock watch list in it and now the spreadsheet is screening all of my 150 dividend paying stocks as well as some growth stocks too.

Now I want to put this screener into testing, but I will do it publicly, so you can see yourself how that works and if it pays to follow it and invest. For the following year I plan to publish my selection of stocks and show results of the stocks what it would look like if you invested in it.

How the investing process would work?

 

  1. Every month I will publish new stock selection.
  2. You can buy those stocks (in your paper money trading account for example) and hold until next month.
  3. You place a stop loss 10% below your entry price. If you get stopped, get out of the stock and move on.
  4. Those stocks which remain in your portfolio let them run up holding them until they reach 25% gain. Then sell.
  5. At the beginning of the new month a new selection will be published.
  6. Buy only those stocks, which you do not have in your portfolio, avoid those you already have.
  7. Sell all other stocks which are not in the list anymore, and are showing a loss. Move stop loss to break even of the remaining stocks.

 

The procedure above may change over time as I will be playing with this strategy more during the year.

And here is the list of January 2015 stocks

 

I will use this screener to buy stocks in my ROTH IRA account. In my options trading TD account I will use these stocks (which are optionable of course) to trade bullish spreads. For example, if you are my newsletter subscriber, you have received an option trade alert to trade a bull put spread against Agrium (AGU). In fact, this trade was based on the screener above. And we opened a bullish put spread at 85/90 strikes. If the stock stays at these levels or even grow higher, this trade will end up profitable.

What if you do not have enough money to buy all selected stocks?

It is easy. Each stock has a rank added to it. The highest the rank the better, so just go and pick stocks with the highest rank and continue down the list. For example, if you can only invest $1000, then buy only 1 stock. With $2000 buy 2 stocks, and so on.

Of course the rank won’t guarantee a winning stock, but gives you a high probability of a winner.

And do you know what the best with those stocks is? Many of them are dividend paying stocks so while you are waiting for them to grow to give you nice capital gains, you will be also collecting dividends in the mean time!

Now let’s put this in test and see how that will work.

Happy trading and investing!
 

Previous selection:

Stocks to buy in February 2015
Stocks to buy in March 2015
Stocks to buy in April 2015
Stocks to buy in May 2015
Stocks to buy in June 2015

 
 




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Posted by Martin January 02, 2015
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Netflix will be a part of your cable service. Will it hurt Comcast?


As I hold a position in Comcast (CMCSA) I typically tend to monitor what’s going on around those stocks and how that activity may affect my position. Comcast has a lot cooking under the hood which I deem to be a good reason for holding this stock.

There is a merger with Time Warner Cable (TWC) on the horizon which is on hold for now, but it will move one way or the other soon. Many people consider it a bad thing and try to stop the merger, but that may actually be a good thing for customers and Comcast. If you ask me why I think so, then my answer would be because they will be combining together all features from both companies – bad and good ones. Then they will be able to get rid of those bad features and keep the good ones. They will have enough strength to afford such clean up.

While people are still occupied by the merger with TWC Netflix (NFLX) came with a proposal to partner with its rivals. How can a strong competitor of companies like Comcast (CMCSA), Amazon (AMZN), Dish Network, Direct TV, Apple TV, AT&T, and others become a partner? How would Netflix benefit from it and will this hurt my position in Comcast?

Comcast Netflix

The biggest benefit from this partnership I see is that now even cable companies will be able to offer Netflix in their network. That would be a great benefit for Netflix as they would gain more channels to stream their content. But even bigger benefit I see with cable companies as they will gain access to the content of TV shows and movies they normally do not provide. This may attract more viewers to their service.

In the recent trend of people slowly shifting from cable to internet streaming of the TV content, this move would be a very smart one from your cable provider. That would help them to retain their service in families which were thinking abandoning the cable and provide even better on demand content.

And of course there will be a bunch of people who would consider this a bad thing monopolizing the world of TV content, yet they will benefit from it at the end.

So what does that do to Netflix and Comcast for example?

As far as Netflix goes, this partnership would be a great growth catalyst for the company. According to the Wall Street Journal Netflix added just 980,000 new subscribers in the 3rd quarter of 2014 compared to 1.33 million new subscribers in Q3 of 2014. That is a severe slowdown in growth for a company with an exceptionally high valuation because of its high rate of growth. A Partnership with at least one cable provider would significantly increase Netflix’s viewer base and bring on more revenue.

Super 8 Film to DVD
Advertising

Netflix has around 50 million subscribers. Let’s say that 50% of them are already Comcast subscribers. If Comcast jumps in, they may add another 25 million of new subscribers to their network. On the other hand Netflix would gain another 75 million of subscribers if all above mentioned networks jump in.

From my point of view as an investor it is a great deal for both companies. As a costumer I like the idea as I may get into another great content. The question of course is how that new content will be incorporated in the cable company’s fee structure.

And those who murmur about this deal? Get over it. It is a better deal for everybody.

My outlook for Comcast hasn’t changed amid the recent selling. I am still bullish and keep holding my position in Comcast. Note that I do not hold stocks, but bullish call spread. The only reason I would be selling my spread would be to release cash and take smaller gain than originally planned. But if that happens I will announce it and explain my reasons for it. If the market rebound from current selling, then there will be no reason to liquidate my position early.

What do you think about this deal?

 




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Posted by Guest December 29, 2014
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Experts, Publications Or Algorithms? Who To Turn To For Stock Picks


Everybody wants to have only the best stocks in their portfolio. This need leads us to the question – Who to turn to for stock picks? While you can very well pick your own stocks, reaching out to experts, publications or using algorithms to arrive at the perfect stock is a more sure shot approach. Let’s take a look at how they help you pick stocks.

Expert’s Advice

 
Advice
 

An expert is anyone with a comprehensive knowledge of a subject matter. It is true that when you enter the stock market you do tons of research and gain sufficient market expertise. But, there lies a huge difference. While as a regular trader, you might possess knowledge of the first layer of a stock market and companies, stock experts have detailed knowledge of the trends of the industry, market, and the company. They are privy to insider knowledge, which people like us might not possess.

How Expert’s Help?

There are experts, and then there’s the rest of us. However, many believe that stock picking experts are poorer at predictions than dart-throwing monkeys. While that certainly isn’t true, these experts do make wrong judgements at times. They’re humans too after all. So how do you rely on them? First thing’s first- too many cooks spoil the broth. Don’t bank on the advice of 5 different experts, otherwise you’ll just end up with a chaotic portfolio. Identify a reliable financial expert and conduct your own round of research on the stock advised. This way you’re not blindly going by the word of the expert, but using your judgement too.

Should I Take The Word Of Publications?

 
Publications
 

Publications from Standard & Poor, Morningstar, Value Line Investment Survey, Amigobulls and Investor’s Business Daily help spread vast amount of knowledge. These publications provide important information related to the company’s financials and its general business. Keeping up with these publications can definitely help you assess stocks of various companies and also predict its future direction, to an extent. Extensive reports like the 10-K, 8-K, Cashflow, Balance Sheet, and Earnings report can be obtained via these publications. You can always bank on these to identify an opportunity since they reflect the true financial data of a company.

Can Computers and Math Be The Answer?

Many people look up companies that are making news, study recent stock trends, and analyze favorable media presence to invest in a stock, hoping it would go higher. Then there are those who buy stocks of companies that make products they like. And then there are those cool-head know it all accounting ones, who take the tried and tested fundamental and technical approach. Who’s to say their approach is wrong? But, there’s another way to pick stocks. A more analytical and more technical method – The Algorithm Method.

What Is This Method?

 
Forecast
The table on the left is the stock forecast. The green box represents a positive forecast and the red represents a negative forecast. The table on the right represents comparison between the actual stock performance and the algorithm prediction.
 

In this method computers, math, and a set of algorithm rules are used to pick the best stocks. These algorithms detect the movement or the waves in the market and predict future movement. The algorithm is fed with input from various stock related sources. Contrary to popular belief, stock picking algorithms are not random predictions. You need to patiently follow stock fundamentals, price moves, news, company reports, management changes, industry growth, economy, and politics.

The Verdict:

In all honesty, there’s no one particular method that can stand out as a clear winner. Most of the stock picking strategies are connected by the hip. Stock picking is much like an art form, it requires the use of a combination of techniques to reflect a perfect result. Blindly taking an expert’s advice would be foolish, but completely ignoring it would be even worse. Publications are sources of knowledge, not the bible of stocks. Use them wisely to arrive at a decision. And finally, algorithms don’t have a mind of their own, so they obviously can’t be trusted completely. But, it can be used as a tool to focus and forecast fruitful opportunities.

References:
http://www.theatlantic.com/business/archive/2014/10/do-financial-experts-make-better-decisions-than-the-rest-of-us/381902/
http://www.mymoneydesign.com/personal-finance-2/stocks/experts-find-good-stocks-9-month/
http://www.altaassociates.com/expert-advice
http://seekingalpha.com/article/960271-stock-picking-by-algorithms?page=2

Image References:
http://iknowfirst.com/stock-picking-by-using-algorithms-7-62-average-return-in-7-days
http://geek4eva.com/2009/09/14/guidance-on-avoiding-redundancy/
http://energy.gov/eere/services/publications




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Posted by Martin December 26, 2014
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Which stocks to buy in 2015?

Which stocks to buy in 2015?

I trade mostly dividend paying stocks, but watch a few companies which I consider good companies although they do not pay dividends. These I use in my portfolio as growth play stocks (for example a few months ago I did buy Alibaba (BABA) for this same reason).

In my watch list I have approx. 100 stocks I watch. Some I trade actively, some I only invest in. For example in my ROTH IRA I only invest into stocks, I do not trade. But in my TD Account I trade stocks and options, but use those exact same stocks as underlying symbol for my trades.

Among the stocks I have in my watch list I try to find those, which are currently undervalued. I use the difference between current P/E, current EPS, EPS estimates, and current price. A formula I created tells me what stock has a bigger potential for growth compared to its current pricing at the market.

The result of my screener for an undervalued stock means, that there is a significant chance that investors are not investing in those companies yet, but potentially will in the future and drive the price of the stock higher. That would be the best time to sell them the stock you purchased at the time you spot it as undervalued.

Here is a list the stocks I believe will become winners in the next year of 2015. Let’s take a look at them.

Agrium Inc. (AGU)

Agrium is in Basic materials sector but in Agricultural chemicals industry. It is not thus beaten down that much as precious metals for example. It produces, retails, and distributes the crop nutrients, crop protection products, seeds, and agronomics primarily in North America, South America, Europe, and Australia. The company operates through two segments, Retail and Wholesale. The Retail segment supplies crop protection products, such as herbicide, fungicide, insecticide, and adjuvant products; crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; seeds; and merchandise comprising fencing, feed supplements, livestock-related animal health products, irrigation equipment, and other products.

Agrium is a dividend paying company but it is not a true dividend growth stock. It was founded in 1931 but it paid dividends only since 1993 and increased dividends in only two consecutive years.

At its current price $95.91 a share it yields 3.30% dividend yield. Its dividend growth of 160.55% is impressive, but it is hard to say whether sustainable or not. I would say, it is not and as the dividend payment plan of the company matures over time, it will decline to a more standard level.

Morningstar provides a fair value at $96 a share with a very high uncertainty and a target to sell at $148.8 a share. My own calculated fair value is at $164.83 a share.

With that said, I would consider this stock a growth play rather than a dividend growth investment. If you buy at the current price and hold until it reaches $148.80 a share, you will collect a nice 55.14% profit and in the meantime you will be collecting a nice dividend. If you play this stock, I would use a stop loss at $86.32 a share. But, be also prepared for a long holding period as it may take quite a long time to get to the target price.

 
AGU
 

In my TD account I am taking this trade as an option play selling a credit put spread expecting this stock to stay above $90 a share at expiration. In my ROTH IRA account I am currently fully invested, thus I have to skip this opportunity.
 

BreitBurn Energy (BBEP)

BreitBurn Energy, as its name provides, is an energy stock and it was beaten hard in the last days. Many analysts predict that price of oil will stay down until 2016 and that the oil crisis is worse than ever and similar to 80s or as in 1997 – 1999, 2001 – 2002, or 2008 – 2009. It could be. But as of now, the stock got so beaten in price that it pushed its dividend yield to levels never seen before. It now yields a staggering 21%. The company pays dividends (distribution, since it is a partnership) since 2007 and it has been increasing dividends in 4 consecutive years by average 7.64%, which is not a bad rate.

The old adage says, when there is blood on the street be buying. I believe that this is an opportunity. Investors are panicking and selling energy stocks. Buy them. I bought Legacy Reserves (LGCY) for this same particular reason. Although everybody shouts sell, sell, sell, I would buy this stock. But it will be a long run and there is a risk involved. If the oil price war continues well beyond 2016, the portfolio hedging of BBEP (as well as LGCY) would be depleted and the company may cut its dividends. Even if that happens, however, it still will be at around 10% range rate and while waiting for price recovery (to get back to 20s) you will be collecting nice dividends. When the stock returns to 20s, which may take up to two years or more, you will see a nice capital gain too.

Saudi Arabia claims that they wouldn’t cut production of oil which sent prices lower. But with their current 17% budget shortfall, they too will not be able to sustain this war for prolonged period of time as their economy is fully dependent on oil. If they start pushing oil price back up, companies involved in oil will go up again (as they did many times in the past).

 
BBEP
 

If buying this stock, be prepared for nice profits, but accept increased risk. The risk is in dividend cuts and further price fall. Nobody knows how low oil and the price of this stock can go. I believe this will be a winner at some point, but it will take some time, even two or more years. I would also consider this trade as a growth play, rather than a dividend growth holding.

Baidu, Inc. (BIDU)

Baidu is not a dividend paying stock whatsoever, but the recent sell off from $250 to $225 sent the stock to undervalued territory. Some investors may not agree with me, but its growth rate is more aggressive than its current valuation. Its price to growth rate is very low making this stock an attractive growth play. Baidu’s growth rate is at 37% which is more than any other stocks in my watch list. There are only a few competitors competing with this growth rate such as Netflix (NFLX), Mosaic (MOS), Alibaba (BABA), Go Pro (GPRO), and some others (some listed below). All those stocks are in a category of young companies with a huge potential for growth, while mature companies (such as AAPL) are slowing down.

 
BIDU
 

Morningstar considers a selling price for this stock to be at $341 a share although their fair value is at $220 a share. I would be satisfied with $280 a share where I would sell this stock.

GameStop (GME)

GameStop is my favorite stock. I was able to make good profits with this stock in the past. A recent sell off of this stock, mostly based on fear and panic that they won’t be able to survive online shopping of the games and a new competition such as Walmart (WMT) entering into used games business, sent this stock again into undervalued territory.

Game stop is a dividend company, although it is not a true dividend growth stock. It yields 4% at its current price and it increased dividend once since 2012 when it started paying dividends.

 
GME
 

GME still may continue falling, however, there is a strong support at $30 a share. If the stock holds this level, we may see it marching back up towards my calculated fair value at $47.2 a share. Buying and holding this stock would be a growth play rather than dividend investment, but during waiting time for the stock to grow, you would collect a nice dividend. I also may use this stock for my options plays opening a credit bull put spread with around 30 strike.

Mosaic Company (MOS)

Mosaic is in the same category as Potash Corp. of Saskatchewan, Inc. (POT) producing and marketing concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. Mosaic is a dividend company currently yielding 2.20%, but it only increased dividends for 2 consecutive years since 2008 when it started paying dividends. Also the dividend growth rate is quite low (only around 2%). That would make this stock a growth play too.

 
MOS
 

This stock’s growth may be a bit tricky when looking at the long term chart. Morningstar considers this stock’s fair value to be at $56 a share which would deliver 20% capital gain if it gets to that level. That would be my selling point although Morningstar recommends a selling price to be $86 a share. While waiting for this stock to grow, you would be collecting an acceptable dividend. There is a nice potential potash contract waiting in India and China and if that happens (expected early in 2015) that can lead to increased potash prices and Mosaic would benefit from it greatly.

Micron Technology (MU)

Micron Technology, Inc., provides semiconductor solutions worldwide. The company manufactures and markets dynamic random access memory (DRAM), NAND flash, and NOR flash memory products; and packaging solutions and semiconductor systems. It doesn’t pay dividends and therefore this would be a growth play. The stock recently ran up in 2014 due to expectation of more massive use of NAND – solid state drives (or SSDs) which could soon replace traditional hard drives. Although it will surely happen unless something better shows up on the scene, the price of SSDs is still prohibitive.

The target price for this stock is at $43.75 a share. At current price $34.91 a share this trade could provide a nice 25% profit.

 
MU
 

But there is a danger that the stock will exhaust its run up (as the volume is declining with the new highs), so I would play this trade with a stop loss at around $31.40 a share.

Old Republic (ORI)

Old Republic (ORI) is a dividend growth stock with 7 years of consecutive dividend increases. It is engaged in underwriting insurance products primarily in the United States and Canada. The company’s General Insurance Group segment offers automobile extended warranty, aviation, commercial automobile, commercial multi-peril, general liability, home warranty, inland marine, travel accident, and workers’ compensation insurance products; and financial indemnity products for specialty coverages, including errors and omissions/directors and officers, fidelity, guaranteed asset protection, and surety.

 
ORI
 

It currently yields a nice 5% dividend yield, but its dividend growth is only 1.43%. Recent sell off in August and October this year sent the stock to $14.59 a share. Yet this price is still below resistance at $15 a share and well below $17 a share of two year max price. I would also consider this stock as a growth play, but it will be okay to add this stock to a dividend growth portfolio too since the stock shows nice disproportion between the EPS growth and stock valuation. Therefore there is still a good potential to catch some capital gains while collecting high dividend in the meantime.

My expected sell target would be at $21.98 a share unless you decide to keep this stock longer or forever to collect dividends.

Qihoo 360 Technology (QIHU)

Qihoo 360 Technology provides Internet and mobile security products and services in the People’s Republic of China. Its core Internet security products include 360 Safe Guard, a solution for Internet security and system optimization; 360 Anti-Virus, an anti-virus application that uses multiple scan engines to protect users’ computers against various kinds of malware, as well as 360 Mobile Safe, a security program for the Google Android, Apple iOS, and Windows smartphone operating systems.

Qihoo is undervalued compared to its growth rate and makes it a good growth play as it doesn’t pay dividends. It, however, fell thru its long term support at $75 a share completing a head and shoulders pattern. Now it is marching towards $25 support. And it may get there.

 
QIHU
 

I recently played this stock on the downside and made money. There is unfortunately nothing to be seen what can stop this stock from further fall. Although this stock is now undervalued when comparing its price valuation vs. EPS growth rate, it still doesn’t mean the stock will rise again. If you decide to play this stock, I would do so with a tight stop loss and get out of this stock at $75 a share (target) or move the stop loss higher with the stock.

Amid the price fall QIHU has been under heavy accumulation since October 2014 and that may continue well in 2015 as China will stabilize their economy and the rest of the world will move its attention somewhere else. Their government has been encouraging the Chinese people to enter the equities market. Like the US during the boom, China wants to prove to the world that their system works. They know that in order to do so they have to be economically sound and financially seen as superior.

Tallgrass Energy (TEP)

It would be surprising if there wouldn’t be any other energy stock which wouldn’t show up as undervalued on my radar. Originally, I thought almost all energy stocks would be undervalued, but it doesn’t seem to be true – yet.

Tallgrass Energy (TEP) is one of the stocks which shows symptoms of discrepancy between price valuation and its growth rate. As is typical for partnership, this stock pays nice dividend and yields 4.30% at its current price at $42.75 a share. Surprisingly this stock wasn’t beaten down too much during the energy stocks sell off and so far it recovered quickly:

 
TEP
 

If purchasing this stock I would purchase it at this level as a growth play and sell $50 a share collecting dividend while waiting. Since the stock recovered nicely from recent sell offs while oil prices are still down, we may expect that the stock would grow fast with the oil recovery. Then we may capture nice capital gain and dividends.

Vipshop Holdings (VIPS)

I have this stock in my watch list for my options trading. VIPS doesn’t pay dividends, so it is a pure growth play.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China. It offers a range of branded products, including apparel for women, men, and children; fashion goods; cosmetics; home goods and other lifestyle products; footwear; sportswear and sporting goods; luxury goods; and gifts and miscellaneous products. The company provides its branded products through its vipshop.com and vip.com websites, as well as its cellular phone application.

 
VIPS
 

The stock may see a growth back to around $25 a share (after split) where I would sell realizing a nice 25% profit. However, the stock may continue its fall down to $17 a share support and if it breaks it, it can fall all the way down to $15 a share. Therefore I would trade this with a tight stop loss or wait how this stock moves in a couple of few days in January 2015. The entry point into a position in this stock isn’t clear. For this reason I would use a contingency order placing a buy order above previous day high so I would buy this stock only on its way up.

YY Inc. (YY)

This is my last stock in my watch list which is shown as undervalued. Why Why company operates an online social platform in the People’s Republic of China. The company engages users in real-time online group activities through voice, video, and text on personal computers and mobile devices; and enables users to create and organize groups of various sizes to discover and participate in a range of activities, including online games, music activities, education, live game broadcasting, and conference calls.

It doesn’t pay dividends and therefore I would consider this stock again as a growth play only. The stock recently bounced from $60 support. If it doesn’t hold, the next stop is at $50 a share. But the stock seems to be holding and marching back up. If we add its valuation vs. growth rate into an equation, we may see this stock marching up to $70 or even to $80 a share.

 
YY
 

These were the stocks which seem to be undervalued when taking into account their current price, EPS, P/E, and EPS estimates. Of course, as anything in the stock market, this doesn’t guarantee that those stocks will grow and make you money. I however see high chances of doing so. If trading those stocks which are not dividend growth stocks I would trade them with a stop loss, but those which pay and grow their dividend I would consider not using a stop loss at all and potentially keep them.
I take these stocks a good opportunity for 2015 investment.

Which of the stocks you would buy for the 2015 year?

Disclosure: I hold bull put spread against AGU (long). I do not have any positions in other stocks mentioned above. I may open new stock positions in my ROTH IRA or options positions in TD account against the stocks mentioned above. If I will be opening a new position I will post it on this blog.
 
 




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