Valero (VLO) turned out to be a great value at $18.20. I believe it's worth around $30 per share but would suggest buying the stock and selling front month calls against the position. Given that the December expiration is just a little over one month from now, investors who buy VLO and sell the December $20 call will receive $0.80 in premium for a maximum 4% return over the next month. In my view, selling the November $20 call against stock purchased at today's closing price of $19.96 is more appealing, as the $0.34 premium represents a 1.7% return over the next week.
VLO has a market cap of around $11.3 billion and a net tangible book value of $15.1 billion as well as approximately $2.3 billion in cash flow from operating activities. If the business turns, the company could earn substantial return on equity going forward. The market appears lousy here, however, so maybe waiting for a correction before entering into the covered call would be a better option.
Seaboard Corp. (SEB) is trading at around 12X earnings and 1.4X book value. I like the company's diverse conglomerate model and also the hog business, which should benefit as pork prices catch up to feed input prices. The company has a market cap of $2.3 billion and $273 million of operating cash flow over the trailing 12-month period. I like the stock but would hope for a pullback of 8-10% before buying a major chunk of shares, given the valuation and run in the stock. The recent growth is likely sustainable; however, I feel adding at a lower valuation makes sense.
Chevron (CVX) is too cheap to ignore at current valuations (4.58 EV/EBITDA, 10X TTM EPS, 8.9X forward PE), given the dollar weakness and coming QE. I do not feel the risk of an oil price crash is overblown, while CVX's move into natural gas will provide a longer term competitive advantage for the company. I would sell calls.
In regards to Chesapeake (CHK), I continue to like it at around book value given their enormous reserves and history of performance. I am long on the March $15 calls and short on the front month $23 calls for a bull calendar spread.
Aspen Insurance (AHL) is trading at 2/3 tangible book value with few definite long term assets and strong cash flow and earnings. The company is currently repurchasing stock. Long the March $20 calls.
US Bancorp (USB)'s financials have not caught up to the rest of the market since the recent run-up, and USB has significant cashflow from operating activities. USB is no longer paying a large dividend, but the cash-generating power of the business remains, and in the future I think USB will be in good enough shape to reinstate a 3-4% annual yield dividend to investors. I'm selling the $24 calls here.
Berkshire Hathaway (BRK.B) is very hard to ignore anywhere near book value, especially when considering that the company has grown tangible book value from $87 billion to $100 billion since the market peak in 2007. The company earned around $15 billion in operating cash flow over the past year, which I feel is worth the $200 billion asking price of the shares in the market. Although fairly valued in my opinion, the stock will likely rise with Berkshire's book value over the long haul, making the premium-to-book value well worth the price for investors over the long term. Still, I'm shorting the calls against my stock.
Chipotle Mexican Grill (CMG) is still a restaurant stock, and the food commodity input prices are rising at a rampant rate with the announcement of more QE. At 47X earnings, investors may be biting off more than they can chew. McDonalds (MCD) would be a prudent pair for the long side of a pairs trade.
OpenTable.com (OPEN) is trading at 128X earnings, and although the company's model and execution are excellent, I can't yet see how they are the next Facebook or Myspace, while the stock market has priced the site at $1.5 billion -- still a lot of money even in the Age of the Cloud.
iShares Russell 2000 Index Fund (IWM) is trading at 30X reported earnings, while many companies in the index are still losing money. The bailouts and QE are not as beneficial to American small caps as they are to S&P companies, given the weak dollar. The Russell has gone up 80% over the past ten years while the S&P is flat -- in my mind investors buying it here are using rearview mirror thinking.
Salesforce (CRM) is a great company in a booming market, but it's overvalued, earnings are decelerating on a Q over Q basis, and it still trades for 200X earnings. Insiders are dumping stock as fast as they can sell and the momentum is dying off in the share price movement. I am longing the Jan $115 put options and shorting the Nov. $115 puts for a bear calendar spread.
Amazon (AMZN) is trading at 70X PE and 49X forward PE; that is not justified by earnings or sales growth in even the most favorable scenario. Short the common and short the ATM weekly put options for income.
Netflix (NFLX) is basically the same as AMZN: 69X PE with growth rate of 25% in earnings over the long haul. Short the stock and short the weekly puts against the position.
Note on shorting: It's way better to buy put options that are a few strikes in the money then to short a stock. The squeezes in the names above can potentially wipe out an account. It is very important to start short positions small and add as they go higher and the company's fundamentals remain overvalued.
I am usually an unhedged bull, but with the recent unbelievable run-up in stocks without a corresponding uptick in the five-to-ten year economic picture, I don't see government-created inflation as positive over the longer term for stocks. In fact, I think the Fed is buying bonds at the top. Eventually interest rates could either rise or the dollar could become devalued. In either scenario, I expect commodities and farmland to continue to perform well compared to stocks.
Unless we find a means to mass produce natural-gas automobiles, inflation due to higher energy prices looks inevitable without the QE interventions alone. In all, this is a difficult time to invest, thanks to peak oil, bad policy, banking risks, etc. I'm hedged in stocks and long calls on iShares Silver Trust (SLV), Powershares Db Diversified Agriculture Fund (DBA), and long some Elements Etn-rogers International Commodity Index (RJI) and farmland.
P.S. Right now may not be the best time to be in the short dollar/long things with price tags trade ... so invest conservatively.
Disclosure: Long all long positions mentioned, and short all short positions mentioned