Getting Aggressive in a Scary Stock Market: Buy the Innovators at Deep Discounts

by: SA Editor Rocco Pendola

In the epic Rosalita, Bruce Springsteen, speaking of a character living through turbulent personal times, notes, "Someday we'll look back on this and it will all seem funny."

My thoughts exactly, as I sit back and try not to listen to the moronic drivel that passes for political debate in America. At least the great RFK can listen to Clarence Clemons' sax as he rolls in his grave.

In any event, S&P obviously has an ax to grind or a rear end full of past missteps to cover. The market meltdown, in and of itself is healthy, and, ultimately, it should work itself out as nothing more than a good, much-needed correction/dose of reality. As I noted over the weekend, this is the time to go long or at least get ready to, but only on the right stocks.

There are so many ways to get aggressive and take advantage of this situation. Of course, you can just go long the stocks you think will be the strong performers over the next year to 10 years. As the dogs on Main Street howl, you can also use options to take charge.

I cannot say it enough - selling puts on Apple (NASDAQ:AAPL) represents one of the best single trades you can make as the transistors blast around you. Let's get this straight. You can get paid roughly $680 (premium of $6.80, multiplier of 100), as of 11:45 p.m., Eastern time Monday, to assume the following risk: If AAPL breaches $350 between now and August 20th, you might need to buy 100 shares of the stock at $350 per share, regardless of market price. I will take that trade any day of the week. And, of course, you can slide the strike price of the put you sell up or down to suit your level of bullishness.

Bottom line, you can collect considerable income for taking on "risk" that will likely never come to fruition. And, if it does, would you be upset over being "forced" to buy AAPL at a discount, even if it, temporarily, trades below your entry price? With that in mind, if you look out more than a month, the premiums on AAPL puts are even more inflated. For instance, as of this writing, the September $350s traded for $13.53 and the October $350s painted $20.11.

An entire universe of stocks exist to execute this strategy on. I just think AAPL represents one of, if not the best bet. (NASDAQ:AMZN) comes a close second. Here's a stock that had everything going for it as it recently notched a 52-week high of $227.45. With incredibly interesting rumors swirling about the company's forthcoming tablet, Jeff Bezos gives Steve Jobs a run for his money in terms of being an innovative genius. These are the types of companies you want to invest in when things look bleak, the ones that dictate the terms of the game as opposed to live by the ones set by somebody else.

Consider the same put selling strategy on AMZN. For a credit of about $540, as of noon, Monday, in New York, you could sell an AMZN August $190 put. If the shares breech that level, you might have to buy them for that price. In the case of AMZN, as well as AAPL, blowout holiday quarters could make this type of bet a major winner.

Often, when selling puts, the biggest "risk" is the one that nobody talks about. That is, the real possibility that the underlying stock does not pull back far enough and you never get the chance to go long. All you're left with is the premium collected on the original trade. To guard against this, you can use the income generated by selling puts to go long stocks or buy calls.

In this environment, I like to give a long hard look to stocks that seem to want to go up, but macro events simply will not let them. Tesla Motors (NASDAQ:TSLA) and Pandora (NYSE:P) both fit that category for me.

As its recent earnings conference call illustrates, Tesla is doing an excellent job of bridging the gap between the end of Roadster sales and the beginning of its Model S run. Bullish sentiment keeps coming, with one analyst even making a comparison between Tesla CEO Elon Musk and Steve Jobs. While Musk could turn out to be one of the many "next Gretzky's," I think there's something to the association.

After crossing $30.00 on July 20th, investors have driven TSLA as low as $22.83 last Friday. I am all for owning shares at this level. As of this writing, the TSLA August $23 puts would bring in roughly $100 apiece.

A similar situation exists for Pandora. Some incredibly exciting news crossed the wire a couple weeks back regarding the company. It went largely ignored. Terrestrial radio, other Internet radio providers and Sirius XM (NASDAQ:SIRI) should all pay close attention because, undoubtedly, Pandora's sales team has been given spiffy one-sheets for use in an attempt to secure ad buys across major markets. These numbers among the crucial 18-34 and 18-49 demos come in better than those put up by top terrestrial stations in markets ranging from New York and Los Angeles to San Francisco and Dallas-Forth Worth.

Pandora's key to survival and a higher stock price is generating serious advertising revenue. Assuming the company has sales people with a pulse, selling these numbers should be a no-brainer. Expect the results to come quick, probably in the next six to 12 months.

In a previous Seeking Alpha article, I noted that I could only really suggest going long terrestrial radio via non-pure plays CBS (NYSE:CBS) and Disney (NYSE:DIS). I stand by that. Pandora can take it to terrestrial radio with these numbers, big time. No doubt, it's a niche, but that's all the company needs-- the key demos in the 18-49 range and the ability to sell a dynamic Internet/mobile platform that only has room to grow and evolve.

In another article, I asked "Can Sirius XM Generate Meaningful Advertising Revenue?" While the conversation often revolves around whether or not the company wants to, I reiterate what I said in that article. I am not sure Sirius XM can generate much more advertising revenue than it does now.

It comes down to being able show advertisers (basically, large ad agencies) that you have large numbers of listeners tuning consistently for significant periods of time. I do not think Sirius XM can do this. Advertisers will turn a polite smile to the number of subscribers Sirius XM has and how many buttons with "SAT" written on them it has installed in new cars. Until Sirius XM translates these meaningless statistics into ratings like Pandora has done (and like terrestrial always has), it will continue to rely on its current backward-looking subscription model. The company may have no other choice because it probably does not put up the numbers Pandora does in key demos across key markets no matter how a slick sales department packages its stations.

Be careful with Pandora options, as they are thinly traded. Most of the bid/ask spreads are quite wide. You can always put in a bid on a call and see what happens. At this point, however, buying the common stock makes most sense.

Apple. Amazon. Tesla. Pandora. Today's biggest innovators. Today, at deep discounts.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in P over the next 72 hours.

Additional disclosure: I am long TSLA.