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By Scott Brown, President, Sabrient Systems

I sit looking ‘round
I look at my face in the mirror
I know I’m worth nothing, without you
And like one and one don’t make two
One and one make one
And I’m looking for that free ride to me

I’m looking for you
I’d pay any price just to win you
Surrender my good life for bad

To find you, I’m gonna drown an unsung man
I’d call that a bargain

The best I ever had

The Who

If you like the lyric “I’d pay any price just to win” or believe that “one and one don’t make two,” then you probably have been buying Green Mountain Coffee (NASDAQ:GMCR) over $100 per share. But if you are like me and are looking for a “bargain,” then these Buy/Write stocks are for you.

After the worst quarter since the 2008 debt crisis, many investors are worried “looking ‘round ... in the mirror” and wondering if they will eventually be “worth nothing.” The worst of times often presents the best bargains, maybe even “the best I ever had.” It doesn’t really matter whether or not they are the best ever, but the point is that when looking for a “free ride” (which doesn’t exist), the closest you’re going to get is in markets like we have experienced in 2011. I’ve seen this many times in the 25 years I’ve been researching the market. We’re never sure where the bottom of a market correction is, but right now we have the opportunity to identify good valuations to gain exposure with “bargains.”

On September 6, 2011, we added VXX as protection against further downside in the market, which has made us 21.3% thus far. I believe it is a good idea to keep that position in place as our hedge against further market erosion, but I’m ready to recommend two positions using Phil Davis’ Buy/Write strategy.

Rockwood Holdings, Inc. (NYSE:ROC) closed at $36.06 Wednesday, October 5, and was upgraded by JP Morgan citing the long slide in share price. This is the type of “bargain” that should catch our attention. ROC was trading at $62.03 on July 27, 2011 which, by itself, doesn’t make it a “bargain.” A big reason for the decline is that a large portion of the company’s sales are in euros, and investors are worried about that in light of the pressure on the euro (good thing to worry about). Most analysts believe ROC’s earnings will increase in 2012 despite the problems with the euro because of demand for titanium oxide. Seven analysts who follow ROC expect earnings of $4.46/share in 2012. Volatility in stocks often are delineated in the premiums received (or for those who buy options, paid), and when we factor in the “juice” in the Feb 2012 buy/write you will see that we can gain exposure to ROC at a 25%-plus discount to today’s close.

The Feb 2012 $40 put is at $7.75, and the Feb 2012 $40 call is $3.80, allowing us to buy half the number of shares we are willing to own at $36.06 and earn $11.55 in option premium, with the obligation being to buy or sell the other half position at $40 on February 17, 2012. Keep in mind that as the time value erodes we will always have the option, prior to February, to roll the positions forward to future months.

Agilent Technologies, Inc. (NYSE:A) is the second company I believe is available at a “bargain” at $32.12. Like Rockwood Holdings, Agilent was trading at $50.23 as recently as July 8, 2011. The sharp drop in share price presents us with the opportunity to acquire a company that analysts expect to grow earnings at 21% over the nex five years for a forward P/E ratio of only 10.07. I particularly like Agilent’s leveraged free cash flow at $2.06 billion per year. Once again, the volatility in Agilent has created increased premium in the options. The January 20, 2012, $33 puts are selling for $4.50, and the Jan 2012 calls for $3.65. That is $8.15 in premiums at a valuation we are already happy to own.

These may or may not be the “best I have ever had” in terms of “bargains,” but they are as close to a “free ride” as I have seen in a while. I will be reviewing the October option positions and recommending action in the next 10 days.

Recommendations:

Buy to open, ROC, at the market, Thursday, October 6, 2011.

Sell to open, ROC120218P00040000, at the market Thursday, October 6, 2011.

Sell to open, ROC120218C00040000, at the market, Thursday, October 6, 2011.

Buy to open, A, at the market, Thursday, October 6, 2011.

Sell to open, A120121P00033000, at the market, Thursday, October 6, 2011.

Sell to open, A120121C00033000, at the market, Thursday, October 6, 2011.

Source: Rockwood Holdings, Agilent Are Bargain Buy/Write Stocks