Stocks Upgraded to "Buy" or "Overweight"
On Monday, 10 names were upgraded to "buy" or "overweight" by at least one analyst. One of the names, Lenovo Group Ltd (OTCPK:LNVGY), trades on the Pink Sheets in the U.S. and doesn't have U.S. options traded on it. The table below shows the costs of hedging the other nine names against greater-than-22% declines over the next several months, using optimal puts.
For comparison purposes, I've also included the costs of hedging the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) against the same decline. First, a reminder about what optimal puts are, and a note about why I've used 22% as a decline threshold. Then, a screen capture showing the current optimal puts to hedge one of these stocks, OpenTable, Inc. (NASDAQ:OPEN).
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I often use 20% thresholds when hedging equities. But OpenTable, Inc. was too expensive to hedge using a 20% threshold (i.e., the cost of hedging OpenTable against a greater-than-20% decline was itself greater than 20%, so Portfolio Armor indicated no optimal contracts were found for it). It was possible to hedge all of the names against a greater-than-22% decline, so that's the decline threshold I've used here.
The Optimal Puts For OPEN
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of OPEN against a greater-than-22% drop between now and July 20th. A note about these optimal put options and the cost: To be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask (the same is true for the other names in the table below).
Hedging Costs as of Monday's Close
The hedging data in the table below is as of Friday's close, and is presented as percentages of position values. The name of the firm that employs the analyst who upgraded each company to a "buy" (or, "overweight", in the case of OpenTable) is listed to the right of the upgraded company's name. Regarding the high cost of hedging a few of these names, recall that, as we noted in a recent article ("A Warning Sign That Might Help You Avoid The Next Sears"), high optimal hedging costs may presage poor performance.
|Analyst's Firm |
|ACOR||Acor Therapeutics||MKM Partners||15.5%**|
|ASNA||Ascena Retail Group||BB&T Capital Mkts||2.85%*|
|BRCM||Broadcom Corp.||Deutsche Bank||5.80%***|
|EME||EMCOR Group||BB&T Capital Mkts||10.7%**|
|FCS||Fairchild Semi||Deutsche Bank||16.2%***|
|FOSL||Fossil, Inc.||Brean Murray||8.23%*|
|IPXL||Impax Labs||Cannacord Genuity||8.24%*|
|OPEN||OpenTable, Inc.||Barclays Capital||19.5%**|
*Based on optimal puts expiring in June
**Based on optimal puts expiring in July
***Based on optimal puts expiring in August
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.