Shot through the heart
And you're to blame, darling
You give love a bad name
An angel's smile is what you sell
You promise me heaven and then put me through hell
Chains of love, got a hold on me
When passion's a prison you can't break free
You're a loaded gun, yeah
There's nowhere to run
No one can save me, the damage is done
Shot through the heart, and you're to blame
You give love a bad name
-- Bon Jovi
In quick summary, Radware Ltd, (RDWR) was called away at $31 with a 34% gain since November 11, 2010. I posted in the March 5, 2012 article the series of option trades recommended to create a 34% gain in a stock which actually traded down from our original purchase price of $33.39 (final cost basis $19.59). Seagate Technology (STX) was called away at $21 with a 14% gain since January 29, 2012. I never complain about profits, but clearly this is a case where buy-and-hold would have yielded a higher profit than the option strategy.
Jabil Circuit Inc. (JBL) was called away at $21 with a 39% gain since January 27, 2011 on a position that we originally recommended at $20.56 (final cost basis of $12.89). Western Refining Inc. (WNR) was called away at $16 with a quick 17% gain on the buy/write strategy recommended on January 29, 2012 (final cost basis of $13.40). Xyratex Ltd (XRTX) was called away at $15 with a 22% gain after being recommended on December 17, 2010 (final cost basis $11.58). Lastly, we had to spend $0.12 to close the LDK Solar Co (LDK) Mar $5 put and sold to open the LDK Jun $5 put for $1.20.
March expiration closed 5 positions, and so we have cash to open new positions, long or short. Let me get back to the opening line of this article, which is the first of those positions, JCOM. The Grumpy Old Accountants published an article March 8, 2012 which details how many view JCOM as having "promised you heaven and then put you through hell." The company has tried to pass off an accounting error as a change in estimate. The explanation(s) offered by the company seem to fail the sniff test of many experienced forensic accountants. If the SEC agrees with Gradient Analytics (which graded the earnings quality of JCOM an "F" on November 21, 2011) and others, then JCOM would be forced to restate prior year earnings. Herb Greenberg issued a "Herb Alert" on JCOM in November prior to the Q1 announcement.
Accounting issues aside, highly competitive pricing in the eFax business has caused a sharp decline since 2007 in revenue per customer for JCOM. The company has used acquisitions to grow revenues, but the core business earnings quality appears to be very suspect. "An angel's smile is what you (JCOM) sell" and with the possible accounting errors also overhanging the company "you're to blame," causing me to say "you give love (stocks) a bad name." My recommendation is to enter a short position in JCOM.
On the long side we want to get exposure to copper, which rallied Friday on the economic news. Freeport-McMoRan Copper and Gold, Inc. (FCX) is my choice as a proxy for exposure to copper. Based on Friday's closing price of $38.56, we can obtain initial exposure at a forward P/E of 7.19. The 18 analysts following FCX anticipate $4.17 in earnings for 2012 and three have upgraded their estimates for the June quarter in the last 30 days. By selling the FCX May $40 call (FCX120519C00040000) for approximately $1.46 and selling the FCX May $40 put (FCX120519P00040000) for approximately $3.10, we can enter with an anticipated cost basis of $34 and a target of being called away (or rolling to a forward expiration) in May at $40.
Western Digital Corp. (WDC) is the second long position I would like to recommend. The 5-year expected growth rate by the 10 analysts following WDC is 20.09% and we can gain exposure (before using our buy/write strategy) at a forward P/E of 4.34. That is the kind of relationship between earnings growth to forward P/E we like to see. WDC also has $585 million in levered free cash flow, along with $3.92 billion in cash. As always, we want to buy ½ the number of shares we are willing to own at approximately $38.26 (Friday's close). Then by selling the WDC July $40 call (WDC120721C00040000) for approximately $2.80 and selling the WDC July $40 put (WDC120721P00040000) for approximately $4.45, we can gain the exposure desired at an anticipated cost basis of $31.01 and a target of being called away (or rolling to a forward expiration) in July for $40.
Valassis Communications, Inc. (VCI) is worth long exposure, as 8 of 9 analysts who follow VCI have raised their 2012 earnings targets in the last 30 days, to $3.11. The forward P/E, based on Friday's closing price of $24.01, is 6.8. VCI has a high short float of 16.2%, which could provide additional upside if the analysts are correct on their increases in earnings for the coming quarters and year. The options for VCI have good liquidity, and so I recommend entering ½ the long exposure desired in VCI and selling the VCI June $25 call (VCI120616C00025000) for approximately $1.50 and selling the VCI June $25 put (VCI120616P00025000) for approximately $2.50. We will have the desired long exposure at an anticipated cost basis of $20.01, with a target of being called away (or rolling to a forward expiration) in June for $25.
These 3 long positions (FCX, WDC and VCI) using the buy/write strategy and shorting JCOM give us "a loaded gun" again, and we still have one position to add in the short term.
- Short JCOM at the market, Monday March 19, 2012
- Buy to open ½ desired shares FCX at the market, Monday March 19, 2012.
- Sell to open FCX May $40 call at the market, Monday March 19, 2012.
- Sell to open FCX May $40 put at the market, Monday March 19, 2012.
- Buy to open ½ desired shares WDC at the market, Monday March 19, 2012.
- Sell to open WDC July $40 call at the market, Monday March 19, 2012.
- Sell to open WDC July $40 put at the market, Monday March 19, 2012.
- Buy to open ½ desired shares VCI at the market, Monday March 19, 2012.
- Sell to open VCI June $40 call at the market, Monday March 19, 2012.
- Sell to open VCI June $40 put at the market, Monday March 19, 2012.