Colgate: International Growth, Cheap Options

Expanding on the thesis of macro economic & demographic trends associated with two increasing bodies of middle-class populations, Colgate (CL) entered my peripheral view. The picture became clear as the company is likely to benefit from a second round of international growth.  Latin America has contributed to climbing sales, and Asia should do the same.  That’s why I thought that at 23x Colgate was fairly valued and while it may be slightly over extended this week on the technicals, the long term chart looks good to me.

Interesting fact: It has 44% of the world’s toothpaste sales.

As I always do, I checked out the option chain to see what strategies made sense.  The IV clip on the LEAPS were on the order of 10%. I never use options for leverage, I only sell premium, but in this case, it just made sense to do a bull call spread.   I bought the $65 2010s for $13.40 and sold the $80 2010s for $4.80.  I had a net position size of $8.60, an effective $65 call with capped gains at $80.  Trade was entered at 3:00 Friday, so I paid only 0.60 in time premium for a over a year. 

The amazing part is the cash left over, because I used this strategy as opposed to buying stock, is $65, so I effectively paid $0.60/$65 or ~0.9% to borrow for 20 months.  Yeah, that’s right, if I took that $65 and put it in a savings account, I could pay for the time premium.  I need an 8% rise in CL, in 20 months, for a technical 74% return on invested capital, but have an upside of ~8.6% and downside of ~11.2% on the effective $74 per share, in leverage. 

I’m comfortable with this risk to reward, because even if multiple contraction down to 19 were to occur, so long as the company delivers as expected, an 8% rise is much more likely than the 12% draw-down. A 3-D profit loss graph is shown below. 

Also, I’d like CL to pull back to $65, because then I could take profit on the short leg, and ride out the long.  If Colgate out-performs and grows as expected, well I’ll be able to take close to the 74% gain sooner, rather than later.

I just began reading up on the company, so the position is a small starter position, I might add more later.

Disclosure: I (obviously) have a long position in CL.