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Tom Armistead's  Instablog

Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • CF Industries - Reacting To Potential Acquisition Of OCI

    Shares of CF Industries (NYSE:CF) spiked on news that the company is in talks with Dutch competitor OCI. Over the weekend, the story was confirmed by both companies involved. What we know so far is that OCI at a $6.2 billion market cap is 39% of CF at $16 billion.

    As a general rule, I resist the urge to invest in situations where an acquisition of more than 25% is part of the picture. The combination of debt, integration risks and market enthusiasm is a recipe for poor results, and occasionally disaster.

    I have a right size position in CF, taken in March this year, based on my belief that recent capex would bear fruit in increased earnings. My thinking was relatively simple, and is explained in an article written at the time.

    I'm not greatly enthused at the new direction. It seems to me management is getting overly aggressive here, pouring on the capex, adding to debt, buying back shares, and now acquiring competitors. Not a style I'm that comfortable with.

    Here's my position:

    (click to enlarge)

    The stock split 5 for 1, which was reflected in the options, and I right-sized the position soon after, since it is intended to represent 5% of the portfolio it's held in. At current prices I will have a fine rate of return on relatively short duration holding.

    Depending on how trading develops today, I plan to roll the LEAPS up from 48 to 55, to increase my cash holdings and position myself for a dip if the initial enthusiasm is not sustained. Most likely I will close the entire position in August, and go on to something else.

    Management is too aggressive.

    Tags: CF, Chemicals, Options
    Jul 20 6:45 AM | Link | Comment!
  • Replacing Chubb With Ace

    Chubb (NYSE:CB) spiked on news that it will be acquired by Ace (NYSE:ACE). I closed my position at $128, and started working on an update of my P&C valuations for Ace and Travelers (NYSE:TRV). In an article published here on Seeking Alpha in July 2014 I outlined a methodology for evaluating high quality P&C Insurance stocks, which correctly called out an intrinsic value of $119 for Chubb.

    After applying the same method to Ace, I arrive at an intrinsic value estimate of $144, which will increase to $149 if and when the Chubb acquisition is completed.

    This estimate does not rely on Ace being acquired as a catalyst. Any company that consistently trades for less than intrinsic value will increase in value more rapidly than the market, assuming its operations perform consistently. By holding Ace long-term, I anticipate receiving an annualized return of 10%, considerably in excess of any realistic expectation for the S&P 500.

    In an article published here on Seeking Alpha in January this year I noted that the P&C industry has out-performed the S&P 500 over 5, 10 and 15 year periods. The three companies discussed today returned an average 13% over the past 10 years, primarily because they are chronically undervalued.

    Travelers has an intrinsic value of $142, by the same line of thinking. I have a double size position, long Jan 2016 80 calls. I plan to roll out to 2017 within the next few months.

    For ACE, I plan to establish a normal size position using the Jan 2017 80 calls.

    These holdings are bond substitutes, to my way of thinking, but with better returns. After all, the primary asset the investor owns is the ability to receive the returns on a conservative bond portfolio.

    I'm accepting some catastrophe exposure with that, for which the rewards greatly exceed the risk. I keep the positions right size.

    Tags: ACE, CB, TRV, Insurance
    Jul 07 9:11 AM | Link | 9 Comments
  • Valuing Intel After The Altera Acquisition

    Holding an outsize position in Altera (NASDAQ:ALTR) since January 2014 when I suggested a $44 price target, I was gratified to see the company accept Intel's (NASDAQ:INTC) offer at $54 per share.

    The way the news developed was peculiar in that there were repetitious leaks, to multiple news outlets, keeping the market posted on the situation as it developed. The WSJ got first and last, with Bloomberg, the NY Post and I forget who else filling in the middle slots. The orchestration was obvious, and I considered it manipulative. I sold covered calls on ALTR at the June 44 and 47 strikes, figuring if the stock was going to be batted around I might as well get paid to watch.

    When the news of the deal came out, the stock went up over $50 and I closed the entire position, since the short calls had little if any time value and I had no further profit to take. While there may be money to be made while the deal is pending, that's a specialty area and I don't play there.

    I have a double size position in Intel, dating back to December 2013 when the stock traded in the $24 area and I suggested $46 as a potential value, while calling for the stock to reach $35 before the end of this year. It's done that.

    The basic thesis was that Intel spends huge sums on R&D and capex, while maintaining fine ROIC and/or ROE. If the company has a history of successfully investing in itself, and continues a high level of investment, the most likely result is positive performance.

    Intel's presentation after the announcement demonstrates sound strategic thinking. It covers the explosive potential of FPGA technology when applied to server acceleration, as well as the potential market, driven by Moore's law, to displace ASSPs and ASICs. I had been looking for great things from Altera, and Brian Krzanich sees the same potential.

    Valuation

    From my point of view, Intel did not overpay. There was and is a large, poorly defined upside potential to Altera's operation. Intel's financial muscle and synergies in IP make that potential more likely to reach fruition.

    I'm on record valuing Intel at $46, while holding reservations as to whether Mr. Market will ever pay up. Time is a four letter word on Wall Street, and the upside potential created by the Altera acquisition may take years to manifest itself in full blown form. No doubt various pundits will take turns second guessing Intel's decision and disparaging it as the top of a M&A feeding frenzy.

    Investment Reaction

    I sold covered calls at $35 over half my Intel position. The thinking is, if the stock fluctuates around that point for a period of time while the Altera deal is completed (or not), I want to be paid to leave my money on the table. At the same time, I would like to participate if the market comes around to my point of view and moves the stock up toward my $46 estimate of value.

    Jun 02 7:08 AM | Link | 3 Comments
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