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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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  • Travelers: Some Brief Thoughts On Valuation
    Travelers (NYSE:TRV) reported earnings today, a 2 cent miss on earnings and a beat on revenue. Market reaction was negative, and misses the point: management is systematically raising rates, which will improve margins over time.

    Meanwhile, here's a snip from my workbook:


    Ben Graham suggested buying quality, dividend paying stocks when their P/E5 was less than 15. Travelers is trading for less than half that multiple.

    The company has been buying back shares at discounted prices, reducing share count an average 7% per year. The result, as shown, is that when assessing normalized earning capacity by looking at historical results, it's important to adjust for share count.

    I added to my exposure today and will add more if the stock continues to decline.

    Disclosure: I am long TRV.

    Jan 24 7:52 PM | Link | 2 Comments
  • GS Downgrades MMM to Sell: This is a Buying Opportunity

    It came as a surprise today when GS downgraded MMM to sell, with a price target of $87.
    With GS, there is always the question of whether this is a misdirection, intended to move the stock for the benefit of their clients, who will buy on the predictable dip. Or whether it is something deeper, with certain clients victimized in order to create profits for others who are farther up the ladder of privileged access. Doing God's work, with GS it is very hard to tell who, if anyone, has been admitted to the inner circle of light.

    None of this changes my opinion on the stock. I see a price target of $95, by the end of the year. That's a midpoint target, based on my projected 5 year average EPS, which currently stands at 5.47. Applying a historical average multiple of 17.5 on this metric, I arrive at the $95 target. It should be noted that if I leave out the values from the panic in 2008 and 2009, the average multiple would be higher.

    Right now I'm long MMM Jan 2013 70.0 calls, and short Apr 2012 90.0 calls. Now would be a good time to add to that position: I plan to buy a few more of the LEAPS and wait for the stock to appreciate before selling any additional covered calls.
     

    Jan 11 9:48 AM | Link | Comment!
  • Olin: At 4 Years, My Longest Running Option Trade
    As I was going over my January expirations, I noticed that my Olin (NYSE:OLN) LEAPS trade has been going for almost 4 years. Options are usually a short term proposition, trying to catch a sudden move on earnings, good news, or rumors. But it's possible to keep a trade going indefinitely, and it can produce consistent profits. Here are the trades:


    Basically, the trade involves using LEAPS as a substitute for share ownership, and selling covered calls against the position.

    If shares remain unchanged as of the January 21 expiration, the position will have an annualized rate of return of 33%, with the position value roughly equal to the profits. Not shown, commissions total $775.18, or 5.85% of the profits.

    While I did take profits from time to time, I held all the way through the financial crisis, rolling down and then up, and selling covered calls whenever the premiums available looked attractive.

    For the past year, the position has been relatively stable, long the 12.5 strike and short mostly the 22.5 strike. Volatility is not that high, and returns are only about 20% for the static case. It works primarily because the LEAPS are so cheap. Between the dividend and the low volatilty, the time value for the deep in the money calls is very reasonable, so most of the income that can be realized by selling covered calls is profit. 

    Taxes are a chore. The income from selling covered calls that expire worthless is taxed as ordinary income, while any losses incurred while rolling the long calls are deferred as wash sale adjustments until the trade is actually closed. I use TradeLog software which does a good job tracking wash sales, and it can download trades from my brokerage account, so there is very little data entry. 

    By way of comparison, buying and holding the shares would have returned 6.9% annualized. As a practical matter, the options strategy requires a definite amount of work, to track market movements and adjust the position as things change.

    I have a number of other trades that have been running for over two years, and the ones that have reliably generated profits are low beta dividend payers, such as 3M (NYSE:MMM) and Chubb (NYSE:CB). Higher beta stocks, such as life insurers MetLife (NYSE:MET) and Prudential (NYSE:PRU) have been extremely profitable at times, but a lot of those profits evaporated during the debt ceiling debate and the ongoing Eurozone crisis.
    Tags: OLN, MMM, CB, Options
    Jan 05 9:51 PM | Link | 2 Comments
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