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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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  • 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.


    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
  • Deere: Goldman Suggests Seasonal Play, My Thoughts On Their Suggestion

    In case you missed it, here is a link to what Goldman Sachs is saying about Deere (NYSE:DE). Briefly, they see a strong pattern of seasonal declines and suggest buying puts in the expectation that the stock will go down during the summer months.

    Anything they say is interesting, but like many others I take it with a grain of salt. I do not trust them and I verify before doing anything.

    Schwab has a Ned Davis seasonality report that covers the period from 1972 to the present for Deere, and verifies serious underperformance compared to the S&P 500 for the months of June and July, followed by a recovery and outperformance into the end of the year. That's the seasonal pattern.

    I'm long Deere, and updated my valuation. Using 7 year average EPS, to include guidance for fiscal 2015, and weighting recent years more heavily than the past, I arrive at projected E7 of $7.88. That's normalized earnings, by my methods. Applying a PE7 multiple of 15 for a high quality cyclical, shares are worth $118, quite a bit more than current prices in the $92 area.

    So what about the seasonal dip? I'm not a fan of paying good money to buy puts on an undervalued stock. I just don't like it. As it turns out, Deere dipped last year, and I did a vertical call spread on it as a way of catching the falling dagger.

    Here's the trade:

    (click to enlarge)

    When the trade was opened, Deere stood at $84.49. By October 3rd, when I rolled the lower leg down, it was at $82.16. By December 19 when the options expired, shares were at $90.10. It's nice to make $550 dollars, particularly at an IRR of 226%.

    My basic position here is a LEAPS covered call: long Jan 2016 75 calls and short Jun 2015 100 calls. But if Deere dips according to its usual seasonal pattern, I will do the vertical call spread again.

    May 15 8:28 AM | Link | 1 Comment
  • Taking A Position In MetLife

    MetLife (NYSE:MET) is fighting the SIFI designation, and the resultant litigation is sure to provide ample commentary and some factual information on the risks involved in the company's operations. I anticipate increased volatility and some downward pressure on share prices.

    Valuation here can be dealt with by looking at book value: the question is, which one? MET publishes GAAP, tangible ex AOCI, and ex AOCI, together with operating returns on each. It's in the Quarterly Financial Supplement.

    For Q1 2015, tangible BV ex AOCI is $41.32, with operating return of 14.4% on that amount. Average for the past 5 quarters is 15.02%. I would like to earn 11% on tangible BV ex AOCI, and accordingly I value the shares at $41.32/11% X 15%, or $56.

    That is, I think a P/B of 1.36 on tangible BV ex AOCI is about right.

    MET made it through the 2008/2009 financial crisis unscathed, and without TARP assistance. I expect the company to respond equally well to the next one. I've seen some negative articles on the company lately, and would not be surprised if the battle over the SIFI designation leads to more of the same, together with some vocal short-selling. If so, volatility and lower prices will present opportunities.

    I bought a vertical call spread today, long the Sep 48 and short the Sep 52.5, for which I paid $3.20. There will be a nice profit if shares stay above $52.50, and a good opening gambit to trade from if the price declines. I'm looking to get an entry point below today's price, and the position taken is effectively the same as selling a put, but easier to manage if the going gets tough.

    Tags: MET
    May 14 10:18 AM | Link | 5 Comments
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