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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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  • 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.


    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
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