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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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  • 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
  • Dealing With Sudden Outperformance

    It's a luxury problem. As a number of speculative energy investments have done well, together with action in tech stocks, my discretionary portfolio is up 14.65% on the year. I don't want to give it back, but I want to stay in the game.

    Two of the energy names were resolved by swapping shares for vertical call spreads. Yesterday as Civeo (NYSE:CVEO) went up over $4.50, I sold the shares and bought vertical call spreads, long at 3 and short at 7. Most of my original investment is back in my pocket, while what's on the table is mostly house money.

    For California Resources (NYSE:CRC), I sold the shares a while ago, and did the same maneuver with a vertical call spread, from 5 to 9. As shares went up over $9, I rolled the 5 calls up to 7, taking more of my winnings off the table.

    Carbo Ceramics (NYSE:CRR) is an exercise in applying theory to a practical situation. It's possible, as a stock fluctuates, to roll options up and down in such a way as to make a profit on a round-trip, or even on a stock that never makes it back to the starting point.

    I started Carbo with a vertical call spread, Mar 40/45, with the shares above $50. As the price declined, every time it got close to the strike on the lower leg, I rolled down. Then when it would recover sufficiently, I would roll back up, receiving more premium than I previously paid to roll down.

    From time to time I bought back and resold the calls at 45.

    Yesterday as I rolled CRR Jun 30 up to 35, I reached a point where my breakeven is $34, and I am now playing with house money.

    So, starting with the stock in the $50 area, and rolling with the punches, I now have a fine profit, with shares trading in the area of $41.50. Oil is up as I type this, and CRR will likely rally.

    International Business Machines (NYSE:IBM), after much bouncing around in the $150 to $160 range, is now in the $174 area, greatly reducing my pain on this outsize position. I'm long by means of deep in the money LEAPS, and rolled Jan 2016 130 calls up to 140, receiving a credit of $9.75, substantially more than the $7.05 I paid to roll down as the stock got down into the low $150's. I've worked my breakeven down from $187 to $177.

    I spent some money the other day, to buy and read a book entitled "Why Smart People Make Big Money Mistakes." Among its fundamental precepts is the fact that money is fungible. The distinction between my money and house money, as mentioned above, is meaningless. A dollar is a dollar, so on and so forth.

    Reading CNBC, I learn that the Saudi Oil Minister says only Allah knows about the price of oil. The information's not available to the mortal man.

    I continue to believe that the price of oil will tend toward the marginal cost of developing new sources of production, somewhere in the $80 area. Speculation and manipulation could well drive it back above $100, in due course.

    As far as house money and my money, I like the ratchet effect achieved by the options trade. That house money is now my money. Let's keep it that way.

    Then there's the distinction between and among gambling money, investment money and spending money. It makes sense to me. I take investment money, or speculation money, and convert it to spending money. Then I spend it.

    For all you DGI investors out there, there is really no distinction between dividend income and capital gains, other than the tax consequences. A dollar is a dollar. But seeing as how I'm so pig-headed, to claim there's a difference between house money and my money, etc., I will let you go ahead with your delusional line of thinking...

    Tags: IBM, CRR, CRC, CVEO
    May 05 9:13 AM | Link | 4 Comments
  • IBM: Correcting Misinformation Created By SA Contributor Josh Arnold

    Let's start with the correct information. I prepared it from the company's financial statements.

    Now the erroneous information, from Mr. Arnold's article:

    IBM has retired about $45 billion worth of shares for $70 billion in recent years.

    International Business Machines (NYSE:IBM) has not retired any shares. Retiring shares has a specific meaning, and should be differentiated from holding them in treasury, which is what IBM does. The accurate information: IBM spent $70 billion to reduce share counts by 412 million from what they otherwise would have been. Those shares would be worth $66 billion at a recent price of $160.59.

    What he forgets to mention, or overlooks, in his haste to disparage the company, is that IBM issued 88 million shares as part of employee stock compensation plans. As shown, they were issued at prices less than market. The difference may be considered as employee compensation cost, and amounts to $5 billion.

    More erroneous information:

    The share count, since 2010, has been reduced from 1,287 million to 1,010 million, an eye-popping reduction of 21.5%.

    The relevant information, matching the share count reductions with the years during which the $70 billion of buybacks occurred:

    Mr. Arnold, to arrive at his count of 277 million, uses average shares outstanding during 2010 and 2014. The effect is, he only uses four years instead of five. The use of the hyperbolic adjective "eye-popping" adds nothing to the rigor of the analysis here. The actual reduction, as demonstrated in the spreadsheet, is 315 million shares. Not shown, 9 million shares were bought back as part of employee compensation plans.

    The Long Term View

    As a simple method of looking at buybacks over the long term, I advocate dividing the cost of treasury shares by the quantity as reflected in the most recent balance sheet. That amounts to $123.06 per share, as of the 2014 10-K.

    It should be noted that treasury shares don't receive dividends, and continuing shareholders reap the benefit in the form of more funds available for current dividends.

    Finally, at a forward PE of 9.6, shares are underpriced by most conventional metrics. Investors who believe Mr. Market is in error will not blame management for that gentleman's idiosyncratic valuation methods.

    Abuse of Adjectives as a Substitute for Analysis

    In addition to the "eye-popping" noted above, the article also features "staggering, enormous, incredible and unbelievable." That doesn't add anything: it simply masks the inaccurate math.

    A Digression - Quality of Articles on Seeking Alpha

    I believe that articles that present incorrect information as facts, and misuse terms that have specific meaning in the financial sphere, are of no value to subscribers. The use of hyperbolic adjectives is simply a further irritant.

    Tags: IBM, long-ideas
    Mar 27 2:31 PM | Link | 17 Comments
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