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Tom Armistead
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I'm a well-informed retail investor and formerly posted on SA in order to expose my thought process to critical examination and comment from readers. It made me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that... More
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  • Taking A Position In Harmonic

    Harmonic Inc. (HLIT) has been a favorite for options trades over the years. The company has current assets well in excess of a 2:1 ratio, and trades somewhat below the $9 I think it's worth. I've written it up a total of three times, discussing valuation and seasonality. It tends to do well in Dec/Jan/Feb. It's optionable, and there is premium available to be earned by selling calls, more or less at the money.

    With the stock at $7.60, I was able to leg into a diagonal spread, long July 2014 5 calls and short April 2014 7.5 calls for a net debit of $2.10.

    The stock has a beta of 1.50, and implied volatility typically runs a little above 30%.

    Long term, there isn't that much downside here, because of the strength of the balance sheet. I suspect the stock will hit $9 somewhere in the next few years, and in the meantime I'm happy to earn the premium on calls at 7.5. I've done versions of this trade on and off for years and always made money.

    So with not that much to do today, and my speculative account having a lot of cash in it, I decided to go back to something that has worked in the past.

    Disclosure: I am long HLIT.

    Tags: HLIT
    Dec 02 10:38 AM | Link | Comment!
  • What I'm Doing With Intel

    I've spent the last several days studying Intel (INTC) in the wake of the sell-off created by their analyst day guidance. I'm working on an article, which requires further work to present my thinking clearly. But I have developed an opinion, which I am expressing by means of an option trade.

    Briefly, I think the market underestimates the probability and size of potential share price movements if Intel succeeds in its effort to grow share in lines other than traditional PC's. At some point, either earnings or rumors of socket wins are likely to spike the stock. Meanwhile, it's priced at levels that are supported by the dividend and cash flow.

    Using options, a bullish risk reversal comes to mind - short Jul 2014 22 puts, and long Jul 2014 26 calls. I'm willing to hold the shares at prices below $22, and would like to own them at prices above $26. If the stock is between $22 and $26 at expiration, both puts and calls expire worthless.

    What I actually did is I bought Jan 2016 15 calls and sold a vertical call spread, the Jul 2014 22/26. This achieves the same effect as the risk reversal at expiration, but it's easier for me to manage if the situation develops unfavorably in the meantime.

    I established the position today, in my Speculative Portfolio.

    Disclosure: I am long INTC.

    Tags: INTC, Options
    Nov 27 1:58 PM | Link | 9 Comments
  • Bringing Capex Into The Stock Selection Process

    I was busy over the weekend, doing an analysis of capex expenditures for companies in both the S&P 500 and 1,500 indexes. Larry Fink gave a speech in which he stated US companies weren't doing enough capex, due to market preference for dividends and buybacks, short CEO tenure, and uncertainty caused by political dysfunction.

    Using a simple test, whether capex exceeded depreciation for both of the past two years, well less than half of US companies get a passing grade. The passing percentage varies substantially by sector, with Utilities and Energy by their nature getting higher capex.

    There is only 100 cents in a dollar, and dividends and buybacks compete with capex for their share of cash flow deployment. Ten years ago, it was rare to find a dividend growth stock that could pass the capex test. Under current conditions of high margins and low borrowing costs, the combination is not that rare.

    I found that using a passing grade on the capex test as an investment criterion stabilized portfolio performance and reduced maximum drawdown on a backtest, when included with a dividend growth criterion. Beta is less important, and I dropped the beta requirement: it produces a portfolio that is imbalanced toward defensive sectors, and concentrated in stocks that are above rational valuations.

    I'm investing on the basis that companies that pass the capex test will provide better and more stable returns over the long term - five years, which is my horizon.

    Portfolio adjustments will be made today, closing positions in Bristol Meyers (BMY), Chlorox (CLX), Johnson & Johnson (JNJ), Kimberly Clark (KMB), Lorillard (LO), Microchip (MCHP), Raytheon (RTN) and Texas Instruments (TXN). I have large profits on these stocks and most of them are over-valued by objective standards.

    I will be opening positions in Caterpillar (CAT), Coach (COH), Conoco Phillips (COP), CSX Corp (CSX), Deere & Co (DE), Helmerich and Payne (HP), Intel (INTC) and Occidental Petroleum (OXY). All of them meet my usual PE5 valuation standard, and I am comfortable with what I saw looking at FASTgraphs and M*.

    I'm working on a more detailed discussion of the issue and my thinking on it, for publication later this week. In the meantime, I decided to post my planned trades and the rationale behind them for those who are interested.

    Nov 18 9:35 AM | Link | 2 Comments
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