Paul Price's  Instablog

[NDQ:CLMS] Nov. 1, 2009 - $10.60
Dividend = $0.55 quarterly = 2.075% current yield

Calamos provides investment management advice and services to institutional and individual investors. The firm offers more than a dozen mutual funds and five closed-end funds, as well as separately managed accounts. Calamos has expanded its fund lineup to include equity, fixed-income, and alternative investments. Calamos Growth and Calamos Growth and Income--account for more than 40% of assets under management.


Both those flagship funds are performing very well this year with the Growth Fund up 39.2% and the Growth & Income Fund up 30.3% YTD through October [versus the DJIA’s + 10.7% and the S&P 500’s +14.7%]. Other Calamos open-end funds have gained above 28% this year and their closed-end funds have shown 52-week shareholder returns of 41.3% {CHY}, 42.2% {CHI}, 33.9% {CHW} and 57.8% {CGO}.


The shares of this fine money management firm were quite popular and highly valued prior to 2008’s market meltdown with typical P/Es in the 21 – 22x neighborhood. Earnings took a big hit last year but are recovering nicely as assets under management are rebounding.


Here are their per share numbers from continuing operations as reported by Value Line:


 

In the nine months ended September 30th EPS were $0.39 versus a deficit in 2008. Full year consensus 2009 – 2010 expectations now run $0.60 and $0.82 /share respectively.


That makes the forward P/E< 13x – well under the historical range since the 2004 IPO.


If the fine fund performances remain strong, I wouldn’t be surprised to see AUM increase dramatically and for estimates to get ratcheted up further. Note the high prices from each of the years 2004 – 2008 for the upside potential over the longer term.


At last week’s close of $10.60 these shares are trading at just over 1.3x the September 30th book value. CLMS has traded at 3 – 4x book value during each of the previous five years. Even twice book value would bring CLMS shares back to over $16 for a 50% move from the current quote.


The dividend yield of 2.075% is better than you can get on your money market or most bank CDs right now.


Morningstar takes a conservative view with a ‘fair value’ estimate of $12 /share. I’m much more bullish than they are but even their target would bring a 13.2% gain on top of the dividend for a > 15% one-year total return. Calamos shares actually closed at $14.83 on July 23^rd and at $14.14 as recently as October 15^th.


I was a big buyer of these shares last fall when they were ridiculously cheap. I lightened up when the shares hit $15 and now I’m buying again expecting at least $15 - $16 over the next 12 months.

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Calamos has options but they are quite thinly traded with wide bid-ask spreads.


Here is a nice trade that should be available with limit orders…





If Calamos shares bounce back to at least $12.50 (+ 18%) by May 21, 2010:


· The $12.50 calls will be exercised.

· You will sell your shares for $12,500.

· The $12.50 puts will expire worthless.

· You will likely have collected $165 in dividends.

· You will have no further option obligations.

· You will end up with no shares and $12,665 in cash.


That best-case scenario would show a total profit of $6,265/$6,400 = 97.8%

achieved in just over 6.5 months on shares that only needed to rise by 18% or more.





What’s the downside?


If Calamos shares are< $12.50 on May 21, 2010:


· The $12.50 calls will expire worthless.

· The $12.50 puts will be exercised.

· You will be forced to buy another 1000 CLMS shares.

· You will need to lay out an additional $12,500 in cash.

· You will likely have received $165 in dividends.

· You will have no further option obligations.

· You will end up with 2000 shares and $165 in cash.


What’s the break-even point on the whole trade?


On the first 1000 shares it’s their $10.60 purchase price less

the $1.20 /share call premium = $9.40 /share.


On the ‘put’ shares it’s the $12.50 strike price less the

$3.00 /share put premium = $9.50 /share.


Your overall break-even would be $9.45 /share (ignoring yield)

or $9.37 /share (including the expected dividends).


CLMS could fall by up to $1.23 /share (-11.6%) without causing

a loss on this trade.





Disclosure: Author is long CLMS shares and short CLMS options.