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REHeakins
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Private Wealth Manager / Securities Expert / Co-host of "Investing and Your Legal Rights" heard monthly on www.KQV.com. Over 32 years in the investment industry, first working at PaineWebber for almost 20 years which included 3 years as a branch manager. Currently have a CRCP... More
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OakTree Investment Advisors
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Covered Call Focus
  • Buy Honeywell (HON) And Write A Call 0 comments
    May 20, 2013 12:33 PM | about stocks: HON

    05/20/13 Covered Call Pick: Honeywell International Inc (NYSE:HON)

    Honeywell International Inc. (HON) is an American multinational engineering and consumer products company that produces technologies in the automotive, aerospace, security, and specialty materials industries. Employing 58,000 people in the United States, and 130,000 across the globe, Honeywell was ranked 77th on the Fortune 500 list in 2012. Developing and manufacturing items from thermostats, to superchargers, Honeywell's products have been well integrated into consumer's lives for decades.

    Honeywell has a market capitalization of $63.53 billion with 786.8 million outstanding shares.

    HON currently pays a $0.41 quarterly dividend for a current yield of 2.0%.

    With a beta of 1.15, HON trades with approximately 15% more volatility than the market.

    An investment in HON right now strays a bit away from the conservative end of the spectrum, but we believe it is a stock that can be work at the core of many equity portfolios. Similar to General Electric, HON has diversified operations across the manufacturing, materials, defense, and automotive industries. The company might be most known for their iconic round-bulbous thermostats that occupy a spot on the wall in many households across the United States. With intelligence like CEO David Cote (who is a big supporter of the Campaign to Fix the Debt) at the helm, Honeywell has the potential to integrate themselves even more with the American household. But we're going to talk more about the stock than the company at the moment, because that's where some of the action is.

    The stock has had a nice run over the past year with a 41.59% gain. Despite the rise in the price, the stock trades at P/E of 20. While not exactly a discount, it is still trading within a reasonable valuation as compared to the S&P 500 of about 16. One of the great things we like about the stock is that you're getting a whole of different characteristics in one basket. They pay out a 2.0% dividend, which while not at the high end, is greater than the yield of the S&P 500. When combined with a 25% ROE from the last fiscal year, and an estimated 34% increase in earnings for 2013, the match-up of income with growth is an attractive note for the stock.

    This is a stock that we would be happy sitting on for years and years. Yet at the moment we think there is a chance to plateau out, or even pull back. And while the growth for the year looks promising, the rise in net income isn't supported with a corresponding rise in revenue - which is pretty much the story so far, but one that remains relevant. That's why we're going to look to approach our strategy for HON as more of an income play. This will allow us to snag some income at the moment, and if the stock ends up pulling back, we're fine with that as we would like to hold the stock for awhile. If it ends up getting called away from us, we'll be able to reinvest (or not) once we get a better hold of how this year's story is playing out. That is why we are recommending buying HON and selling the September 2013 $80 Call.

    Scenario:

     

    • Buy 100 shares of HON @ $80.66 = $8,066 + Commission ($12.95) = $8,078.95
    • Write 1 HON September 2013 $80 Call @ $340 - Commission ($8.70) = $331.30

    Note: Prices may vary from the time of post. Actual commissions paid will vary returns.


    Static Return (Not Called):
    (Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration

    (3.31 + (0.41))/80.79 X (365)/123

    = 13.66% Static Return


    If-Called Return:
    (Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration

    (3.31 + (0.41) + 80 - 80.79)/80.79 X (365)/123

    = 10.76% If-Called Return


    Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarentee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.

    Posted by OaktreeAdvisors at 5/20/2013 9:56 AM
    Categories: Weekly Picks

    Previous Post

    Disclosure: I am long HON.

    Additional disclosure: At OakTree we are long HON and have sold calls on some of these positions. Our blog address is blog.myoaktreeadvisors.com

    Stocks: HON
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