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Andrew319
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I am a graduate of Thiel College with a Bachelors in Business Administration, double minor in Finance and Economics, Masters degree at Harvard University. Derivative Trader and small fund manager, with performances 2012 : 75.3% | 2013: 117% | 2014 (YTD) 168% I use simple, and advance short and... More
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The Covered Call
  • The Comeback Kids 0 comments
    Dec 6, 2013 10:56 AM | about stocks: EOG, MNK, WRK

    Questcor Pharmaceuticals, Inc. (QCOR)

    The Comeback Kids

    Overview

    Questcor Pharmaceuticals, Inc., a biopharmaceutical company, provides drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. It primarily offers H.P. Acthar Gel, an injectable drug for the treatment of acute exacerbations of multiple sclerosis in adults; to induce a diuresis or a remission of proteinuria in the nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythematosus; and as monotherapy for the treatment of infantile spasms in infants and children under two years of age. The company's H.P. Acthar Gel also focuses on rheumatology-related conditions, including collagen diseases and rheumatic disorders. In addition, it offers Doral for the treatment of insomnia. The company sells its Acthar primarily to specialty pharmacies; and Doral to pharmaceutical wholesalers. Questcor Pharmaceuticals, Inc. was founded in 1990 and is headquartered in Anaheim, California.

    Investment Thesis

    QCOR has a current Value of $120.99 per share. Therefore, it is undervalued compared to its Price of $59.12 per share. Value is computed from forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. Value increases when earnings, earnings growth rate and profitability increase, and when interest and inflation rates decrease. The stock has a trailing stop of $57.52; this is $1.6 below the current closing price. QCOR has a forecasted Earnings Growth Rate of 28.00% which is above its competitors, also a forecasted EPS of $6.67 per share. Acthar, which has 19 FDA-approved indications, is currently used in the fields of neurology, nephrology and rheumatology, areas of medicine which have significant unmet medical needs. The company is focused on increasing the usage of Acthar among specialists who treat patients with multiple sclerosis, infantile spasms, proteinuria in nephrotic syndrome, dermatomyositis and polymyositis, and is also actively researching other applications for Acthar. Since initiating dividends in October 2012 with a $.20 quarterly payment, QCOR has increased its dividend twice in 2013, to $.25 in April and July, and recently to its current $.30 level. Although it's not a high dividend stock, QCOR's 2%-plus current dividend yield is the second highest in the biotech industry, which currently has less than 3% of its stocks paying dividends. QCOR has very high options yields, which you can profit from, by selling out of the money covered calls or cash secured puts. Other benefits from these strategies: 1. Cash Flow - You get paid the option money now, vs. waiting for dividends; 2. Tax deferral l- If you hold the position into 2014, any taxes on potential profits won't be due until 2015

    Recommendation

    The April 2014 trade below offers you a call premium of $10.50, an 18% nominal yield in just 5 months, (over 40% annualized). The $60.00 strike price is $1.66 above QCOR's $58.34 share price, so the potential assigned price gain outweighs any loss of dividend income. The alternative would be to sell cash secured puts below QCOR's share price, in order to achieve an even lower breakeven cost, and margin of safety, (which is what we did). This April 2014 trade has a $55.00 strike price and pays a $10.20 put premium, (an 18.5% nominal yield). In addition it has lower breakeven of $44.80, which is 16% below QCOR's $58.34 price/share.

    EOG Resources, Inc. (NYSE:EOG)

    The Comeback Kids

    Overview

    EOG Resources, Inc., together with its subsidiaries, engages in the exploration, development, production, and marketing of crude oil and natural gas. As of December 31, 2012, it had total estimated net proved reserves of 1,811 million barrels of oil equivalent of which 701 million barrels (MMBbl) were crude oil and condensate reserves, and 320 (MMBbl) were natural gas liquids reserves; and 4,740 billion cubic feet were natural gas reserves. The company operates primarily in the United States, Canada, the Republic of Trinidad and Tobago, the United Kingdom, the People's Republic of China, and the Argentine Republic. EOG Resources, Inc. was founded in 1985 and is headquartered in Houston, Texas.

    Investment Thesis

    EOG has a current Value of $210.12 per share. Therefore, it is undervalued compared to its Price of $170.15 per share. The stock has a trailing stop of $160.03, this is $10.12 below EOG's current closing price. EOG has a forecasted Earnings Growth Rate of 20.00%,also a forecasted EPS of $9.02 per share. EOG's third-quarter results were equally impressive. The firm delivered a 39% year-over-year increase in total crude oil production thanks to "stellar" economic results from the Eagle Ford, Bakken/Three Forks and Leonard plays. Earnings per share leapt 49%, discretionary cash flow increased 29%, and adjusted EBITDAX rose 27% compared to the same period a year ago. EOG continues to execute nicely and raised its full-year crude oil and condensate production growth target for the second time in 2013 (now 39%, was 35%). EOG reported its top well to date from its western Eagle Ford acreage (Kaiser Junior Unit #1H) and indicated its "exceptional" Eagle Ford results were replicated in the North Dakota Bakken/Three Forks. EOG plans to increase the level of drilling activity in the Bakken/Three Forks formations in 2014.

    Recommendation

    Recommendation would be to buy the December $165 calls at $5.90. This will be well within the trading range of the stock. The stock is of its earlier November highs of $189, and could easily start to bounce off this base that has been established at the $167 range. It will have its first resistance level at $172, but if it manages to break through that level, it will easily climb to the $181 mark.

    Rock-Tenn Company RKT)

    The Comeback Kids

    Overview

    Rock-Tenn Company manufactures and sells corrugated and consumer packaging products in the United States, Canada, Mexico, Chile, Argentina, Puerto Rico, and China. The company operates in three segments: Corrugated Packaging, Consumer Packaging, and Recycling. The Corrugated Packaging segment offers containerboards, corrugated sheets, corrugated packaging, and preprinted linerboards for consumer and industrial products manufacturers and corrugated box manufacturers; converts corrugated sheets into corrugated products; and provides structural and graphic design and engineering services, and automated packaging machines, as well. as turn-key installation, automation, line integration, and packaging solutions. The Consumer Packaging segment provides coated recycled and bleached paperboard, and market pulp; specialty paperboard; folding cartons; solid fiber partitions; express mail envelopes; temporary and permanent point-of-purchase displays, and permanent displays; contract packing services, such as multi-product promotional packing and product manipulation; and lithographic laminated packaging products. This segment also converts specialty paperboard into book covers and other products; prints, coats, die-cuts, and glues cartons to customer specifications; and offers ship finished cartons to customers for assembling, filling, and sealing. The Recycling segment is involved in collecting, sorting, grading, baling, and processing various grades of recovered paper, including old corrugated containers, office paper, box clippings, newspaper, and print shop scraps; collecting aluminum and plastics for resale to manufacturers; providing recycling and waste disposal services, as well as fiber marketing and brokerage services; and selling scrap materials. The company markets its products through its sales force, independent sales representatives, and independent distributors. Rock-Tenn Company was founded in 1936 and is headquartered in Norcross, Georgia.

    Investment Thesis
    RKT has a current Value of $163.38 per share. Therefore, it is undervalued compared to its Price of $95.21 per share and has a trailing stop of $96.24 per share. This is $1.03 above below RKT's current closing Price. RKT has a forecasted Earnings Growth Rate of 24.00% and a forecasted EPS of $8.61 per share. Due to its steadily growing cash flow, there should be ample room for it to increase its dividends. It also looks undervalued on a 2013 and 2014 PEG basis. Short term: It has high call option prices, which currently pay out over 7% for just a 4-month term, for an annualized yield of over 20%.. Rock-Tenn (RKT) is one of the leading manufacturers of corrugated and consumer packaging in the US. With its 2011 acquisition of Smurfit-Stone, it became one of the top 4 players in the rapidly consolidating US containerboard industry, which gives it pricing power. You're probably thinking, "big deal," a 1% yield, but you can substantially improve upon RKT's dividend yield, via selling options. This January $110 call trade, from our Covered Calls Table, currently pays over 25 times RKT's November $.30 dividend. Your break-even cost is $101.90, if you receive the $.30 dividend, or $102.10, if your shares get assigned/sold prior to the ex-dividend date. Another benefit is that, even though you get paid the $7.70 call option premium now, you won't have to pay taxes on it until 2015, if you hold the position into January 2014.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: EOG, MNK, WRK
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