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06/18/13 Covered Call Pick: CBOE Holdings, Inc. (CBOE)

CBOE Holdings Inc. (CBOE) operates a global option exchange in Chicago, Illinois. Established in 1973, and converted to a publicly traded company in 2010, the CBOE meshes open outcry methods and an electronic platform to create a single options and futures market that is the largest U.S. options exchange, dealing in contracts on over 2,200 companies, 22 stock indices, and 140 ETFs.

CBOE Holdings has a market capitalization of $3.80 billion with 87.3 million outstanding shares.

CBOE currently pays a $0.15 dividend for a current yield of 1.4%.

With a beta of 0.68, CBOE trades with approximately 30% less volatility than the current market.

Most people are unaware that the stock exchanges are publicly traded and can be invested in just like any other publicly traded company. Nearly all of you reading this blog that have actually instituted some of the writes we have recommended in our strategies, have had that Options order routed through the CBOE hub in Chicago. Investment derivatives such as Options have become more and more popular over the past few years - this blog and the fact you are reading it are good examples of that. An interest in Options strategies like the Covered Call Strategy, combined with the positive markets (which help drive interest in buying and selling Options) have helped boost CBOE's stock over the last two years. The stock gained 13% in 2012 and over 43% YTD on the back of large increases in orders on VIX and S&P 500 Options.

With the run up in the stock we have to look at the valuation of the stock. The P/E ratio is currently sitting at 24, which is a bit high, but sits in the middle of its 5-year P/E Range. It's Forward P/E based on 2013 earnings is 22, off of a 17% expected increase in earnings for the year. This comes out to a PEG ratio of 1.4. With this data we can come to the conclusion that while the stock is not cheap, it is not outrageously overpriced. This is a good sign considering the stock's recent rise and the fact there are plenty of valuations that are getting stretched in the market.

The stock's Relative Strength line, a measure of a stock's performance against the S&P 500, has been flat or rising for the past eight months, indicating it has been performing at least as well as the index, and better than the index in most cases. This combines with an Up-Down ratio of 1.9 to create a lot of positive support for the stock. The stock is in the IBD 50(Investor Business Daily), a list of 50 top stocks for the week marked for strong growth, is currently in IBD's "buy zone", and carries a 99 IBD composite rating, meaning it outperformed 99% of all stocks.

For a Covered Call Strategy on the stock, we're looking at an out-of-the-money Call due to the bullish reasons stated so far. That is why we are looking to buy CBOE and sell the December 2013 $46 Call.

Scenario:

• Buy 100 shares of CBOE @ $43.69 = $4,369 + Commission ($12.95) = $4,381.95
• Write 1 CBOE December 2013 $46 Call @ $150 - Commission ($8.70) = $141.30

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

(1.41 + (2 * 0.15))/43.82 X (365)/186

= 7.66% Static Return

(1.41 + (2 * 0.15) + 46 - 43.82)/43.82 X (365)/186

= 17.42% If-Called Return

Posted by OaktreeAdvisors at 6/18/2013 12:41 PM
Categories: Weekly Picks

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Disclosure: I am long CBOE.

Additional disclosure: At OakTree we are long CBOE for our clients and may have covered calls on some of these positions. At this time we plan on continuing to add shares to portfolios when and if suitable.

06/03/13 Covered Call Pick: Whole Foods Market (WFM)

Whole Foods Market (WFM) is a supermarket food store chain that operates 335 supermarkets in the U.S., Canada, and the U.K. Specializing in natural and organic foods and consumer products, this consumer-first Austin-based company is ranked as one of the most environmentally conscious businesses in the United States, and has generated an almost cult-like following due to their high quality products and great customer service.

Whole Foods Market has a market capitalization of $9.62 billion, with 185.4 million outstanding shares.

WFM currently pays a $0.10 quarterly dividend for a current yield of 0.4%. The stock just recently split for a 2:1 stock dividend.

With a beta of 1.14, WFM currently trades with approximately 14% greater volatility than the market.

WFM has been a favorite name for stock pickers for the last few years. The stock was up over 30% last year, and up nearly 13% already this year. The company name is now synonymous with high-end organic food. So what makes this a great company (and stock) to invest in, and do the characteristics that have created its past success still exist at these levels?

The biggest thing we see in WFM that sets them apart from its competitors is the management and the focus on people. Founder and co-CEO John Mackey has proven his competency in growing and managing a business that many thought would not have enough demand to be profitable, and in a way that went against the grain of conventional supermarkets. With a focus on both customers and employees, the stores' "team" structure creates motivation and camaraderie among employees which translates to a better customer experience. This leads to a higher rate of repeat customers - an important factor that has led to the company's success. Talk to someone who shops at Whole Foods frequently, and see how hard it is to get them to switch their shopping to a Giant Eagle, or a Kroger's. We believe management's focus on customer loyalty has been core to what has led to the company's success, and we have not seen a disruption in this philosophy.

We've talked about trends quite a bit on this blog, and the theory behind the general trend of a shift in consumer preference towards healthier foods is supported by recent improvements in WFM's earnings and gross margin. The company's FQ2 earnings beat estimates by $0.03 while their revenue came in-line with expectations. The company's gross margin grew by 10 basis points (0.10%) to 36.4%. While that does not seem like a very large increase, the gross margins have been a major investor concern as the company has been very focused on price and promotions. Yet lowering the cost of procurement combined with proper leveraging of the supply chain has helped create margin growth while still providing more competitive prices.

Despite the popular rise of the company, there is still a huge amount of room for growth. They currently have 85 stores under development, and have already opened 17 stores year-to-date. In addition, they have recently launched an e-commerce initiative to be able to capture a portion of the online market, a move we believe is a microcosm showcase of the company's forward-thinking adaptive management.

Moving to the stock, we see some interesting metrics and some conflicting signals we need to decipher. The stock is trading at a P/E of 38, which is a premium to some of its peers, but the company's growth is expected at 15% in earnings for the 2013 fiscal year and we believe there could even be better performance than that. Like we mentioned above, one of the best attributes of the company is its people, a hard metric to measure but one that is highly integral to the success of the company. In terms of technicals, we see that the stock gapped upwards nearly $5 after their great earnings report, but has since held their new highs. The recent price movement is pushing the 50-day moving average over the 200-day moving average, a very bullish technical feature called the "Golden Cross". But, after last Friday's huge sell-off, we see a momentum indicator creating a sell signal. How do we consolidate these opposing indicators? Well we believe the stock is still a buy (hence the recommendation). We believe the sell-off on Friday was mostly profit-taking, and there is no fundamental change in the facts of the stock.

For a Covered Call Strategy, we are going to look for an out-of-the-money Call with a decent premium. This is to take advantage of the growth potential we believe the stock to have, while also getting paid to hold the stock since it does not pay a substantial dividend. That is why we are recommending buying WFM and selling the November 2013 $57.50 Call.

Scenario:

• Buy 100 shares of WFM @ $51.91 = $5,191 + Commission ($12.95) = $5,203.95
• Write 1 WFM November 2013 $57.50 Call @ $183 - Commission ($8.70) = $174.30

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

(1.74 + (0.10))/52.04 X (365)/165

= 7.82% Static Return

(1.74 + (0.10) + 57.50 - 52.04)/52.04 X (365)/165

= 31.03% If-Called Return

Posted by OaktreeAdvisors at 6/3/2013 10:02 AM
Categories: Weekly Picks

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Disclosure: I am long WFM.

Additional disclosure: Our clients are long WFM and some have wrote calls on these positions. We intend to continue adding WFM to our clients portfolios when suitable.

03/28/13 Covered Call Pick: PNC Financial Services Group (PNC)

You can find our first article on PNC here, and our wrap-up of that strategy here.

PNC is a holding company for PNC Bank and operates in over 2,800 branches throughout Pennsylvania, New Jersey, Delaware, Washington D.C., along with 14 other states. Headquartered in Pittsburgh, Pennsylvania, PNC is the sixth largest bank in the country based off of total assets and engages in retail, corporate, and institutional banking along with a myriad of additional banking and financial services.

PNC has a market capitalization of $37.64 billion with 529.4 million outstanding shares.

PNC currently pays a $0.44 quarterly dividend for a current yield of 2.5%.

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

Last week we reviewed how our initial strategy on PNC closed as the stock got called away, netting us a 23.61% annualized yield, and a 12% un-annualized return. We mentioned that we still like PNC as an investment and the stock is poised to go higher for a number of reasons. As promised, we're going to spend this article talking about those reasons.

Firstly, we see the bank expanding. Back in October, we found PNC with approximately 2,500 locations across 14 states. Now, the group has over 2,800 locations across 18 states. We believe this is a healthy rate of expansion for the company indicative of growth without stretching the balance sheet to obtain it.

Our second attractive statistic is the stock's recent dividend increase. On April 4th, PNC declared a $0.44/share quarterly dividend, a 10% increase from the prior quarter. While the company did not announce any share buybacks, the increase in dividend is significant as it attempts to build up the substantial dividend it supported prior to the 2008-2009 crash causing its dividend to get cut from $0.66/share. The increase comes at a good time to support the stock's move higher as investors still hunger for yield and hunt for cheap income plays.

Which brings us to our third comment on the stock, its valuation. It has been widely covered by many of the investment news outlets just exactly how cheap the financials are as compared to earnings and the market. PNC is no exception. The stock is trading at a P/E of 12, with a Book Value of x0.97. When compared to its peers, its Book Value is higher than Bank of America's and Citigroup's, but lower than JP Morgan's. While on valuation, you might think this means that Bank of America and Citigroup are better investments, but PNC provides us with the exact mix of characteristics we are looking for. Unlike Bank of America, PNC has a low P/E and strong earnings at $5.80 EPS for the trailing twelve months. While Citigroup also has strong earnings and a good outlook for the year, they have a paltry 0.1% yield. PNC has a great mix of low P/E, low Book Value, decent yield, and a projected 15% increase in earnings on the year. All of these statistics make it an attractive investment for us at these levels.

Adding on to our initial comments on why we think the stock is a good investment, the company has had both a good earnings quarter as well as displaying the ability to adapt to the changing times. Recent earnings showed the company beating EPS by $0.21, while missing revenue slightly by $0.03 billion. The revenue still was up 6% y/y, with a Tier 1 Capital Ratio of 9.8% beating the Fed criteria by more than 5%. The company has also seen large success with giving its customers the ability to deposit a check just by taking a picture of it with their smartphone. The technology apparently saves the company nearly $3.88 as opposed to going to a teller window. As we continue to integrate mobile technology and computing into our ever-increasingly busy lives, mobile banking is going to become a bigger choice for most people. PNC is showing that they can not only adapt to this change in technology and lifestyle, but use it in a way to become profitable.

For a Covered Call Strategy for PNC, we're going to look at an out-of-the-money Call. The stock has had quite a run so far, so some might be concerned about a pullback in the stock price. But not only have we seen increased forward guidance in terms of earnings, but the stock has broken a key resistance level around $66 after a period of consolidation in March. The stock has considerable upside before reaching additional resistance at its pre-crash highs over $80. We're not going to reach for a strike price out quite that high, as we want to get a premium for our time, but we do believe the stock will continue higher. That is why we are recommending buying PNC and selling the November 2013 $75 out-of-the-money Call.

Scenario:

• Buy 100 shares of PNC @ $71.96 = $7,196 + Commission ($12.95) = $7,208.95
• Write 1 PNC November 2013 $75 Call @ $218 - Commission ($8.70) = $209.30

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

(2.09 + (2*0.44))/72.09 X (365)/171

= 8.79% Static Return

(2.09 + (2*0.44) + 75 - 72.09)/72.09 X (365)/171

= 17.41% If-Called Return

Posted by OaktreeAdvisors at 5/28/2013 9:52 AM
Categories: Weekly Picks

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Disclosure: I am long PNC.

Additional disclosure: We are long PNC for our clients and have calls written on some of these positions. We will continue to add PNC to our clients portfolios.