ESPN Firings Hurt Mickey Mouse Stock
Disney (NYSE: DIS) shares are falling fast after some bad publicity at one of its biggest cash cows.
ESPN is reportedly planning to fire hundreds of people to offset a slipping profit margin. The ESPN firings are a blow to the sports network’s image. Its parent company’s stock is feeling the brunt of that blow.
Disney shares are down 1.5% today after falling 1.5% in the final three trading hours yesterday once news of the ESPN firings became public. Part of Disney’s decline can likely be chalked up to the pullback in the market as a whole the last two days. Stocks have fallen 1.4% since the start of trading yesterday.
But the ESPN firings could signal a problem for one of Disney’s biggest moneymakers. The rising cost of broadcast rights is weighing on ESPN’s profits. New deals for broadcast rights to Monday Night Football, the new college football playoff, Major League Baseball and the U.S. Open tennis tournament add up to a whopping $29 billion – roughly 260% more than the network’s previous deals for those sports.
The advent of DVR means that most people record their favorite TV programs these days. Sports, however, are one of the few events people still watch live – making their broadcast rights more valuable.
As the cost of sports broadcast rights continues to escalate, ESPN will have to keep shelling out big bucks if it wants to maintain its spot as the self-proclaimed “Worldwide Leader in Sports.” Rival sports networks such as NBC Sports, the CBS Sports Network and Fox Sports 1 have been popping up everywhere in recent years.
Staying ahead of the competition will come at a great cost for ESPN. Eventually, there won’t be enough people to lay off to prevent the higher costs from slowing ESPN’s profit growth.
It hasn’t happened yet, however. Last quarter, in fact, ESPN was a major contributor to Disney’s earnings growth, as operating income from the company’s cable networks increased 15% year over year.
The last two days aside, ESPN is doing way more good than harm to Disney’s bottom line. That said, whenever a company has to lay off 300-400 people because of declining profit margins, it’s never a good sign.
An Oil Opportunity That’s Off The Beaten Path
It’s no coincidence that energy exploration companies have some of the greatest upside potential in the market today. One successful well can transform an unknown company into a headline story … and turn a couple of thousand dollars into a small fortune.
As I wrote last week, “I think we’ll be hearing more success stories during the coming months and years since exploration companies, armed with increasing amounts of data, will be able to more precisely locate high-potential drilling targets.”
One of the areas worth a good, hard look for oil exploration is New Zealand.
Small and isolated, but beautiful and resourceful, New Zealand is a fully developed country that has a thriving domestic oil and gas industry. It also has potentially massive shale oil reserves in the country’s yet-to-be explored East Coast Basin, which more than one creative writer has dubbed the South Pacific’s “Bakken.”
New Zealand’s seclusion has been one of its biggest energy challenges to overcome since it has historically depended largely on imported supplies of oil and gas. Recent investments in wind and solar infrastructure have helped, but like most places around the world they just don't produce enough energy to meet growing demand.
Up until the late 20th century New Zealand imported nearly all of its oil. Thankfully for the Kiwis, that finally changed in 1959 when the first of three major oil and gas strikes proved that New Zealand had the potential to eventually reach energy independence.
That year marked the discovery of the huge offshore KÄpuni gas field.
That success was followed a decade later, in 1969, when the massive offshore MÄui gas field was found, showing that NZ had world-class natural gas potential.
Oil was added to the equation a decade later when the onshore McKee oilfield showed that there was an active hydrocarbon system in the Taranaki Basin.
Along with other smaller discoveries, these resources allowed New Zealand to rely 100% on domestic natural gas beginning in the 1970s and to decrease foreign imports of oil in the 1980s.
It was also during this time that the government funded a number of infrastructure projects - including natural gas-fueled power plants - to capitalize on the economic development opportunities that accompanied domestic energy production.
New Zealand now heavily depends on domestic natural gas. The problem is that natural gas and oil production is falling - rapidly.
MÄui, by far the biggest producer of oil and natural gas, reached peak production in 1997 and is now in sharp decline. The same holds true for KÄpuni and several smaller fields.
The country needs more natural gas and oil production soon to avoid returning to the days of foreign dependence. That’s why significant investments in exploration efforts are underway to see if North American-style shale oil and gas reserves exist.
According to GNS Science, a leading earth and geosciences consultancy in New Zealand, the country has a number of sedimentary basins that may host oil and gas. In fact, of New Zealand’s 250,000 square kilometers of landmass and 5.7 million square kilometers of seabed, 20% could hold oil and gas reserves, according to GNS estimates.
Much of this area has been covered only by reconnaissance geophysical surveys and is poorly understood. However, several petroleum basins have been defined based on modern seismic surveys supported, in some cases, by well logs.
At least part of each of these petroleum basins has been licensed for exploration and companies are ramping up exploration programs right now.
It’s certainly off the beaten path but I think there is immense upside in select New Zealand-based oil and gas explorers. I’m out of room today, but in the coming weeks I’ll get deeper into the details on a couple of high potential targets.
Tyler Laundon, MBA
|Wed, May 22, 2013|
Wall Street Unfazed by Apple Tax Avoidance
U.S. lawmakers called it an unprecedented exploitation of the American tax system. Wall Street didn’t seem to care.
Apple (NASDAQ: AAPL) CEO Tim Cook took the stand on Capitol Hill yesterday, defending his company’s knack for finding holes in the U.S. tax system. Apple has subsidiaries around the globe – some of which have no actual employees – in an effort to avoid paying the high U.S. tax rates.
From 2009-2012, the company shifted an estimated $74 billion overseas. One subsidiary in Ireland, called Apple Operations International, hasn’t paid taxes in five years. It generated $30 billion in revenue over the last four years.
Congress is outraged by Apple’s “gimmicks” “schemes.” John McCain labeled them “among America’s largest tax avoiders.” But Apple hasn’t broken any laws.
So while the average America may share Congress’ outrage, the average investor hasn’t seemed to care.
Apple shares were down only slightly yesterday as Cook testified before a Senate subcommittee on investigations. Today the stock has vaulted 2% higher.
If anything, investors are likely impressed with Apple’s creativity in finding tax loopholes and holding to its cash.
Some investors had accused Apple of being stingy with its shareholders by hanging on to so much of its $145 billion cash stockpile. But the company recently vowed to return $100 billion to shareholders over the next three years in the form of dividends and share buybacks.
However, they won’t do so by bringing their overseas money back to the States and subjecting it to America’s 40% corporate tax rate. Instead, the company took on $17 billion in debt – thus saving themselves another $23 billion.
Slippery? Yes. Unethical? Perhaps. Smart and perfectly legal? Absolutely.
Wall Street has never been accused of being a bastion of morality. That’s why investors don’t seem to care that the largest company in the world is a “tax avoider.”
The Real Story Behind this Market Rally
In a moment, I am going to tell you how to take advantage of one of best investments for the foreseeable future. But first I want to you to take heed to what I am about to tell you.
When the stock market rises as fast as it has, you owe it to yourself to take precautions. No market rises forever. So today I’m going to tell you a way to protect yourself from the likelihood that this market won’t keep rising indefinitely.
But first, some context …
The Standard & Poor’s 500 Index (SPY) is up 16.8%. That’s the best start to a year since 1987, when it rose 18.7% during the comparable period. Later that year on October 19th, the Dow lost 508 points, or 22.6%, in the historic crash known as Black Monday.
Moreover, it's been 184 days since a daily 5% pullback in the S&P 500. The return for the market benchmark during this overwhelmingly bullish six months is 22.3%.
But it was the latest three-week spike higher in SPY made me realize the journey higher was nearly complete.
Roughly three weeks ago, SPY was trading for $153. Since that short time, the index has managed to tack on 8%. That's pretty remarkable, considering the historical annual average return for SPY is approximately 8% a year.
The historic move has had a side-effect as well. It’s impacted the success of high-probability credit spreads over the past several months.
But before I get to the side-effect let me give you a brief insight into one of my favorite investment strategies. Other than selling puts, credit spreads offer the highest-probability strategy in the investment world. We’re talking about making investments with an 85% chance of success. Credit spread strategies are THE choice amongst professional investors, particularly professional options traders. The strategy allows you to make money in a up, down or sideways market in less than 45 days. As a result, it is one of the best ways to bring in monthly income and why I use the strategy, among others, in my Options Advantage service.
Unfortunately, we have been in one of weakest periods for credit spreads over the past 30 years. A sharply trending market coupled with historically low volatility is the one extreme credit spreads have a hard time handling. However, the most profitable periods have followed these weak periods…and I expect to see history repeat itself once agin this year.
Fortunately, this historic period is an anomaly, so the chance (or probability as I like to say) of the upward trend continuing is low. Unfortunately, it's the anomalies that are a detriment to high-probability credit spread strategies.
But as we all know, it's the weak periods that lead to historic returns.
This leads me to the investment I mentioned at the beginning of the article. I recently put together a webinar on what I call “The 77% Income Trade”. Within the presentation I discuss the strategies I use to bring in income on a monthly basis. But more importantly, I give away two actionable investments that should do well over the next 35 days.
Editor's Note: If you would like to learn more about options and how you can generate steady income month in and month out... then consider taking a free, 30-day trial to our real money alert service, Options Advantage. You'll discover exactly how our resident options expert, Andy Crowder, is using high probability trades to steadily grow a $25,000 real money portfolio. Every trade is executed for real... and readers are alerted instantly, so they can invest right alongside Andy. Click here to try Options Advantage, free.
|Tue, May 21, 2013|
The Marissa Mayer Effect
Until last summer, Yahoo! (NASDAQ: YHOO) looked like a dying company, one that peaked in the late ‘90s. Now it’s in the midst of a resurgence, growing profits and shelling out a billion dollars to buy social-blogging platforms.
The reason for the turnaround? Marissa Mayer.
Prior to hiring Mayer as CEO last July, Yahoo! had cycled through four CEOs in four years. Mayer has brought stability, growth and – most importantly – relevance back to a company that seemed on the brink of going the way of AOL (NYSE: AOL).
Since Mayer’s hiring on July 16, 2012, here are some of the improvements Yahoo! has made:
Yahoo! was in the dumps for years as the company lacked true leadership, direction and innovation. With Marissa Mayer running the show, Yahoo! is suddenly hip again, snatching up a popular social media company like Tumblr the way Facebook (NASDAQ: FB) did when it bought out Instagram last year.
Investors trust Mayer. And right now the 37-year-old CEO is leading an improbable resurgence at a company that 10 months ago appeared beyond saving.
Tableau IPO Up 64% in Debut
Yesterday’s Tableau IPO was the latest sign of the appetite investors have for new stocks right now.
A provider of interactive data visualization software, Tableau popped 64% in its market debut yesterday despite pricing above its expected range at $31 a share. The stock, listed on the New York Stock Exchange under the ticker symbol “DATA”, is currently trading at $53.19 per share.
Tableau raised $254 million in its debut, and already boasts a market cap approaching $2 billion.
The Tableau IPO wasn’t the only new stock to flourish yesterday. Marketo (NASDAQ: MKTO), a marketing software company, actually outperformed Tableau, advancing 78% in its initial public offering. The company went public at $13. It’s already up to $24.57 a share. That’s the largest first-day pop since Splunk (NASDAQ: SPLK) shot up 108% in its April 2012 IPO.
According to Renaissance Capital, Marketo and Tableau are the first pair of IPOs to produce first-day gains of more than 50% on the same day since 2010, and just the second since 2000. It speaks to the health of the IPO market right now.
Marketo and Tableau bring May’s IPO tally to 22. That’s the most of any month since November 2007 – and we’re only two-thirds of the way through the month. No fewer than nine more companies are currently in the IPO pipeline. If all of them price before May 31, it will mark the biggest month for IPOs since 2004.
The Rich Investor’s Secret to Buying Low
"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."
Eight months ago, investors had essentially written off Netflix (Nasdaq: NFLX).
Not to single any particular firm out – but San Diego based investment bank Caris & Company downgraded Netflix on December 6, 2012 – when the stock sold for $86 a share…
That turned out to be just a temporary rebound. By last summer, Netflix shares were back below $70, and by late July, the stock had dropped below $60. I held onto the position, maintaining my belief that the correction was just a short-term blip brought on by a series of questionable decisions. That turned out to be a wise decision.
Since August 2, Netflix shares have more than quadrupled. The stock is up an astounding 346%, closing Monday just below $240 a share. I bought the stock at $71 a share, netting my $100k Portfolio subscribers a whopping 236% profits since.
Full Disclosure: I currently own shares of Netflix.
|Fri, May 17, 2013|
Five Stocks That Made Big Gains this Week
Ho-hum, another record-setting week for the stock market.
U.S. stocks continued their six-month climb into uncharted waters this week. The S&P 500 advanced another 2%, closing above 1,660 for the first time ever today. The Dow Jones Industrial Average nearly matched the benchmark index, tacking on another 250 points to close above 15,300.
As usual, several stocks advanced at an especially blistering pace. Here were five of this week’s biggest gainers:
Facebook (FB): One Year Later
Tomorrow will mark a year since Facebook (NASDAQ: FB) went public in one of the most hyped initial public offerings in market history. As we know now, the stock has not lived up to that hype.
Facebook shares immediately tumbled after their May 18, 2012 IPO. The social network went public at $38 a share. Within three months, the stock was trading at roughly half that.
It has since recovered, but has never been close to returning to its lofty, hype-fueled IPO price. Earnings growth – or lack thereof – has been part of the problem.
Despite steady revenue growth, Facebook’s net income has been on the decline for the past year. Solving that issue will be a key to the company’s future – and where its stock goes from here. An expanding mobile presence should help the social network’s future earnings potential.
Here’s a comparison of where Facebook stands now vs. where it stood then – both as a company and as a stock:
Share Price: $26.37
Market Cap: $64 billion
Past 12 Months’ Earnings: $112 million
Share Price: $38
Market Cap: $104 billion
Past 12 Months’ Earnings: $1 billion
The good news is that the stock is a lot cheaper now than it was a year ago – at least on a price-to-earnings basis. The bad news is that those earnings have declined almost 90%.
Perhaps the company has turned a corner, though. Facebook brought in $217 million in net income last quarter – five times what it earned in the previous quarter. And its mobile footprint is growing, accounting for 30% of total advertising revenue compared to just 23% last year.
Still, with the stock down 31% from its ballyhooed IPO, Facebook has a long way to go just to get back to break-even.
Read this Before Selling Stocks
The rally that just won’t quit continued again last week. In fact, last Monday marked the 177th straight session without a 5% pullback, breaking the previous record stretch of 176 days set in 2010. That’s an incredible record to break.
The 77% Income Trade: Live Options Chat Video Replay
Did you miss yesterday's live options chat with Andy Crowder? Not to worry. We have you covered.
Here is the full video of Thursday's hour-long options discussion, titled, “The 77% Income Trade”. In it, Andy reveals his powerful income strategy that consistently delivers 5% to 15% returns per month. He also answers a ton of viewer questions regarding his options trading approach, and offers his latest Apple (NASDAQ: AAPL) trade recommendation.
And for those interested in signing up for Andy’s premium Options Advantage service at a special discount, click here. But do it soon – like options, this limited-time offer has an expiration date!
Why Black is the Real Green in Energy Production
That's unfortunate, because the environmentalists have it wrong.
This will strike many as counter-intuitive, but “black energy” - meaning the established hydrocarbon sources (oil, coal, and natural gas) - are the true environmentally friendly alternatives.
How can I say that? Well, because any proper analysis must include both the seen and the unseen.
In the current jargon, “environmentally friendly” is a euphemism for low- or no-emissions energy. Wind turbines and solar panels, for example, are often cited as the preferred “green” alternatives to oil, coal and natural gas.
To be sure, alternative energy emits fewer airborne pollutants. That said, the emissions from hydrocarbon energy have been vastly reduced over the years.
Take the gas combustible engine. From the 1960s-era automobile through the mid-1990s, exhaust emissions were reduced 96%.
And the improvements continue. A U.K. trade group - the Society of Motor Manufacturers and Traders - reports that average CO2 emissions from new cars sold in 2011 were 31% lower than the prevailing level in 1997.
Yes, there are more cars on the road. And yes, they will continue to emit CO2 and NOx (nitrogen oxides). But each year the average car emits less of both.
Let's also keep in mind that the environment is more than atmosphere … it's also land. Hydrocarbons are relatively land efficient for each unit of energy produced.
The same can hardly be said for wind turbines and solar panels. Wind projects occupy anywhere from 28 to 83 acres per megawatt produced. As for solar, most estimates I've read from pro-alternative energy literature say the world could be electrified by solar with an area the size of Spain.
Call me a skeptic.
For one, both wind and solar require back-up generating capacity. This redundancy is provided by burning hydrocarbons. (If you start with hydrocarbons, you don't have to be redundant with hydrocarbons.) Redundancy means even more land and more resources must be allocated to “green” energy production.
Hydrocarbons, in comparison, are more land-friendly than many environmentalists admit.
Consider Alaska oil. The controversial Arctic National Wildlife Refuge (ANWR) comprises 19 million acres in North Alaska. Of those 19 million acres, 17.5 million are off-limits to any economic activity. Of the 1.5 million available, only 2,000 acres would be needed to tap 10 billion barrels of oil reserves, should the federal government ever permit it.
Being efficient also mean being green. And hydrocarbons are the most efficient energy. If all energy is put on equal footing – no taxes, no subsidies, no tariffs – hydrocarbons produce the biggest bang for the buck; that is, the most energy received for the fewest dollars spent.
Capital allocated to technologies that use hydrocarbons (such as the gas-combustible engine) will lead to technologies that are even more efficient and more environmentally friendly in the future. But when capital is artificially diverted to other sources – through subsidies, tax credits and tariffs – there is less capital investment and less technological advancement in hydrocarbon-useless capital.
Efficiency evolves at a less optimal pace, and more pollution is the result.
This is an important concept, because when all energy sources are measured on an equivalent scale – such as millions of tons of oil-equivalent consumption – hydrocarbons are by far the preferred energy source. Of world energy consumption in 2011, oil accounted for 33.1%, coal accounted for 30.3%, and natural gas accounted for 23.7%.
“Green” energy – solar, wind, biomass – commands headlines for posting exceptional double-digit annual growth (17.7% year-over-year growth in 2011), but only because it is growing from such a minute base. In 2011, these energy sources still accounted for only 1.6% of global-energy consumption.
These ratios won't change for decades, which is to say it's green (environmentally friendly) to invest in black. The more capital that flows into hydrocarbon production and into the engines and machinery that run on hydrocarbons, the greener the earth becomes.
I point all this out to emphasize that “socially responsible” investors focus on the seen. Rarely do they focus on the unseen.
The seen is an emissions-free turbine spinning in the wind. The unseen is the lower capital investment in the far-larger unseen of traditional-energy technology that reduces emissions and waste while concurrently raising living standards around the world.
From a financial perspective, there is no contention – black is by far the greener alternative.
And by “greener” I mean return on invested capital. There’s a reason why I include only black energy recommendations in High Yield Wealth. These investments provide return on capital that leads to superior income and consistent price appreciation.
In other words, they produce wealth.
In fact, the “black energy” investments featured in High Yield Wealth yield between 6% and 10%. I have yet to find any worthwhile investment in the alternative universe that comes close. Indeed, most heavily subsidized alternative energy sources are money losers (Suntech and Solyndra are among many failures.)
The bottom line is that environmental discussions aren't as black and white - or should I say as black and green - as they might seem. In other words, black energy is more environmentally responsible than you might think.
The environment matters to all of us. That said, being environmentally friendly and earning a high rate of return are not mutually exclusive.
Editor's Note: If you would like to learn how you can boost the yield of your portfolio... and earn bigger monthly payouts... then consider taking a free, 30-day trial to our income service, High Yield Wealth. You'll discover exactly how we are built our cash-cranking portfolio and get access to every special report and investment recommendation. Click here to try High Yield Wealth, free.
|Thu, May 16, 2013|
Is Google (GOOG) a $1,000 Stock, or the Next Apple (AAPL)?
Google (NASDAQ: GOOG) has been on a tear for quite some time.
Shares of the search-engine giant have risen 41% in the last six months, 46% in the last year and 77% over the past two years. Yesterday, stock topped $900 for the first time in its history.
Is $1,000 per share next? Perhaps. But Google could just as easily suffer the same fate as Apple (NASDAQ: AAPL).
Let’s compare where Google shares are now vs. where Apple was when it started retreating eight months ago:
Google Now Apple Then
Right now, Google has a loftier price-to-earnings ratio, lower quarterly earnings growth and a higher share price than Apple did on September 18. Since then, Apple shares have tanked, falling 39% to roughly $430 a share as of this morning.
Does this mean Google is destined to suffer the same fate as its rival? Not necessarily. But the lofty P/E coupled with the potential sticker shock some investors might feel in seeing a $900 stock (a historical rarity) will make getting to a $1,000 a share – something no tech stock has ever accomplished – an uphill battle.
Live Options Chat Today!
Our resident options expert will tell you about his powerful income strategy that consistently generates 5% to 15% a month – without forcing you to constantly monitor your brokerage account. Andy will also fill you in on a pair of action-specific trades that you can put to use right away.
This live, hour-long event is FREE and open to the public. It is an interactive chat, so come equipped with any questions you may have for Andy – a 16-year options veteran and former Wall Street trader with Oppenheimer & Co.
Click here to sign up. Hope to see you at noon!
What The North American Oil “Bonanza” Means to You
“North America has set off a supply shock that is sending ripples throughout the world.” - International Energy Agency (IEA) Executive Director Maria van der Hoeven
Anybody questioning the global impact of U.S. shale oil development should have had those questions laid to rest earlier this week when the IEA published its annual Medium-Term Oil Market Report.
“The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves,” stated Executive Director Maria van der Hoeven. “But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”
The report highlights the impacts of continued growth in North American shale oil, which is affecting everything from exploration to refining, transportation and storage.
To put it bluntly, it’s an entirely new world out there in the oil market.
The technology that unlocked this oil is making its way around the globe, so don’t think that the status quo is locked in place. It’s not. Any geographic region sharing similarities with North American shale formations is now a target for shale oil development.
This means many countries’ oil reserve estimates are potentially outdated and understated. A new exploration boom is the only way to know if these reserves exist or not.
As we’ve seen over the past year new oil discoveries in remote locations in Africa and Australia have caused once unknown stocks to soar in value. And I think we’ll be hearing more success stories during the coming months and years since exploration companies, armed with increasing amounts of data, will be able to more precisely locate high-potential drilling targets.
It will be an exciting time for investors who seek out the small exploration companies with potential blockbuster projects. Of course, these companies carry higher risk due to the uncertainties inherent in wildcat-style drilling. So if you go after the big winners, I suggest minimizing the risks by investing smaller amounts of money than you would in an established company.
But the face of the oil exploration industry isn’t the only thing that is changing … and it’s not the only opportunity.
Developing economies are now leading developed nations in oil demand and have the added boost of new refining capacity. This is changing global trading patterns. The Middle East and China will lead the charge, helping to expand global refining capacity by 9.5 million barrels per day (mb/d) over the next five years.
For the risk-averse, a company such as Chevron (NYSE:CVX) is a good way to go. As an integrated oil company, Chevron has upstream (exploration and production) and downstream (refining, selling & distribution) operations all over the globe.
While not the biggest company in the space - Exxon takes that honor - Chevron's still massive size, global footprint and oil-based portfolio are competitive advantages.
The company’s upstream plans are well integrated with its downstream plans, which increasingly positions the company to sell higher-margin products into growth markets. This means fuel, specialty chemicals and premium-base oils to countries around the Pacific Rim, including Asia, the Americas and Africa.
Chevron's existing refining capacity is built around this strategy and despite the company being much smaller than Exxon its Pacific Rim distillation capacity is nearly equivalent at just under 15 million barrels of oil equivalent per day (MMBOED)
All of Chevron's operations boil down to a company that is able to adapt to a changing market over time, focus its efforts and deliver on the bottom line. At the end of the day this is what investors should care about for the majority of their oil-related investment dollars. What’s more, the company pays a reliable dividend that has grown over time and boasts an average long-term return on equity of around 20%.
But if you like a little excitement too, select exploration stocks offer a lot of upside. Over the past two years we’ve had a couple of big strikes with stocks in the Small Cap Investor PRO portfolio. And over the next couple of months I’ll be covering additional oil explorers as they look to apply the same techniques that led to the North American oil “bonanza.”
Tyler Laundon, MBA
|Wed, May 15, 2013|
3 Companies Upping their Dividend by more than 10%
Terra Nitrogen (NYSE: TNH) is one of the most generous dividend payers on the market. Tomorrow, it will become even more generous.
The mid-cap fertilizer producer is increasing its quarterly dividend to a whopping $4.68 per share on Thursday – or $18.72 per share annually. With a current share price of $227, that’s a hefty 8.3% yield. Only 14 companies larger than Terra Nitrogen offer a higher yield.
Terra Nitrogen has long been a generous dividend payer, returning almost its entire cash flow in 2012 to shareholders in the form of a dividend. That practice may have enticed a few more investors to buy the stock, but it also led to a volatile dividend.
Terra Nitrogen has alternated between increasing and slashing its dividend nine times in the past three years alone. In November 2010, for example, TNH slashed its dividend from $2.36 a share to $1.40 per share. By May, it had suddenly tripled to an all-time high of $4.82 per share.
That’s not dividend growth. That’s dividend uncertainty. And the uncertainty has sent the stock on a wild ride of late – from a high of $292 a share last April to a low of $175 a share last May. The stock has risen 13% since then, but is up less than 3% in 2013.
For more reliable dividend growth, income investors would be wise to turn to two other companies increasing their dividends this week: Chevron (NYSE: CVX) and Costco (NASDAQ: COST). Both companies are upping their dividends today – the latest in a steady string of increases.
Costco is bumping its dividend to $0.31 per share from $0.275 per share, a 13% increase. It’s at least the 10th straight May that the company has upped its dividend.
Chevron has been nearly as reliable a dividend grower. The oil giant has increased its dividend every year since 2005. Chevron’s latest dividend hike, to $1.00 per share from $0.90 a share, brings its yield to 3.3%.
It’s no 8.3% yield. But at least Chevron – like Costco – offers reliable annual dividend growth, and avoids the seesaw dividend approach that has made Terra Nitrogen so volatile of late.
The 77% Income Trade
Don't forget to register for Thursday’s FREE webinar, "The 77% Income Trade." Resident income expert Andy Crowder will hold a live webinar showing you how to make this 77% income trade on shares of Apple. In addition, Andy will go over everything for free during this event, which takes place this Thursday, May 16th at 12pm EDT. We have a strict attendance limit, so we urge you to sign up now for this webinar by clicking here.
As an investor, I love simple.
Some people take a simple concept and sprinkle it with some mumbo jumbo to make it seem complicated … and then claim only they can explain it to you! Don't listen to them … and certainly don't buy into any such load of bunk!
Take options, for example. Yes, a lot of people - maybe even your stockbroker - will tell you options are too complicated and confusing. What they’re probably telling you is that they don’t want to understand options, so they don't want you to trade them either!
Yes, lots of people have joined the ranks of options traders. But only 10 years ago, just a privileged few investors could take advantage of things like streaming quotes and real-time options chains. Options were shrouded in mystery and deemed too complex for the average Joe. They were traded only by so-called "sophisticated" professional investors.
Since then, however, seismic changes in the options world have leveled the playing field for individual traders and investors. Thanks to advances in technology, innovative trading tools and better access to what was once privileged information, the self-directed investor is now in the same position as the Wall Street fat cats during their heyday just a few short years ago.
So now that we as self-directed investors have access to the same technology as professional traders, why aren't we applying this technology in the same way?
We all know that buying a stock or ETF has only a 50/50 statistical chance of success. But most investors don't know that they can increase the statistical chance of success well above 50/50. Professional traders do, and they have been using powerful technology to assist them with an appropriate strategy for years. But now you and I have the same technology. Now it’s up to use it to our advantage.
One of the more powerful tools offered in today's options trading software is option theoreticals. Probability of Expiring is the most informative data point among the options theoretical and one that I employ every day for my Options Advantage readers.
What is Probability of Expiring? It’s the chance a stock will close in the money at options expiration.
So the real question is … how can you use Probability of Expiring to your advantage?
Say, I believe that the Russell 2000 ETF (IWM) is currently in a short-term overbought state and the market is due for a short to intermediate-term correction. As a result, I want to place a trade that has roughly an 85% probability of expiring, or as I like to refer it as an 85% probability of success.
I realize that some of you do not have access to trading software that gives you the probability of success, but any worthy trading software will provide you with the delta of any given option.
Just look above and you will notice that how delta relates to the probability of success. Basically to find the probability of success you just take 100 minus the delta.
So, let's look at how we can apply probability of success to the real world.
IWM has pushed to new highs is currently in a short to intermediate-term overbought state. Moreover, we are entering the "sell in May" period.
With that being said, I want to place a bearish trade with defined risk and close to an 85% chance of success.
A bear call spread fits the bill.
As seen in the option chain above the 98 calls have a probability of expiring out of the money (OTM) of 83.41%. That means there was a 16.59% chance that IWM will close below 98 at June options expiration. In other words, the trade has roughly an 85% chance of success. You want the credit spread to expire worthless by not pushing above the 98 strike.
A theoretical trade: 98/100 bear call spread for $0.29 (.52 - .23) for a return of 16.9% if the trade closed at or below $98.
If you choose a trade with a lower probability of success, such as 67% (right at one std. deviation or 68%) you will be able to bring in more premium with less capital at risk. But, it is important to realize that when you give up probability for premium your chance of success declines.
Simply stated, the greater the risk, the greater the gain. You must always take that into consideration because is it worth making an extra 10% to give up 20% in your probability of success? Sometimes yes, sometimes no - it truly depends on your risk profile and conviction.
No glitz or glam here - just straight trading. Today, we're at a special time in history. I think we'll see options trading absolutely explode over the coming decade. Early adopters like you and I will be sitting in the driver's seat as wave after wave of novice options investors come into the fold.
To learn more about capturing 77% probability on all of your option trades, WATCH my FREE Special Webinar this Thursday.
|Tue, May 14, 2013|
Big Banks Burst Higher
Big banks have been frequent market leaders of late, and today they’re at it again.
Financials are up sharply today, rising 1.5% as of 3 p.m. ET. Goldman Sachs (NYSE: GS) has been the biggest riser, gaining 3% today. Bank of America (NYSE: BAC) (+2.5%) and Citigroup (NYSE: C) (+2.3%) weren’t far behind.
Not surprisingly, good news for the banks has been (more) good news for the markets. The S&P 500 has advanced another 0.9% and appears on its way to closing at yet another record high. The Dow Jones Industrial Average, meanwhile, has added close to 100 points and is also on the brink of a new high.
Big banks have led the way during this furious rally. The Financial Select Sector SPDR (XLF) has risen 15% in 2013 as stocks have advanced 12%.
For all the talk about the market pulling back, as long as the big banks continue their recovery, stocks will likely ride their coattails.
Tesla (TSLA) Motors Even Higher
The fastest rising stock on the market is being powered by electricity and strong earnings growth.
Shares of Tesla Motors (NASDAQ: TSLA), maker of electric cars such as the Roadster, Model S and Model X, are up another 2% today and a whopping 150% this year. Much of Tesla’s gains have come in the week since the electric-car company reported its first-ever quarterly profit last Wednesday.
Tesla earned 12 cents a share in the first quarter, quadrupling expectations of 3 cents per share and marking the company’s first profitable quarter since its inception. Sales also improved 83% from last quarter, to $562 million from $306 million.
The stellar earnings have pushed shares up 60% in the last week, accelerating what was already an incredible start to the year for Tesla.
Tesla’s profitable quarter gives credence to its standing as a growth company. So does the company’s improving outlook: it now expects to ship 21,000 cars in fiscal 2013, higher than the previous target of 20,000 cars. As demand for Tesla’s electric cars increases, so too will its earnings. Analysts are forecasting EPS of $1.08 in 2014, up exponentially from a projected 5 cents per share this year.
Meanwhile, the stock is approaching large-cap status, boasting a market capitalization of more than $10 billion now. When 2013 began, Tesla was valued at just $4 billion.
Now that it’s finally profitable, Tesla’s growth story may just be getting started.
Four Reasons I’m Buying Gold Today
Today’s letter is a bit on the long side. But I hope you’ll read it all the way through because it encompasses all of my thoughts on gold: one of the most important asset classes, and something I’ve owned in my personal account since 2006. If you own gold, gold investments or have any plans to buy gold in the future, today’s Daily Profit is a must-read.
First off, I’m not going to predict a speedy recovery for gold prices. That said, I continue to believe that gold offers investors safety in an uncertain world – which is why I added more exposure to the yellow metal in my latest issue of the $100k Portfolio.
The U.S. economy – and the global economy for that matter – is in somewhat uncharted territory. Just consider the following:
Sky-high debt among developed countries...growing government deficits…unfunded entitlement programs such as Social Security and Medicare…printing money at an unprecedented pace to support economies…stubbornly high unemployment…record corporate profits…0% interest rates…and $120 Bitcoins…
I think you’ll agree that there are numerous reasons to pause and consider the true value of money.
While I remain optimistic about the recovery of the U.S. economy and stellar financial performance of some companies, there is reason for concern on a global level.
And that’s why I think every investor – even those of us who are optimists – must own gold.
Here are four specific reasons why I think gold continues to matter…and why the recent decline offers a real opportunity to add exposure:
Reason 1: The Cyprus Effect
For months, Europe was largely absent from the financial headlines. Investors – at least on this side of the pond – were more preoccupied with the presidential election, the fiscal cliff, sequestration. Then Cyprus happened.
One of the smallest countries in the euro zone, the heavily indebted island nation sent shockwaves around the globe when it announced plans to impose taxes on all bank deposits as a condition of its financial bailout, courtesy of the International Monetary Fund and European Union. Cypriot parliament promptly voted the measure down. But then they enacted a similar “tax” on high net-worth account holders, taxing anything over 100,000 Euros at 30%...
Cyprus’ tax on bank deposits sent one clear message to the rest of the world: your money isn’t safe. If “taxing” – code for “stealing,” in this case – bank deposits was the solution for rescuing one financially insolvent country, what’s to prevent it from being the model for future sovereign bailouts?
Next time it might not be a nation that accounts for just 0.2% of the European Union GDP. It could be Italy. Or Spain. Or Greece. All of these countries are in terrible financial shape, and could find themselves in a similar situation to Cyprus. If so, the effect on the global economy could be disastrous.
If governments can suddenly steal bank deposits as part of a bailout agreement, then your money may not be worth what you thought it was. By nature, the currency becomes devalued – as the euro did in the days after Cyprus’ radical bailout plan became public.
So if you can’t trust paper money, the International Monetary Fund, or your bank, where can you turn? For many people, the answer is hard assets. And gold is one hard asset that has stood the test of time.
Reason 2: Unstable Currencies
Currencies have risen and fallen over the years. Through it all, gold has remained a valuable commodity.
People have been stockpiling gold for centuries. In these uncertain economic times, the precious metal still has tremendous value. As currencies have become devalued in recent years, the price of gold has steadily risen.
Gold is represented in gold, the U.S. dollar is represented in green.
This chart shows that the U.S. dollar tends to move inversely to the price of gold. Right now the dollar is on an upswing, advancing roughly 12% since late 2011. Meanwhile, gold has plummeted, sinking more than 22%. With countries from the U.S. to Europe to Japan pumping money into their economies, however, currencies – including the dollar – will eventually begin to lose some of their value again. When that happens – as we’ve seen for 12 years now – investors will seek safety in the form of gold.
And right now, gold is the cheapest it’s been in more than two years. With stocks at all-time highs and the dollar hovering near a two-year peak, the yellow metal holds plenty of appeal.
Reason 3: Emerging Market Demand
Those of us in the developed world aren’t the only ones who see value in gold. Increasingly, people in emerging markets are recognizing gold as a safe and secure asset, and a way to protect wealth. Additionally, gold is seen as a status symbol among the wealthy in developing countries.
China and India are the two fastest growing nations on the planet. They are also the largest gold consumers, accounting for more than 43% of the world’s gold consumption.
Both countries value the metal as a visible sign of personal status. In India, especially, gold jewelry is traditionally given as a gift at weddings, births and religious ceremonies. Gold is also a status symbol in China, but it’s also a hedge against inflation – and the Chinese government is actually encouraging the practice, lifting an old ban on purchasing gold as an investment last year.
In the wake of gold’s decline, demand in both countries should continue to grow.
In China, also the world’s largest gold producer, demand is projected to surpass supply by 2015. Meanwhile, in India – already the world’s biggest gold user – consumption is expected to hit 960 tons this year, 11% higher than last year.
As India and China’s love affair with gold progresses, gold should continue to maintain its value.
Reason 4: Gold Investment Ownership is Low
For the average person – and especially in India and China – gold’s value is largely in the jewelry that they wear. People covet gold in their wedding rings, their necklaces, their bracelets and their earrings. They don’t normally think of gold as an investment.
However, in the U.S. and Europe, more and more individuals are viewing it that way.
Even so, last year gold as an investment represented just 1.2% of global financial assets. That’s up from 0.7% in 2010 and a measly 0.2% in 2000. But it’s still well below the 3% of global financial assets individual gold investments comprised in 1980, and the 5% peak in 1968. Compared to those figures, the percentage now is still relatively low.
The meteoric ascent in the price of gold over the past 12 years is undoubtedly a major reason behind its increasing popularity as an investment. But one other factor has convinced more people to invest in gold: ETFs.
The advent of the gold exchange-traded fund (ETF) made it easy for investors to own gold without having to purchase physical bullion. Owning gold became as simple as buying a stock through an online broker once gold ETFs such as the SPDR Gold Shares (NYSE: GLD) – which holds $50 billion of bullion – became available about a decade ago.
For all of these reasons, I believe gold will maintain its relevance for years to come.
Further reading: As I said, I’m buying one gold investment today in my personal investment account. I’ve made this account available for you to view in my $100k Portfolio. If you’re not already a member and you’d like to see what I’m doing with my personal investment account today, I’m also excited about a simple way to buy silver. Click here for the full story. : http://www.100kportfolio.com/landing/25172
VIDEO: Is Sell In May Going Away?
Sell In May? Not yet. Stocks continue to climb higher, hitting new record highs during what is the traditional beginning to the seasonal sell-off period. When will the run end? At this point, it's foolish to make predictions.
|Mon, May 13, 2013|
April Retail Sales By the Numbers
The April retail sales numbers are out, and the results aren’t much different from March.
The $419.2 billion U.S. retailers sold is last month is just a tick higher than the previous month. However, it’s a $15 billion improvement from the $404.27 billion in retail sales last April – a 3.7% increase.
Here are some other key numbers from the April retail sales report:
Though the sales gains were modest (+0.1%), they were better than the 0.3% decline that was expected. That did little to propel markets forward today – the Dow was down 0.2%, while the S&P 500 was basically flat. However, with stocks already near record highs, only a vastly improved retail sales report would have likely triggered another big jump.
For now, the status quo is a welcome one on Wall Street.
IPOs on Pace for Record Month
Record-high stock prices are fueling the busiest month for IPOs in at least a decade.
Fifteen companies priced initial public offerings on U.S. exchanges in the first 10 days of May – the traditional start to summer sell-off period. Ten IPOs priced last week alone, making it just the second double-digit IPO week since 2007. Another 12 IPOs are scheduled to go public in the coming days.
The largest May IPO thus far has been Quintiles Transnational (NYSE: Q), a biopharm research organization that raised $947 million in its debut. Three of last week’s IPOs were real estate-related – a nod to the ongoing housing recovery.
One thing that could slow the IPO market down in the coming weeks is the modest returns. Of the 15 companies that have gone public this month, only three of them have managed double-digit returns. Eight of them are either in the red or flat since their debuts.
Insys Therapeutics (INSY) has been May’s most successful IPO by far. It’s a company that sells synthetic marijuana as a cancer drug. So far, that’s been a big seller (I’ll give you one guess as to why): the stock posted a first-day return of 18.8% and is up 35.4% since its May 2 debut.
Seven more companies are slated to go public this week. If the current pace holds, there would be 45 IPOs this month. To put that in perspective, no month has had as many as 30 IPOs since May 2007, and the 31 that went public in October 2004 marks the highest monthly IPO tally of the last decade.
As long as stocks keep setting records, the IPO market is likely to remain red-hot.
VIDEO: The Market is Out of Options
The market hasn't been kind of late to options traders -- especially not those of us who trade credit spreads based on probabilities. Stick to your convictions though, says Andy Crowder. A correction is inevitable.
|Fri, May 10, 2013|
ESPN Data Plan Boosts Disney (DIS) Stock
The Worldwide Leader in Sports continues to fuel Disney (NYSE: DIS) stock this week.
Disney beat first-quarter earnings estimates earlier this week in large part due to growth at ESPN. Now the cable sports giant is driving Mickey Mouse shares on an entirely different front – mobile.
ESPN is attempting to subsidize wireless connectivity on behalf of its legions of mobile users, thus enabling them to watch games, highlights and videos on their smartphones without limits. The company is reportedly in discussions with at least one major U.S. carrier. If the deal goes through, it would mark the first-ever limitless data plan for mobile users.
News of the potential deal initially pushed Disney stock up 1% in early trading, though it has since pulled back a bit. What’s more important is the future financial ramifications for ESPN – and by extension Disney, its majority owner – if the company can pull this off.
ESPN currently has 45 million digital users, 16 million of which access content strictly through mobile devices. The company’s mobile usage has been growing rapidly – its average users per day has more than tripled in the last three years. A one-of-a-kind limitless data plan would surely accelerate that growth.
ESPN’s groundbreaking potential deal extends what has been an impressive run for Disney stock in 2013. Shares had risen 30.5% year-to-date entering the day. They were up 3.5% already this week after the company’s earnings-per-share increased 36% from the first quarter a year ago.
Google Takes a Bite Out of Apple
The verdict is in: Google Glass is the future.
"What’s it actually like to have Glass on? To use it when you’re walking around? Well, it’s kind of awesome," wrote Josh Topolsky, editor in chief of technology site The Verge.
But while Google has built a groundbreaking gadget and is considering retail locations, the similarities to Apple end there. Glass clearly isn’t for everyone – definitely not in the way an iPod, iPad or iMac is.
Top 5 Threats to Your Financial Security
I've always considered myself a glass-half-full kind of guy. Tomorrow will be better than today; opportunities will ceaselessly abound.
Sometimes, though, I get down … and I've been a little down lately. I say that because I see more economic fallacies passed off (and accepted) as profound, and more misbehavior tolerated - if not encouraged - than I have seen in my investing career.
Though I don't believe an apocalypse is imminent, there are a few extenuating factors that could lead to one if they continue along the same ominous trajectory.
1. A Reckless Federal Reserve. No organization has more impact on financial markets than the Federal Reserve. And at no time has the Fed had more impact than it has today.
Through endless money pumping (given the concealing euphemism “quantitative easing”) at $85 billion per month indefinitely, the Fed has filled the economy with trillions of dollars of new monetary units.
Much of that money has found its way into the asset markets: bond markets are at all-time highs (the average yield of junk bonds is below 5% for the first time ever), interest rates are at all-time lows, the collectibles market is booming (many cable-television outlets have multiple shows dedicated to collecting), and farmland prices are soaring.
The Fed's money has, of course, infiltrated the stock market. Stocks, too, are at an all-time.
This is reason for concern, because the stock market is the only legitimate game in town for income and yield investors. Unfortunately, it has also become an increasingly dangerous game. Thanks to the Fed's promiscuous monetary ways, stock values are today driven as much by anticipating the Fed's monetary policy as they are by company fundamentals, thus making the stock market a riskier market.
2. Piling Up of Debt. The Fed and the Treasury Department have a unique symbiotic relationship. The Fed is able to inject new money into the economy by purchasing the Treasury Department's debt. In turn, the Fed's demand for this debt lowers the borrowing cost for the Treasury.
At the same time (and this goes under-reported), the Fed monetizes the Treasury's debt. I say that because at the end of the year the Fed remits all its profits (which include interest payments on Treasury debt) to the Treasury Department, thus further lowering the Treasury’s borrowing cost.
This incestuous alliance between Fed and Treasury undermines the economy in a more inconspicuous, more sinister way.
High levels of government debt weaken individual property rights, because debt must be paid from productive sources – your and my property and labor. Government debt also retards capital accumulation (the source of wealth creation), because government debt is spent mostly on current consumption. What is spent can't be invested.
In short, the debt is a big deal, and a potentially dangerous one to the well-being of our economy.
3. Belief in the “Free Lunch.” The height of naivety is to believe in the free lunch – something for nothing. Naivety was exemplified by the believers in Obamacare, who thought this bureaucratic monstrosity would lead to lower cost, better service and universal coverage.
It didn't take long to discover the opposite is true.
Stories abound of double-digit premium increases for individual health policy holders (around 19 million). According to management consulting firm Oliver Wyman, single adults age 21 to 29 earning 300% to 400% of the federal poverty level can expect a 46% premium increase. Meanwhile, analysis by WellPoint projects small-group premiums will increase 13% to 23% on average.
Obamacare also hits larger employers, many of whom are subject to a tax penalty if the healthcare policies they provide are insufficiently generous. Employers are reacting to the law's mandates through rational actions – by lowering wages and by reducing hours, because the penalty doesn't apply to employees who work fewer than 30 hours per week.
I can't say I was surprised to read that U-6 employment, which includes people employed part time for economic reasons, ticked up for the first time since July 2012
4. Meaningless Job Growth Statistics. Speaking of employment, we were told by the Bureau of Labor Statistic that the unemployment rate edged down to 7.5%, thanks to 165,000 new jobs being created in April.
It seems intuitive: more jobs, lower unemployment. But if we dig a little deeper we find things aren't quite as intuitive as they appear.
The unemployment rate factors in only those actively seeking work. If you've thrown up your arms in frustration and taken to playing Grand Theft Auto full time, you're no longer considered unemployed.
The sad truth is the labor force participation rate remains at a decades-low 63.3%. If participation had held constant since December 2007, when the recession started, the unemployment rate would be 11%.
5. Dependency Rising. This is the most subtle and troubling indicator of the five, because government dependency rots the very foundation of economic prosperity – a productive, self-sufficient labor force.
Sadly, our society is becoming less productive and less self sufficient.
The latest USDA report shows the number of Americans on food stamps hit an all-time high last month. According to the bureaucrats at the USDA, 47.8 million Americans – that’s 15% of the population - are subsidizing their food intake at taxpayer expense. Concurrently, the number of Americans receiving federal disability benefits hit a record 10.96 million in April – marking the 195th consecutive monthly increase.
Dependency and idleness are hardly the mettle of a great society.
One, two or even three of these factors set on the same disturbing trajectory might make no difference. But if all five take to the road to perdition, the stock market, the economy, and our financial security will be the worse for wear.
And that's why I tend to see things a little half empty these days.
|Thu, May 09, 2013|
The Best Financial Move Ever
What if the smartest financial move you could make didn’t have anything to do with stocks or bonds? And what if it virtually guaranteed you at least a 3.5% annual “yield”?
Would you be tempted?
I think you probably would. In fact, despite dedicating most of my time to chasing down stocks with “double” potential, I’ve been committing more capital to this nearly zero-risk investment.
So what is it?
Paying off your mortgage.
I know, I know. It seems horridly boring. And you may be wondering why it’s worth paying down something that has tax advantages and a low interest rate. Valid points, for sure.
But consider the positives for a moment.
With the broad market breaking out to all-time highs and interest rates near record lows, one can make the case that neither stocks nor bonds are exceedingly attractive. Conversely, paying down the principle on your house has very defined results.
You’ll have less debt and more equity. Pretty simple.
Let’s also not forget that living without a mortgage gives people a lot of financial freedom, which likely results in less stress. Wouldn’t it be nice to eliminate that massive monthly expense sooner rather than later? Not to mention have that huge nest egg that you could tap into at any time if you needed to? I think so.
According to a Harris Interactive survey from a couple of weeks ago, a lot of middle-aged people agree.
Of 1,540 people polled, 40% that were 55 and older said that paying off their mortgage was the best financial decision that they ever made.
Interestingly, younger people – ages 25 to 54 – didn’t consider the mortgage important, and were more inclined to focus on saving early.
But I think that “focusing on savings” and “paying off the mortgage” are essentially the same thing; it’s just a matter of perspective. Paying down a mortgage is a form of savings, which at its essence is just deferred consumption – putting more aside now so you have more later.
Consider this simple example:
A $250,000 mortgage with a 4.0% interest rate over 30 years costs $1,193.54 per month ($833.33 in interest and $360.20 in principal in payment 1).
It will cost a total of $429,670 over 30 years.
But paying $200 extra per month reduces the total cost to $381,610, and the house is paid off in only 22 years and 10 months.
That extra payment of $200 per month saves you $48,060 in interest. Not to mention that for 7 years and 2 months you’ll have no mortgage payments. That amounts to over $100,000 in expendable income that you wouldn’t have otherwise had, all things being equal of course.
The easiest way to see how extra mortgage payments could be the “best financial decision you’ll ever make” is to plug the details on your mortgage into a free mortgage calculator. You can find one here. Then play around with the “additional payments” field to see the impact. You can view an entire amortization schedule so you can see how it all works over time.
Another option is to call your financial advisor and ask him to provide the same information to you.
It’s worth looking into. It doesn’t cost anything, but can end up saving you tens of thousands of dollars over the long run, and with essentially zero risk.
|Wed, May 08, 2013|
Is 3D Systems Plotting a Buyout?
Shares of the largest 3-D printing company were halted earlier today after the company announced plans to sell $250 million of new stock tomorrow. The mysterious trading pause has fueled speculation that 3D Systems (NASDAQ: DDD) may be preparing to buy out some of its competitors.
Some, including William Blair analyst Brian Drab, think that Swedish company Arcam (OTC: AMAVF) could be 3D’s primary buyout target. Arcam uses electric bean melting technology to create metal parts – something that could enhance 3D Systems’ technological capabilities.
It seems investors are buying into the Arcam speculation. Shares of the micro-cap stock shot up 10% in morning trading.
With a market cap of just $163 million, Arcam seems like the ideal buyout prospect for 3D Systems. Drab estimates that an Arcam takeover would cost 3-D between $180 million and $200 million. 3-D’s impending $250 million stock sale would thus cover the tab.
3D Systems has been on quite a tear of late. Shares have risen 35% in the past month, pushing the stock close to its all-time high of $46.44 established in late January. As a result, the company’s market cap has risen to $3.85 billion.
However, today’s stock-sale news has slowed the company’s momentum. Since putting its stock back on the market at 11:28 a.m. ET, shares have fallen 3.5%.
Why aren’t more people selling?
The questions have been rolling in this week.
Last week I talked about how you can get paid to buy stocks. It’s simple, real and more importantly, a great source for driving income on a monthly basis.
There are so many advantages to using this simple strategy to buy stocks you want to own. Again, it’s a safe and reliable way to bring in income, but some investors simply use the strategy to lower the cost basis of their stock. Either way, it’s a strategy that every investor should incorporate in their quest to grow wealth.
So why aren’t more investors selling puts?
Simply put: most “experts” in the financial media think this kind of investment is too risky or complicated for the average investor. And frankly, there’s no money in it. Once you learn how to use this type of investment for yourself, you begin to see the whole world of finance differently. Instead of “paying” people to invest your money, you learn to get paid to invest.
The first key to selling puts safely and profitably is knowing the real risks in owning a company’s shares. We need to assure ourselves the companies we sell puts on are fundamentally sound.
For instance, take Microsoft.
It’s a company that we feel comfortable owning for the long haul mostly due to its unwavering quest to please shareholders. The company continually buys back stock and pays a healthy dividend of 3.1%.
The stock is currently trading for $33.31- a 10-year high.
In my opinion, the price is a little inflated. So I prefer to pay $31.
Remember when I said we want to get paid to be investors? Well, given our desire to own Microsoft at $31 – we can get paid. Think about that: we can get PAID to agree to buy a stock at a lower price that we prefer.
I don’t want to get into the details in this short column, but we can sell one put contract that gives us the ability to buy 100 shares of Microsoft at $31 a share – and collect an immediate $40.
And no matter what happens, we get to keep that $40. If Microsoft stays above $31 – the $40 we collected is ours.
But for the sake of understanding, we should examine the alternative - Microsoft closing below $31 by option expiration.
In that case we'd keep the $40 and be forced to buy Microsoft stock at $31 per share.
In this case, we’d actually own the stock for $30.60 per share - that's the $31 strike price minus the $0.40 premium. That 9.4% less than Microsoft’s current market price.
Here's that math:
Initial income from sold put premium - $40.
Plus you'd get the dividend going forward of at least $92 per 100 shares, as each share pays a 92-cent annual dividend.
One way to think about it is that you'd receive $132 on a $3,100 investment. This works out to 4.3% on your money.
To me, this safe 4.3% return is superb given the current yields on bonds and other safe investments … and the likelihood of Microsoft raising dividends going forward.
One other thing to mention … had we been put Microsoft stock, I probably would have recommended selling a set of calls against our new stock position. This would boost the immediate income to the trade ... but let's not get too far ahead as I want to save this for next week.
I had to skip over some important details due to the length of this daily letter. But, if you are interested in hearing more, click here for full details.
Editor's Note: If you would like to learn more about options and how you can generate steady income month in and month out... then consider taking a free, 30-day trial to our real money alert service, Options Advantage. You'll discover exactly how our resident options expert, Andy Crowder, is using high probability trades to steadily grow a $25,000 real money portfolio. Every trade is executed for real... and readers are alerted instantly, so they can invest right alongside Andy. Click here to try Options Advantage, free.
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