Time To Make Money From Your Holdings

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my Investing Strategy, I like to sniff around stocks which I have featured, when the S&P has experienced a period of selling. At current valuations, the S&P is at a point where I prefer to be lightening the load, or looking at setting up some covered calls to generate some funds. I had suggested some covered call opportunities on Feb. 1 around Tesoro Corporation (NYSE: TSO), Krispy Kreme Doughnuts (NYSE: KKD) and Tenet Healthcare (NYSE: THC). A couple of names performing strongly and worthy of consideration this time are Medidata Solutions (NASDAQ: MDSO) and American Railcar Industries (NASDAQ: ARII)


Since Feb. 1, Tesoro went on a surge. The suggested May $50 option will likely be exercised given the stock currently trades in the mid- to upper-$50s , although the offered return was a respectable 9.7%. The Energy sector has managed to buck the trend in oil prices by pushing beyond the February price peak. Despite the strong price action, Tesoro Corporation has maintained a competitive forward P/E valuation of 9.3. Next earnings release isn't due until May, so current price action is mirroring the broader market and whatever news items are floating around. The price of renewable fuel credits (required to conform to the government's renewable fuels standard) has jumped from $0.01 to $1.00 per gallon in the space of a few months. This significant leap will likely attract attention in the company's next earnings report, and will be a contributing negative on margins.

Given the relative position of the S&P, a larger pullback is likely on the cards sooner rather than later. Tesoro's Corporation May $55 call around $4.70 might prove attractive for those expecting Tesoro to ease back in the months ahead.

Krispy Kreme Doughnuts

Hot off the press was Krispy Kreme disappointing earnings release. The May $13 strike is still holding its value around $1.20. The remodeling (and closure) of stores in Kansas and Missouri is likely to slice $9 million off the revenue stream, assuming the work doesn't take longer than a year to complete. Concerns on meeting year-on-year growth targets are more compelling. In the current earnings report, same store sales grew 5.5% on a 6.2% rise in customer traffic. Domestic franchise was also strong, with a 6.8% growth in same store sales. International same-store sales declined on an exchange-adjusted basis. These will be tough figures to repeat on a regular basis.

The company opened its 500th international store in Mexico during the fourth quarter. It expects to have 900 international locations by fiscal end 2013; a very aggressive growth strategy which will lead to continued cannibalization in its international operations (i.e. lower international revenue until the expansion program stabilizes). The company also expects to have 400 domestic shops by 2017, over the 240 currently in operation.

Overall, it's an aggressive plan, which is a long way from its earlier troubles. It will probably take a couple of years to bed in its international growth, which may see some missed earnings as it becomes a larger percentage of the overall revenue pie. A forward P/E of 19.9 is on par with Dunkin' Brands Group's 20.5 and discounted against Starbucks Corporation's 22.0. So while the current earnings hangover selling will probably take a few weeks to play out, any decline will only make its valuation more attractive.

Tenet Healthcare

The stock is on course to double in value since the November low. The suggested March $40 call will have exercised, leaving you with the earlier premium. Existing holders can look to May $45 call around $2.15 as a new covered call opportunity. As mentioned just a couple of weeks ago, this is a stock which is trading at about one fifth the value of its 2002 high.

The Affordable Health Care Act will provide the long term earnings engine, with very few negatives. The chief benefit is a reduction in the loss from the provision of non-insured health care. How the Health Care Providers position themselves to take advantage will be key. Aggressive pricing for inclusion in exchange-based plans will look to offset revenue against higher participation rates. Participating hospitals will be in a smaller network of providers, but will get more patients because there will be fewer choices available to the consumer. Tenet Healthcare has already penned three contracts for exchange plans in "tiered" networks. In these scenarios, participants will have to pay more for services outside of the tier structure. Tenet Healthcare is in discussions to sign further exchange plan deals. Projections for Exchange Plans is for $50 to $60 billion in revenue from up to 13 million participants in 2014

Despite this, the stock's price will not be immune to the trials and tribulations in the market, but any 10% trim off highs will probably be reason enough to start nibbling.

Medidata Solutions

The stock featured last August when it traded at $35.24 a share, but it has since reached the mid-$50s. The 'back office' software service provider to assist medical companies in running clinical trials will enjoy some of the pickings the Affordable Care Act will bring. The company has seen a 36% rise in its customer base over the past couple of years as it moves to grab market share.

The company reported earnings which met on expectations on revenue, and beat on earnings per share, but margins were down. Full year revenue was up 18% to $218 million. However, the company enjoyed strong bookings which left it with record backlog. Co-founder, Tarek A. Sherif, considered 2012 was an "inflection point" and left the company "poised to transition from being just a provider of Rave to a platform company with greatly expanded capabilities and opportunities." The company was accelerating its investment into R&D for its non-Rave portfolio with a goal of 20% sustainable revenue growth. To highlight this switch, there was a 50% growth in customers committing to multiple products last year. And at the end of 2012, 38% of its customer base were multiproduct users. Non-Rave product sales grew 300% (!) year-on-year and accounted for a quarter of all sales in 2012.

If there is an issue, executing the covered call strategy may be difficult. Option liquidity is limited, so dangling an offer for July $55 Strike at $4 may catch a fill given the strength of its prior advance, but there may be only a couple of contracts available at the price. However, the underlying stock looks well placed to continue its advance.

American Railcar Industries

This was another high flyer which featured in August at $28.29 a share, but now trades in the mid-$40s. The stock is riding the powerful rally in the transport sector; an excellent lead sector for marking a recovery in the broader economy. According to IBD, the Dow Jones Transportation Index is the best performing index of the major indices it tracks for 2013.

Sales growth has slowed, although demand for rail cars remains high. CEO Jim Cowan noted an industry backlog of 60,000 railcars at the end of December, of which 89% is the tank and hopper rail car, American Railcar Industries key sector (mostly tank). However Hopper demand is expected to pick up in the second half of 2013, after a strong December and January.

Revenue for the fourth quarter was up 6% on the comparable year last. Consolidated earnings came in at a record $41 million, compared to $30 million in the third quarter, and the $15 million of the comparable quarter last year. A forward P/E of 10.8 sits comfortably inside current trailing P/E of 15.3. Competitors The Greenbrier Companies and Trinity Industries have trailing P/Es of 12.0 and 14.1 respectively, so the stock may offer another 20% of upside just to match projections it has handily beaten in the past.

From a covered call perspective, round numbers are hard to break. A June $50 strike at $1.70 looks tempting. This may rise to $3.50 if the stock makes another pass at $50 in the coming couple of weeks (as the June $45 strike has traded recently). 

Declan Fallon has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus