Two Watch List Stocks Looking Even Better Now
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s been two weeks since I launched a paper trading portfolio called the “No Drip, No Mess” Portfolio to show investors how to use options and dividend paying stocks in a way to take away a lot of the risk in buying exceptional growth stocks.
We are using the income generated from the options and the dividends and instead of reinvesting them back in the same company as we would in a dividend reinvestment plan (or Drip), we are taking that income and specifically using it to buy smaller, more volatile growth companies that can cause a mess in your portfolio if you are not careful. I’ve been quite active in working to build out the portfolio and wanted to take a breather to see where we are as well as give a glimpse as to what lies ahead.
Through the first two weeks I’ve recommend six trades that have the potential to invest up to 23% of the portfolio’s $100,000 in virtual cash. As it stands only about 9% of that cash has actually been invested with the rest of it being set aside for potential put obligations. Through a combination of writing puts and both covered strangles and straddles, we’ve generated just over 1% worth of additional cash that we are putting to use buying a much more volatile and exciting growth company. Over the next few weeks we will continue to add companies to both the portfolio and the watch list, but first, let's review where we’ve been.
The portfolio’s first trade was a simple put write on Linn Energy (NASDAQ: LINE). I love how that company is an exceptional balance of growth and income, making it a perfect fit for the portfolio. They have a near perfect balance of oil and natural gas liquids to dry gas (48% to 52%) as well as a very long reserve life coupled with 1,500 low-risk and liquids-rich drilling locations. They’ve done a phenomenal job acquiring bolt-on assets and seeking toe-hold positions in new resource basins. Each time they buy a producing asset it is immediately accretive and comes with additional drilling locations for more growth. Their distributions to unit holders keep increasing, which is exactly what we are looking for in this portfolio. I’ll keep writing puts until we are assigned and then I plan on holding Linn for a long time.
My biggest disappointment thus far was being paid much less than projected for writing puts on Rogers Communications (NYSE: RCI). In my write-up I suggested that, “given the current market volatility there is an opportunity to pick up shares much cheaper or earn a very fat premium for trying. For the portfolio I am going to write October $30 puts for around a dollar. This gives us 3.3% yield on our cash required to hold the trade open as well as the opportunity to scoop up shares for just over 11% cheaper.” Unfortunately, I was only able to net $42.46 for those puts for a paltry 1.4% yield on the cash we are setting aside to hold the trade. It is unlikely that we’ll be assigned the shares as the stock is closer to $35 a share now. Come mid-October I’ll see if there are any reasonable put writing trades, otherwise we’ll buy shares outright or wait for a better price.
The crown achievement thus far in my option was being able to write a put to try and buy Rex Energy (NASDAQ: REXX) with absolutely no risk to our original $100,000 virtual investment. If we do finally end up with shares of Rex and the company subsequently ends up going bankrupt for some unforeseen reason the portfolio is completely protected from this thanks to the income generated by the options strategies we used to acquire our shares. While I obviously don’t see bankruptcy their future, it could be a rough ride for the company as gas prices remain low, but we have the potential to pick up our shares at such a compelling price that I think it’s worth the risk. If we are not assigned on the first put write we’ll try writing puts again or simply buy shares. In fact, the greater risk is that we are never able to get shares because of anchoring on price and then investors re-price the company for its real potential.
Our watch list of promising companies continues to grow even after plucking Rex from the list just days after singling them out. While we are probably a few weeks from generating enough income to take another company from the watch list to the portfolio there are two companies that I have my eye on. If we had the cash today, I’d be interested in adding both Arcos Dorados (NYSE: ARCO) and Mako Surgical (NASDAQ: MAKO) to the portfolio because their shares have both been hit hard, making them very compelling buys given their long-term potential. Arcos has a huge runway of growth in Latin America while Mako’s surgical tool is positioned to benefit from the aging population here in the US.
Over the next few weeks expect more of the same types of trades as we continue to seed the portfolio with income producing companies. I expect to make several investments in natural resources companies over the next few weeks given the current weakness in commodities, as well as look to build up the technology portion of the portfolio. Big tech companies are generating a lot of cash these days and will be returning more of it to shareholders; we want to be on the receiving end. Do you have a company that you think would be a perfect fit for the portfolio? Let me know your thoughts below.
latimerburned owns shares of MAKO Surgical, Linn Energy, LLC, and Rogers Communications (USA). The Motley Fool owns shares of Arcos Dorados and MAKO Surgical. Motley Fool newsletter services recommend Arcos Dorados, MAKO Surgical , and Rogers Communications (USA). 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. If you have questions about this post or the Fool’s blog network, click here for information.