3 More Great Companies I Want to Buy, Just Not At These Prices
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I just wrote about the fact that I’ve been on the receiving end of more than my share of exceptional investing advice over the years. As I said in that article, one of the investors that I’ve found has given more freely of his pearls of wisdom is none other than the Oracle of Omaha. A favorite Buffett quotes of mine is, “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If I have one hang up as an investor it is in knowing the difference between price and value. More often than not I’ll find what I think is a wonderful company but I have to question if they are selling at fair a price or not. Couple that with the fact that I’ve found over the years that what I thought was a fair price today is in the market’s discount bin tomorrow.
To become a less emotional investor I’ve discovered it helpful to use options in order to acquire shares at a better price. I’ve been doing this for all to see in a virtual portfolio I call the “No Drip, No Mess” portfolio. Having already seeded the portfolio with a half dozen great companies and I’ve slowly been adding more though the strategic us of options. Here’s a list of three more great companies that I want to buy, just not until they go on sale.
I’ve always heard it said that money doesn’t grow on trees but I don’t think that those who speak such proverbs have ever invested in Plum Creek (NYSE: PCL). Of the major US timber REITs, Plum Creek has three attributes that set them apart from their tree growing brethren. First, they are by far the largest landowner with more than six million acres. Secondly, a very significant amount of their acreage position is either along the west coast to be exported or in the south where the economy has better long term growth fundamentals. Finally, other than some manufacturing operations, a majority of their income comes from either harvesting timber or recycling their land.
Comparing them to Weyerhaeuser (NYSE: WY) who also own home builders or Rayonier (NYSE: RYN) who's heavy into performance fibers shows a more focused business in my mind. While there is nothing wrong with these businesses at all, it makes Weyerhaeuser even more levered to housing while both have an added layer of company specific operations risks to be aware of. With Plum Creek you get a safe and secure dividend that should grow over time as both inflation and log prices rise higher.
All that being said, I’m still not willing to pay any price even though I think they operate a wonderful business. I’d much rather pay $35 a share in order to lock in a dividend yield of 5% which is why I wrote November $35 puts on Plum Creek. With shares now north of $40 my puts appear falling toward a worthless expiration.
I’m no stranger to seeing options expire worthless. Recently, I had to write a new set of puts on Seaspan (NYSE: SSW) after the first set sunk into worthless oblivion. That was fine with me, because I really like the floating REIT that Seaspan has built. With 69 container ships out on long term fixed rate charters, Seaspan can sit back and collect boatloads of income. As the tide of more boats being added to their fleet has led to a subsequent rise to their income, it’s also lifted the boatload of dividends being returned to shareholders.
Still, I want to pay less than the $16.50 shares are currently bidding so I wrote November $15 puts to pick up my shares. If these options expire I’ll try not to be disappointed as I’d have booked 8% worth of options income and would have no problem trying again.
While options can be great for generating a little income while you wait for a better buy price, they’re also great tools for risk management. That’s exactly how I viewed my trade on UnitedHeath (NYSE: UNH). Sure, I was able to get paid a little bit of income up front but the bigger payout happens if shares of the health care giant fall following the election. Not only do I have the opportunity to buy shares at my preferred price of $50 a share but I’d also be paid another 5% of my total purchase price thanks to a ratio put spread I wrote on the company.
While that sounds fancy it simply means that I bought one put option and wrote two. The second option I wrote could net me shares of United Heath at a more than fair price while the option I bought and the one I sold form a spread which could be sold for a fat payout.
UnitedHealth is a wonderful company and as the largest health insurance company they’ve been in the spotlight as health care has taken center stage in the national debate of the last few years. As their operating parameters begin to clear up over the next few months this giant can go back to concentrating on what they do best and that’s manage the risk of insuring the health of millions of Americans.
Thankfully most of us only have to manage the risk within our own portfolio. Personally I’ve found that options help me manage the risk in my portfolio, they’re a tool that have helped me invest better. Options might not be your cup of tea, but we can certainly learn a lot from the advice of others. If nothing else we can try to be a bit more Buffettesque by buying wonderful companies, even if we can only get them at a fair price.
latimerburned owns shares of Plum Creek Timber Co. and ssw (covered call). The Motley Fool owns shares of Seaspan and Weyerhaeuser Company. Motley Fool newsletter services recommend UnitedHealth Group. 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.