Three Stocks I Was Watching in September
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
About a month ago I wrote about three stocks that I needed to watch closer in September because I had overlaid options on them that were going to expire. These positions are part of a continuation of a virtual portfolio I’m managing called the “No Drip, No Mess” Portfolio. Now with that key date past it is a good time to review the positions in context of the portfolio.
The first company that overlaid an options position was Ford Motors (NYSE: F). At the time I reviewed the position shares of Ford had fallen to about a dollar below the strike price of both the calls and puts I wrote. If Ford’s shares stayed below $10 I would have been required to buy more shares via the puts I wrote. As it turned out Ford’s shares accelerated by more than 10% in the month so that I was required to sell most of my shares at $10.
I’d attribute this more to the announcement of QE3 than due to Ford’s stellar operational performance. They reported decent quarterly earnings with their net income of a billion dollars or $0.26. That was slightly below the $0.28 cents analysts were expecting. With nothing altering the long term thesis of Ford it makes sense to continue the journey. You can read my thoughts on how to continue investing in Ford here.
While the market rally fueled Ford’s shares higher, it didn’t help sickly PetMed Express (NASDAQ: PETS). Shares ended up 21% below my $12.50 strike price which required me to buy 200 shares for the portfolio at that price. That’s ok with me; I’d always planned to own a small allocation just to collect the large dividend.
The company is currently under pressure from increased competition which has forced them to increase costs by both increasing their marketing spend and discounting products. However, they are solidly profitable and pay out a healthy portion of their earnings in the form of dividends. They operate in the vast and growing pet medications market that’s growing by about 5% annually. If they can begin to gain traction with their marketing they’ll be able to start growing both their sales and profits.
The final company that I was watching last month was Rex Energy (NASDAQ: REXX). I wanted to buy shares of this energy underdog but didn’t want to pay more than $10 a share due to the risks of investing in a smaller driller. This was one of those cases where using options actually caused me to miss my price as Rex did dip below $10 not too long after I wrote the put. With shares now 37% higher than my desired buy price it appears like I missed my chance.
One of the reasons for the spike is due to Rex’s emerging position in the Utica Shale. Peer Gulfport Energy (NASDAQ: GPOR) produced some truly exceptional results from their first Utica well with an average peak rate of 4,650 barrels of oil equivalent per day. Those results are more than four times higher than the results that Chesapeake Energy (NYSE: CHK) was seeing from their Utica wells. What’s interesting about the play is that Chesapeake saw about 1,000 boe/d from their Utica wells while the much more talked about Eagle Ford wells were mostly seeing about 500 boe/d.
That’s why a multitude of analysts began upgrading Rex in anticipation that they’ll see similar results. When combining this with QE3 and a stabilization of natural gas prices and you can understand why shares ran higher. With no viable put writing candidates at my $10 desired purchase price I’m going to send Rex back to my watch list for now. I do think the company is still undervalued compared to their future potential but they face a lot more risks as a small company so I want an ample margin of safety before investing.
For some options might seem like more work than they are worth. However, I’ve found that they force me to continually reevaluate my thesis to ensure I didn’t miss anything. Not to mention the income’s rather nice and in my option well worth the extra effort. The three options positions I overlaid in September generated $537 worth of income and short term capital gains on the $5,500 of capital invested. That’s quite a nice return if you ask me.
latimerburned has an options position on Ford. The Motley Fool owns shares of Ford and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Ford. 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.