The Four Stocks I’m Watching This October
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we head into the final quarter of the year we could also be heading into its most volatile period. Uncertainty abounds thanks to a hotly contested presidential election; continued uncertainty in Europe and a slow American economy that many think might be headed toward a fiscal cliff. To be quite honest with you I’m not overly concerned with any of these issues.
Instead I’m more concerned with building a portfolio that won’t create too many messes that I'll need to clean up. To do this I use options to both generate income and buy stocks cheaper. This month I have four options that are set to expire this October in my virtual portfolio, the “No Drip, No Mess” Portfolio. Here’s an update as to what I’m watching for over the next month.
Earlier this summer I recommended writing puts on Intel (NASDAQ: INTC). Specifically, I recommended writing an October $25 put for a 2.5% allocation. Since that day I haven’t written another word about the tech giant. Instead I’ve been content to wait around and see if I’m assigned Intel shares on the first attempt. Lately with shares around $23 it appears like I’ll be adding Intel to my portfolio this October.
Intel reported a fine quarter with revenue of $13.5 billion and net income of $2.8 billion or $0.54 a share, all up single digits over last year. What’s been driving the stock down over the past few months was their announcement lowering their outlook for third quarter revenue. They’d previously guided to revenue of $13.8 to $14.8 billion but slashed that to a mid-point of $13.2 billion.
We’ll know more when they report those earnings on October 16th which incidentally is a few days before the options are set to expire. In the meantime shares are cheap at just 10 times earnings in addition to a net cash position of nearly $7 billion. Don’t be surprised to hear more on Intel soon.
The first trade I recommended when I started this journey was writing puts on Linn Energy (NASDAQ: LINE). I wrote one $35 October put and as it stands right now with shares over $41 each that I’ll unlikely be successful landing shares this go around. Any return in market volatility and I should be able to write another round of puts on Linn in an effort to add them to the portfolio at a better prices.
There’s a lot to like with Linn, they are balanced between gas and liquids, well hedged and have well over a thousand low risk drilling locations. Additionally, they’ve been raiding BP (NYSE: BP) this year to the tune of $2.2 billion worth of producing wells and drilling locations in two separate transactions. These are exceptional assets for Linn to add to their portfolio and likely wouldn’t have been available if BP didn’t need the cash to plug a hole in their balance sheet caused by the Gulf of Mexico disaster.
Most of the time I write puts in an attempt to buy shares of my target a bit cheaper. Other times I’ll use a more complex options trade just to generate some income. That’s exactly what I did by recommending strangling Lowes (NYSE: LOW). It wasn’t too complex as I simply bought 100 shares and wrote a $28 call to cover those shares and wrote a $24 put to buy more shares, both of which expire in October. With shares of Lowes now well over $30 a share it appears I’ll end up without shares but earn a combined 6% short term return in the process.
This wasn’t meant to be a short term trade; I wanted to earn income while buying more shares of Lowes cheaper in the process. When compared to their larger orange rival they are priced much cheaper to go along with more growth potential making them a more appealing company to own. If volatility returns don’t be surprised to see another trade on Lowes.
The final company I’ll be watching is the owner of my favorite baseball team, Rogers Communications (NYSE: RCI). I wanted to buy shares of this underfollowed telecom much cheaper and wrote opportunistic $30 puts that will expire in October. I was only able to virtually collect half of the income I’d thought I’d be able to collect on the company as shares have been dialing higher ever since I started looking into the company. Now shares are over $40 each and outside my preferred buy price of $35 or less.
Other than owning a stable of great Canadian sports clubs and their venues, Rogers owns several media outlets and Canada’s largest wireless carrier. Their business has been fairly flat of late but they continue to acquire great content which they’ll increasingly be able to leverage across all of their platforms. At this point I’m not as interested in the company at their current prices but I’ll keep watching for a better entry point.
A lot can happen over the next few weeks but barring any increased volatility it might be a while before I recommend another income trade on three of these four companies. That is one of the problems with using options to buy a company cheaper. However, price does matter and over the long term I think the results will speak for themselves.
latimerburned owns shares of Linn Energy, LLC and Rogers Communications (USA). The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel 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.