Four Stocks I’m Watching This November
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The decisions we make in the next month are arguably some of the most important we’ll ever make. We’re faced with a presidential election wherein each candidate’s platform will take us on a different path toward a hopeful economic recovery. Not only that, but earnings are being released in rapid succession and we’re but two months away from a fiscal cliff.
Those macro themes could make for a very volatile month, one that could affect several positions I have in my “No Drip, No Mess” portfolio. Specifically, I have four companies with options overlaid that expire mid-month. That's why I’ll be watching these four stocks closely this month with an eye toward their future place in the portfolio.
These macroeconomic concerns have hit some industries harder than others. Even with video game sales still greatly affected by the slow economic recovery, I thought that there was money to be made from the industry. While many are still on the fence as to the future of the industry, I thought that straddling that fence by straddling Activision (NASDAQ: ATVI) could turn out to be quite profitable. This simple, three step options trade could generate significant income if the shares went nowhere.
Specifically, I wrote a covered straddle at $12, which encompassed buying 200 shares and writing two $12 calls and two $12 puts that expire this November. This worked out to a 4.7% allocation to a company that had 26% of its market cap in cash and more than a billion dollars of annual free cash flow. The combined position paid very well, enabling me to generate an 8.5% return in just over five months.
Currently shares are about 7% below my strike prices, but earnings arrive on Nov. 7, and their next blockbuster release, Call of Duty Black Ops II, releases one week later. Both events will be key drivers of the share price before expiration. I’m hoping that they both just slightly exceed expectations so that I can repeat a similar trade right after expiration.
Repeating my next trade would take a miracle, because as much as I would love to buy global mining giant BHP Billiton (NYSE: BHP), I will only do so at a great price. That’s why I wrote a November $50 put that at the time was 20% out of the money and yielding about 3%. That was just too good to pass up. Fast forward a few months and shares are now 30% higher than my strike price.
While I love BHP’s strategy of owning and operating large, long-life, low cost assets, I’d rather own them for a lot cheaper. China is slowing down while Europe still hasn’t sorted out their mess, and we in the states have our own set of economic and fiscal problems. I don’t think shares represent a compelling value at today’s prices and unless that changes over the next month, I’ll probably wait this one out for a while.
That's not the only trade I'll likely need to wait on. I originally wrote a November $35 put on Plum Creek (NYSE: PCL) in order to buy this great resources play for just a little cheaper. With shares now over $44, that’s not likely to happen any time soon. A combination of QE3 and more upbeat housing data has sent shares growing skyward. The company reports earnings on Oct. 29 and, barring a terrible report, it is unlikely shares will fall to my fair value of around $40.
With no viable options to buy shares cheaper, I’m likely to turn my attention to Weyerhaeuser (NYSE: WY) instead. With housing starting to rebound, they’re an even more levered play to the sector given that they are one of the top 20 largest homebuilders in the country. Add to this the fact that they have a very large wood products business and a Real Estate segment to go with their vast timber holdings and you can see why a bet on Weyerhaeuser is a bet on housing. We’ll see how the month plays out before making any changes.
For the second time since launching the portfolio, I wrote puts on Seaspan (NYSE: SSW). With that first round expiring for income, I took the same route again by writing two $15 puts, this time expiring in November. With shares still above that strike price, I might have to wait for round three before I’m assigned shares.
Shares of this floating REIT have a very nice 6%+ yield, which is one reason why I want to add the company to the portfolio. The company, which signs long term, fixed rate charters their container ships, is a more stable way to invest in the global economy. The current uncertainty in the global economy has shares trading cheaply, but I'd like to get them even cheaper. Still, I can’t complain if this put write expires as well, as these two rounds have netted more than 8% worth of options income. The company should report earnings in early November, which will provide some clarity as to whether I’ll get shares or need to try again.
While using options to build a portfolio might seem like a lot of work, the income generated is well worth the extra effort. These four trades will generate a 4.5% yield on the capital at risk, and for the most part that money will be earned in less than five months. I can reinvest those earnings back into the portfolio and take the original capital and try again. Over time I expect to do very well, but there’s a lot of work still to do.
latimerburned owns shares of BHP Billiton Limited (ADR) and Seaspan and has an options position on Activision. The Motley Fool owns shares of Activision Blizzard, Seaspan, and Weyerhaeuser Company. Motley Fool newsletter services recommend Activision Blizzard and Seaspan. 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.