Riverbed Technology: An Accidental Long Term Investment
George is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
These days I am a "Buy and Hold" investor by accident only. What I have discovered is that regardless of how invincible you may imagine yourself to be, accidents do happen.
After many years of watching my professionally managed accounts see paper gains evaporate and then come back again just long enough to make it clear that cycles do exist, I went on a different path.
I almost exclusively have migrated to a covered option approach to investment and restrict my activities to a universe of about 50 stocks. I've almost lost all ability to look beyond the horizon, other than when absolutely necessary. My stocks usually come and go, leaving my portfolio at their predetermined strike prices, but they do come back for frequent, albeit short visits.
Being a numbers savant I really never had much interest for details. While I know what industry McDonalds is in, very often that kind of information seems superfluous to me. By and large, I focus on periodicity and rhythm of share price without much regard to macroeconomic issues. Maybe "TMI" (Too Much Information) explains why I've never invested in shares of McDonalds.
By contrast, I am rarely without shares of Riverbed Technology and much of the time I've been entirely ignorant of its character. Being shallow, all I really cared about was the exhiliration that came with it leaving my stable of stocks.
But after a while of owning the same stock over and over again you can't help but start to learn a little about them. It's not much different from occasionally saying a word or two to the person that has only received a nod over the past few years. Somewhere, somehow, unbeknownst to you, you simply went beyond the tipping point and just had to start a conversation.
That is the case with Riverbed Technology. Over the years I have probably owned it on more individual occasions than any other stock, by last count over 40 times in 6 years, and have cackled while running the virtual option premiums through my hands.
But over those years I've come to know Riverbed Technology. FIrst there was the rumor of a Hewlett Packard buy-out, back when HP was feared and respected. That was when I realized that Riverbed Technology was a company that possibly had something to do with technology.
Then I learned that its price tended to inexplicably move when Cisco, Oracle, Juniper and others reported earnings. Apparantly, they had something to do with networking. Not that any of that really mattered.
Then I learned that Riverbed had very good management and was thoughtful in their own acquisitions and maintained narrow focus on their business. But I also learned that as good as they were in forecasting earnings and how accurately earnings releases would be in line, I also learned that executives were often very dour in providing guidance.
It seemed that they had not learned the game of "under promise and over deliver." They just told it like it was, just as they told the world what the earnings would be. Accurate and with the precision of an engineering mindset.
Of course, when more and more emphasis is placed on guidance and predictions of good fortune in the future, shares can plummet after earnings.
And so, here we are, with Riverbed Technology prepared to deliver another earnings report on April 29, 2013 after the closing bell. The range from low to high? $0.23 to $0.24. You can feel reasonably confident that they will come in somewhere in that range.
But since you can't feel reasonably comfortable with what words the future will be described, and the knoiwledge that shares are easily capable of sustaining large plunges, even on the order of 25%, even a short term oriented "investor" as I can become an accidental "buy and hold" owner of shares.
For those that shiver just a little, or do even worse, thinking about such a prospect, there is insurance. You can still be a buy and hold kind of person and squeeze a little extra comfort out of shares.
In this case, the use of a long term option (LEAP) can help you straddle both worlds, without the actual complexity of a straddle. WIth RIverbed Technology currently trading at $14.25, why not get the best of all worlds and sell a January 2014 call contract?
Doing so offers many advantages. Firstly, it can confirm your commitment to a buy and hold strategy by utilizing a longer term contract. You can select a strike price that also fits your own tolerance for risk and need for reward. If you want to maximize potential profits and minimize premature loss of shares to assignment, simply select a higher strike price.
In return, for example, selecting a $20 strike price, you would achieve a 40% capital gain or shares and an additional 5.4% in option premium.
Think of the premium as the dividend Riverbed Technology never offered. Or instead, if you're not quite as commited to your shares, or if you have some doubts about whether there is price appreciation in its near term future, shout it out and sell an $18 option. While settling for "only" a 26% capital gain on shares, you'll immediately get your hands on what would be the equivalent of an 8% special dividend.
Although I may end up as an accidental long term holder of Riverbed Technology, it always ends up being a welcome accident.
I currently own shares of RIverbed Technology and Cisco. I have weekly call contracts sold on Cisco and my sell call contracts on RIverbed Technology.