New options trades: LOW, CB, MBT, CFR, MDT & more!
With the market up 60% from its March lows and many stocks now trading at questionable valuations, I continue to remain wary about selling near-strike put options given the increased potential for a significant pullback (or worse) in the coming weeks and months. At the same time, I don’t want to miss out if the market continues to work its way higher, or even flat lines for a few months.
As a result, I’m continuing to focus mostly on selling longer-dated farther-out-of-the-money put options. While the resulting annualized returns from these options sales may not all be in the double digits (reflecting their lower risk), I’ll still benefit from any of the above market scenarios – by either collecting the option premiums (i.e., earning income) while waiting for better prices/valuations, or by ending up buying some quality stocks at much better (i.e., lower) prices.
Here are the new short put positions I initiated during last week’s market turbulence:
The Chubb Corp. [[CB]] – On 10/23/09 I sold some April 40-strike puts against CB as it sold off on an analyst downgrade and some cautious earnings guidance:
Despite the analyst downgrade (to “hold”), the shares of this property and casualty insurance provider seem reasonably valued here (at about $50) by most measures, and currently yield about 2.8%. The Chubb Corporation has a long history (44 years) of dividend increases, earning it the distinction as an S&P 500 Dividend Aristocrat and is one of my longtime watchlist buy candidates.
The stock is currently in a strong intermediate-term uptrend – a picture that would probably only change on a move back below $45. While I’m not a buyer at these levels, I’d be happy to own CB in the low $40s or below (with a corresponding 3%+ dividend yield), which would be my cost basis if I’m ultimately put the stock.
Cullen/Frost Bankers [[CFR]] – On 10/21/09 I sold some April 40-strike puts against CFR as it sold off on weakness in the financial sector:
Trading at about $49 and yielding 3.5%, the shares of this Texas-based commercial bank remain in an intermediate-term uptrend from their March lows. A move below the $45-$46 level would change this picture to something more neutral/negative.
This regional bank appears to be financially strong and, importantly, was not a TARP recipient during the recent financial crisis. In addition, the company has a long history of raising its dividend – 16 consecutive years according to DividendInvestor.com. While CFR is probably about fairly valued here, it would be attractive at $40 or below, which would be my cost basis if I’m ultimately put the stock.
Lowe’s Companies [[LOW]] – On 10/23/09 I sold some April 17-strike puts against LOW as it sold off on market weakness:
Trading at about $21 and yielding 1.7%, the shares of this home improvement retailer remain in an intermediate-term uptrend from their March lows. A move below the $18-$19 level would change this picture to something more neutral/negative.
Fundamentally, LOW appears to be a reasonable value here, with some measures showing it undervalued. Like The Chubb Corp. (see above), Lowe’s has the distinction of being a Dividend Aristocrat, with 47 years of consecutive dividend increases. If I’m ultimately put the stock, I’ll own it at the decidedly more attractive price of under $17 per share (net), at a starting dividend yield – which could be expected to grow nicely over time – of over 2%.
Medtronic [[MDT]] – On 10/20/09 I sold some May 30-strike puts against MDT as the stock sold off on weakness in the healthcare sector:
The shares of this maker of medical devices are currently in a strong intermediate-term uptrend from their March lows, but well below their highs of recent years. A drop below about $33 would suggest a more negative/neutral technical outlook.
MDT is a leading company in a volatile sector, and has had to contend with being a “hot” growth stock (i.e., being “over owned” and “overvalued”) for many years. Now, currently trading at about $36 and yielding 2.3% (with 12 years of consecutive double-digit-percentage dividend increases behind it), MDT appears reasonably attractively valued. It would be even more so at the $30 level (and corresponding 2.7% dividend yield), which would be my cost basis if ultimately put the shares.
Mobile Telesystems OJSC [[MBT]] – On 10/23/09 I sold some March 35-strike puts against MBT as the stock sold off on market weakness:
MBT is the largest cellular provider in Russia and the Commonwealth of Independent States, and its recent purchase of a controlling stake in landline operator COMSTAR-UTS is expected to now offer it growth opportunities in broadband. Trading at about $52 and yielding about 5% (based on MBT’s expected 2009 dividend payout), the shares are currently in a strong intermediate-term uptrend – a picture that would change only on a drop below about $40-$42.
Fair value targets for this stock calculate to anywhere from about $40 up to over $100 (depending on the valuation method and growth estimates used), suggesting that it may still be reasonably valued here. While there are risks to owning such emerging market stocks, its reasonable valuation and MBT’s shareholder friendly dividend policy make me very comfortable with the idea of owning the shares down at the $35 level, which would be my cost basis if ultimately put the stock.
Trustmark Corp. [[TRMK]] – On 10/21/09 I sold some February 15-strike puts against TRMK as it sold off on weakness in the financial sector:
Headquartered in Mississippi, Trustmark Corp. is a bank holding company with more than 150 locations in Mississippi, Florida, Texas, and Tennessee. Unlike Cullen/Frost Bankers (see above), Trustmark did choose to participate in the TARP program, but elected to do so as a “healthy, well-capitalized bank.”
Valuation analysis shows current fair values estimates ranging from $12 to over $30 a share. Currently trading at about $18 and yielding 5%, the shares appear to be reasonably valued here. Technically, however, they’re presenting a neutral intermediate-term picture at best.
Up until the recent financial crisis, Trustmark had a 35-year record of consecutive dividend increases. However the dividend has remained unchanged now since the last increase in late 2007 – but it hasn’t been cut either. Given TRMK’s good dividend history and the company’s decent fundamentals, I’m comfortable owning the shares down at the $15 level or below, which would be my cost basis if they’re ultimately put to me.
