Options trades: 3M, Norfolk Southern, General Dynamics and more!
As the market continues to move lower – and as likely future 10 to 20-year annual real returns edge up toward the high single digits – I’m increasingly viewing my put option sales as a way of establishing potential long-term investment positions. When stocks were trading at all-time highs and the average dividend yield was under 2% this strategy didn’t hold much appeal – now, the odds have dramatically shifted in its favor.
That said, I’m certainly not jumping in all at once – there’s still plenty of downside risk. But by using options to potentially initiate positions in selected stocks, I’m able to participate in any short-term upside move while reducing risk and retaining some flexibility in the face of further downside action.
With that in mind, here are my most recent options trades:
3M Company [[MMM]] – On Friday I sold some July 40-strike puts against MMM as it dropped along with the market:
3M is a quintessential blue chip and has the dividend record to prove it – over 50 years of consecutive dividend increases. Trading at about $42 with a dividend yield approaching 5%, the stock is beginning to look increasingly attractive. If I’m put the shares, my net cost will be about $36. While a short-term bounce could occur at any time, intermediate-term downside momentum suggests that lower prices seem likely. Near-term downside price support levels appear to be at about $40, $35 and ~$31.
Cintas [[CTAS]] – On Friday I sold some August 15-strike puts against CTAS as it dropped along with the market:
The stock of this maker of corporate identity uniforms is dropping back toward its lows of 1996 and appears undervalued by most measures. The company has increased its stock dividend for 26 years, and has doubled it in the last eight. Its payout ratio is still a low 22%, which leaves room hopefully for continued increases. Near-term support is at the 1996 lows of about $17-$17.5.
General Dynamics [[GD]] – This past week I sold some May 30-strike puts against GD as it and other defense stocks dropped along with the market and on concerns over reduced defense spending:
The stock is down dramatically from its high last year of around $95 and appears undervalued by most measures here at about $36 and with what appears to be a safe dividend yield of over 4%. Its current downside momentum suggests that it’s likely to see lower prices in the intermediate term, but at the same time positive divergences on the daily price oscillators point to the potential for a bottom of some sort in the nearer term. Downside price support levels appear to be at about $35-$36, $30 and ~$26.
Integrys Energy Group [[TEG]] – Last week I sold some May 22.5-strike puts against TEG after it dropped precipitously following the company’s forecast of sharply lower 2009 earnings:
The sell-off seems overdone and the stock appears clearly undervalued here based on current earnings expectations and with respect to recent historical valuation ratios. Integrys has raised its dividend for 50 consecutive years, and – in a move viewed suspiciously by some investors – did so just before its latest earnings forecast. Now trading at about $21 per share and yielding almost 13%, the stock appears to be pricing in a dividend cut. The high current payout ratio suggests this is likely as well. This isn’t too much of a concern to me as my net cost basis if put the stock will be at about its current price.
Norfolk Southern [[NSC]] – Last Thursday I sold some June 20-strike puts against NSC as it dropped along with the market and a weak transportation sector:
Currently trading at about $27 per share, the stock of this railroad company is now down 64% from its high of about $75 last year – and looks like it’s likely headed still lower. However it’s approaching what should be strong support in the low $20s and upper teens. While the stock isn’t especially undervalued by some measures at current levels, it will be increasingly so if it trades down to the low $20s or below. My net cost basis if ultimately put the stock will be below $19 per share.
Valspar [[VAL]] – Last week I also sold some July 12.5-strike puts against VAL as it dropped on market weakness:
Trading at about $16 and yielding about 3.8%, the shares of this paint and coatings manufacturer are probably about fairly valued to slightly overvalued here, but will be attractive if they trade down to the $12.50 strike, as appears likely. Still, I elected to sell the puts now rather than wait. The company has raised its dividend for 30 consecutive years, and a payout ratio of 40% suggests the dividend – which will yield about 5% at my net cost basis if I’m put the stock – appears safe. Downside support levels appear to be about $15, $14, $12.75, ~$11.5 and ~$10.
