Options trades: Naked puts on BP, C, AFL, BBVA & more!
I sold more put options this week as the market appeared to begin a well-deserved correction while attempting to digest a trifecta of crises: new eurozone fears, more Goldman Sachs fallout, and concerns over the oil spill in the Gulf of Mexico. The result – some tempting opportunities to sell naked put options in stocks in the financial and oil sectors.
New positions:
Aflac [[AFL]] – On 4/28/10 I sold some January 40-strike LEAPS put options against AFL as the shares sold off on concerns over the company’s investments in European hybrid securities:
Aflac is a leading supplier of supplemental health and life insurance in the U.S. and Japan, with the latter accounting for over 70% of its revenues. Positives include the company’s leading position in its market and its strong operating history; risks include a weaker yen relative to the dollar and the company’s significant exposure to hybrid securities (such as convertible bonds and preferred stocks) of European banks, including $1 billion in Greek bank bonds and $750 million of Portuguese debt.
Trading at about $51 and yielding 2.2%, its shares remain in an intermediate-term uptrend – albeit one that appears to be slowing in its momentum and exhibiting negative divergences in some price oscillators. While the stock is already down some 10%+ from its recent highs, the technical picture does suggest further consolidation may lie ahead. A drop below $45 or so would change this picture to something less positive.
Valuation wise, AFL seems about fairly valued to perhaps somewhat undervalued here. While significant losses in the company’s European investments could certainly negatively affect its valuation, the company would seem to have the financial strength to withstand such a scenario (although for many investors, with AIG still fresh on their minds, it may be a case of “sell first, ask questions later”).
AFL is a Dividend Aristocrat and has raised its dividend for 27 consecutive years – at a healthy 20+% rate in recent years – and has indicated it will be in a position to “consider a dividend increase later this year.” My cost basis if ultimately put the stock would be about $38, with a corresponding dividend yield of almost 3%.
Banco Bilbao Vizcaya Argentaria [[BBVA]] – On 4/27/10 I sold some October 10-strike put options against BBVA as the shares sold off on European sovereign debt fears:
Based in Spain, Banco Bilbao Vizcaya Argentaria offers retail banking, asset management, private banking, and wholesale banking services in Spain and throughout much of Latin America (including Mexico, Brazil, Chile, and Argentina) and is expanding into the U.S and China. Positives include the company’s exposure to fast-growing economies in emerging markets – it posted positive earnings even during the recent financial crisis – while negatives include continued weakness in the Spanish economy, as well as European sovereign risk exposure.
Trading at about $13 and yielding over 4%, its shares have taken a hit recently in what appears to be a correction of the massive rally they experienced from the 2009 panic lows. While the intermediate-term trend is currently negative to neutral, the stock is oversold and exhibiting potential positive divergences suggesting a possible bottoming out process.
From a valuation standpoint BBVA appears undervalued based on current earnings and expected earnings estimates and growth going forward. While this outlook could change depending on what happens in Europe, the company has indicated it has minimal exposure to Greece and Portugal, and that it can deal with even a “worst-case scenario” of a downgrading of Spain’s debt.
I’d be quite comfortable owning BBVA below $10 (with a corresponding dividend yield of almost 6% (minus a Spanish 18% withholding tax)), which would be my cost basis if ultimately put the shares.
Beckman Coulter [[BEC]] – On 4/27/10 I sold some November 55-strike put options against BEC as the shares sold off on market weakness:
Beckman Coulter makes equipment and supplies – such as diagnostic systems and life science research instruments – designed to “simplify, automate and innovate” complex biomedical testing in hospital and other clinical laboratories. The company has an installed base of more than 200,000 systems worldwide. Risks include competition from alternative technologies and from competitors like Abbott Laboratories, as well as potential product compliance issues.
Technically, trading at about $62 and yielding 1.2%, shares of BEC are presenting a negative to neutral intermediate-term picture. The shares recently jumped on good earnings from oversold conditions. A move below the $58-$60 level would suggest a more negative picture.
Valuation wise, BEC appears somewhat undervalued here with current fair value estimates ranging from the high $50s to over $100. The company has an 18-year record of consecutively raising its dividend, though not at a double-digit rate. My cost basis if ultimately put the stock would be under $52, a level which would seem to offer a good total return potential.
BP plc [[BP]] – On 4/27/10 I sold some January 50-strike LEAPS put options against BP on weakness:
Based in London, BP plc is the world’s third-largest integrated oil company and the fourth largest U.S. refiner, with profits tied to the pricing and demand for oil and gas. Positives include its diversified businesses in the energy industry, while risks include fluctuations in crude and gas prices as well as costs – material and reputational – and potential lawsuits associated with accidents like the current oil spill in the Gulf of Mexico.
Trading at $52 and yielding over 6%, its shares are presenting a negative to neutral intermediate-term picture. The recent oversold condition could suggest a bounce, while a move below the $50-$52 support area would present a weaker picture.
Valuation wise, BP appears to be somewhat undervalued here, with fair value estimates ranging from about $50 to almost $70. Of course the company’s earnings will be 
affected by costs related to the current offshore drilling accident, but to what degree is unclear – the company says it could be several hundred million dollars. Investors (and the news media) seem to be assuming it’s going to be at least as bad as the Exxon Valdez oil spill, and we all know how badly Exxon’s stock (XOM) performed in the wake of that disaster – or do we? To see a price history chart of XOM before and after the Exxon Valdez accident (which ultimately cost Exxon over $4 billion) click on the thumbnail image to the left.
The timing of my put option sale could have been better – it was with some chagrin as I watched the stock take a drubbing two days afterward. Still, unless I adjust the position at some point by rolling it out, my cost basis if ultimately put the stock will be almost 10% below where it’s currently trading – at the very reasonable price of a little over $47.
Citigroup [[C]] – On 4/27/10 I sold some January 2012 4-strike LEAPS put options against C on weakness:
Citigroup is a large global financial services company with approximately 200 million customer accounts and business operations in more than 140 countries. The company nearly imploded during the recent financial crisis and is now working its way out of the mess with the help of government loans, and through massive writedowns and a company restructuring.
Potential negatives include the company’s continued exposure to “toxic” assets, its diminished earnings power going forward, stricter financial regulation of derivatives, consumer credit risks in a weak economy, and overhang in the share price as the U.S. Treasury sells off its 27% stake in the company over the course of 2010. Positives include a better-than-expected first-quarter performance, a relatively low institutional ownership of the shares, the company’s capital strength, and the shares’ reasonable current valuation.
Currently trading at about $4.40, its shares are presenting a neutral to mildly positive intermediate-term picture. A break below the $3.50-$3.75 level would change the intermediate-term outlook to something less positive.
Valuation wise, a case can be made that the shares could be about reasonably valued here in the $4 to $5 area, or even somewhat undervalued perhaps by some metrics (such as tangible book value). Most of the valuation arguments, however, are based on estimated possible earnings several years out; estimates for the nearer term are all over the map, which could mean the shares will remain susceptible to price volatility.
What does seem clear is that C is attracting interest as a turnaround/value play and that the stock appears to have established significant support around the $3 level. I certainly wouldn’t buy C outright here, but I’d buy a small position in C preferred stock if one were available offering a tempting enough annual yield – say 10% plus.
As an alternative, by selling the 4-strike LEAPS put options I’ll either earn a return of over 21% on the position if held to maturity or ultimately be put C shares for a net cost basis of about $3.15. (I could earn more on an annualized percentage basis by selling the January 2011 4-strike LEAPS put options, but – based on their current pricing – would risk being put the stock at a higher cost basis than I’m currently comfortable with.)
Total S.A. [[TOT]] – On 4/27/10 I sold some November 50-strike put options against TOT as it sold off on market weakness:
Based in France, Total S.A. is the world’s fifth largest publicly-traded integrated international oil and gas company with operations in more than 130 countries. Risks include lower oil and gas prices and demand, currency risk (its sales are mostly in dollars, but expenses and income are in euros), as well as significant exposure in OPEC countries where potential cuts in production quotas could reduce output; positives include a strong balance sheet and business profile, while investments in foreign markets – including Brazil, Angola, Kazakhstan and Nigeria – could boost revenues in coming years.
Trading at about $54 and yielding 5.7%, its shares remain in an intermediate-term downtrend after having fallen almost 20% from their highs earlier this year. The stock is oversold and could be looking to form a bottom over the coming weeks, although a break below $50 would suggest a more negative outlook.
From a valuation standpoint, TOT seems reasonably valued here, with decent potential for appreciation going forward based on estimated earnings and earnings growth. In addition, it’s included on the 2010 list of International Dividend Achievers – an index comprising companies that have increased annual regular cash dividends for at least the past 10 consecutive years, and that typically have strong cash reserves, a solid balance sheet and a proven record of consistent earnings growth.
My cost basis if ultimately put the stock would be a little over $47. At this price, the semi-annual (June and December) dividend payout would work out to about 6.5% (minus a probable 25% withholding tax for U.S. stockholders).
