Options trades: Sold puts on CTL, BSBR, KMR & more!
I sold more put options this week as opportunities presented themselves as the market fell sharply and volatility expanded. The sell-off so far appears to be a well-deserved correction – one that’s going about doing its job of scaring market participants quite effectively.
Many individual stocks are at or fast approaching intermediate-term oversold levels, although it wouldn’t be at all surprising to see 1010-1020 on the S&P 500 in the coming days/weeks. And of course an even more extreme move can’t be discounted.
Keeping this in mind, I’m continuing to initiate new short put option positions, but am also maintaining a conservative approach of selling farther-out-of-the-money and later-dated put options.
New positions:
Banco Santander (Brasil) S.A. [[BSBR]] – On 2/4/10 I sold some September 10-strike put options in my IRA against BSBR as it sold off sharply on European sovereign debt fears:
Banco Santander (Brasil) is a Brazilian-based subsidiary of Banco Santander that went public just last October. It’s a full-service bank focusing on commercial banking, global wholesale banking and asset management and insurance, and offers a play on the fast-growing Brazilian economy.
Currently trading at $10.77 (with a dividend distribution policy based on 50% of the company’s yearly net income ($0.14 was paid in 12/09)), the shares are clearly in a downtrend and likely at oversold levels. Fundamentally, based on current earnings and expected earnings growth rates, BSBR appears to be undervalued here. I would certainly be comfortable owning the shares at well under $10, which would be my cost basis if they’re ultimately put to me.
CenturyTel [[CTL]] – On 2/5/10 I sold some July 30-strike put options against CTL as it fell on market weakness:
CenturyTel (now CenturyLink) is a regional telecom company offering a range of communications services – including voice, broadband and video – in over 33 U.S. states. Trading at almost $34 and yielding over 8%, its shares, while experiencing short-term weakness, remain in an intermediate-term uptrend. A break below the $32-$33 level would suggest a less positive picture.
Fundamentally CTL is probably about fairly valued here ($34), but appears to represent a reasonable yield play. The company is in fact a Dividend Aristocrat, with a record of 36 years of consecutive dividend increases, and appears to have the earnings and cash flow needed to maintain the dividend. My cost basis if ultimately put the stock will be under $29 (with a corresponding dividend yield of 9.7%).
Harsco Corp. [[HSC]] – On 2/4/10 I sold some July 25-strike put options in my IRA against HSC as it fell on market weakness:
A diversified mid-cap global infrastructure play, Harsco provides industrial services and engineered products in three segments: Infrastructure, Metals, and Minerals & Rail. Currently trading between $28-$29 and yielding 2.9%, its shares are presenting a somewhat neutral intermediate-term picture, which would worsen on a break below the $25-$27 level.
Fundamentally HSC currently appears roughly fairly valued to somewhat undervalued here with good growth potential tied to the global economy. The company has also earned status as a Dividend Achiever – an index of companies that, among other things, have increased their annual regular dividend payments for the last ten or more consecutive years. If ultimately put the stock, my cost basis will be under $24 with a corresponding dividend yield of almost 3.5%.
Kinder Morgan Management [[KMR]] – On 2/5/10 I sold some August 50-strike put options in my IRA against KMR as it fell on market weakness:
Kinder Morgan Management oversees the businesses of Kinder Morgan Energy Partners L.P. (KMP), one of the largest pipeline master limited partnerships (MLPs) in North America. KMR itself is not an MLP, but trades in tandem (at a varying discount) with KMP. In addition, it pays a dividend in the form of shares (like a DRIP) that offers an effectively higher yield than that of the MLP that it controls and manages.
Fundamentally, KMP/KMR appear somewhat on the expensive side based on price to distributable cash flow (DCF) compared to some other MLPs, but are trading in line with the sector with an average distribution yield of 7% (7.9% for KMR). Standard & Poor’s currently rates KMP a five-star “strong buy,” based on an expected forward distribution yield close to 6% (a premium to its peers).
Technically the shares of KMR have been performing extremely well until just recently, when the sector (and overall market) suffered a sharp down draft. However the intermediate-term trend remains positive, and it would probably take a break below the $49-$50 level to change this picture to something more negative. Meanwhile I’d be quite comfortable owning KMR at the $47-$48 level, which would be my cost basis (with a corresponding effective yield of 8.8%) if ultimately put the stock.
Sunoco Logistics Partners L.P. [[SXL]] – On 2/4/10 I sold some August 60-strike put options against SXL as it fell on both market weakness and a secondary offering by its general partner:
Sunoco Logistics Partners L.P. is a master limited partnership (MLP) formed by Sunoco to acquire, own and operate refined product and crude oil pipelines and terminal facilities in 13 states located in the northeast, midwest and southwest United States. Trading at about $63 and yielding 6.7%, the units of this MLP remain in an intermediate-term uptrend, despite having taken a sharp hit over the last several days. A break below the $59-$60 level would suggest a less positive picture.
Fundamentally SXL appears to offer a better-than-average balance sheet with strong earnings and free cash flow and decent growth prospects. Valuation wise it seems reasonably priced here on a price to distributable cash flow basis, and its yield is in line with other investment-grade MLPs.
Standard & Poor’s currently rates SXL a four-star “buy,” based on an expected forward distribution yield of below 6% (a premium to its peers). My cost basis if ultimately put the units will be below $58 with a corresponding distribution yield of 7.4%.
