Common Cents purchased CLNE today as it declined to around $7. The purchase consisted of several call options, each of which represents the right to buy 100 shares of the stock at a certain price.
More specifically, Common Cents purchased September 18 call options with a $6 strike price for $1.35 a piece. Common Cents' goal is to sell the options for a minimum of $1.45. CLNE will have to increase, at a maximum, 6.4% (or to $7.45) for the option contracts to reach $1.45. More information on options trading will come in a future 101 post.
Wednesday, June 24, 2015
Tuesday, June 16, 2015
AGNC: Sell; 1Q15 Update
AGNC reported earnings on April 28. With a decrease in the monthly dividend from .22 to .20, and a slight decrease in the book value from the higher $25's to $25.53, I didn't get the warm-and-fuzzy's from the quarterly performance. However, neither of these events were a surprise to me.
Since the quarter, the book value has further decreased to just under $25. The current price, in the upper $19s, represents a near 20% discount to the reported book value. However, this discount is warranted given the risk that The Fed will raise interest rates, immediately increasing the short-term borrowing costs for AGNC.
AGNC's management seems to be handling the interest rate volatility pretty well. They have decreased the leverage of the portfolio, which decreases the portfolio's exposure to rising interest rates. The sweet spot for AGNC is when rates do not change. Volatility in the rates forces the portfolio to be actively managed to reduce the effects.
Looking forward, I don't see interest rate volatility decreasing any time this year. While AGNC's 10%+ dividend yield is enticing, this just doesn't seem like a fight that I want to take on for the Common Cents portfolio. Further, I quite honestly have no idea what the company is going to report in regards to book value or dividends each month. Therefore, Common Cents maintains a SELL opinion in this position.
Since the quarter, the book value has further decreased to just under $25. The current price, in the upper $19s, represents a near 20% discount to the reported book value. However, this discount is warranted given the risk that The Fed will raise interest rates, immediately increasing the short-term borrowing costs for AGNC.
AGNC's management seems to be handling the interest rate volatility pretty well. They have decreased the leverage of the portfolio, which decreases the portfolio's exposure to rising interest rates. The sweet spot for AGNC is when rates do not change. Volatility in the rates forces the portfolio to be actively managed to reduce the effects.
Looking forward, I don't see interest rate volatility decreasing any time this year. While AGNC's 10%+ dividend yield is enticing, this just doesn't seem like a fight that I want to take on for the Common Cents portfolio. Further, I quite honestly have no idea what the company is going to report in regards to book value or dividends each month. Therefore, Common Cents maintains a SELL opinion in this position.
YTD Performance Update: June 2015
YTD performance (as of 5/31/15): +5.82%
S&P performance (as of 5/31/15): +3.23%
Common Cents Portfolio is up by 2.59%!!
Portfolio Composition by Position:
S&P performance (as of 5/31/15): +3.23%
Common Cents Portfolio is up by 2.59%!!
Portfolio Composition by Position:
AAPL: 13%
V: 10%
RH: 8%
LUV: 7%
CLNE: 6%
BP: 6%
AGNC: 5%
T: 5%
HD: 4%
GLD: 3%
CASH: 32%Portfolio Composition by Sector/Industry (excluding cash):
Retail: 20%
Energy: 19%
Technology: 19%
Financial Services: 15%
Industrials: 11%
Real Estate: 8%
Communication Services: 7%
Wednesday, May 20, 2015
LUV purchase @ $37.5
Common Cents purchased LUV today at $37.5 after an approximate 6% intra-day decline. The decline was likely based on news of probable increases in oil prices and capacity increases by airliners, particularly Southwest. Capacity increases, analysts justify, will increase supply at a constant demand, and, consequently, ticket prices (i.e. PRASM) will decline. Southwest's management seems to think that demand AND supply are increasing, so the capacity increase is justified.
Common Cents Take: Great airline for customers. Great company for employees. Great execution by management. None of these change with speculation on the direction of oil prices and PRASM.
Going forward, I will look to unload this chunk above $41, a 9%+ increase.
Common Cents Take: Great airline for customers. Great company for employees. Great execution by management. None of these change with speculation on the direction of oil prices and PRASM.
Going forward, I will look to unload this chunk above $41, a 9%+ increase.
RH Sale @ "$92"
I sold my June 19 2015 $80 call option today for $12.00. The "$92" in the post heading alludes to the $80 strike price plus the $12.00 sale price. This was the first option bought and sold for the Common Cents Portfolio, so I'd like to review my two strategies for trading around my position: options vs. regular shares.
On April 29, Common Cents purchased an $11.00 call option. I will assume RH was @ $88.50 (it ranged between $87.5 and $90.7 that day) at that time and that I purchased my usual lot at that price. Typically, I would need to earn 8% on my typical total purchase amount (i.e. share price multiplied by number of shares) before I would be willing to sell for a profit. That means that RH would have to increase to a price of $95.60 before I would sell. However, to earn an equal return in total dollars as the stock purchase option, I bought an $11.00 call option and sold it for $12.00. When my option hit $12.00, RH share price was at $91.50, or an increase of 3.4% from the original $88.50 price.
In summary, when trading options, I was able to get an equal return in total dollars with a 3.4% increase in share price relative to an 8% increase in share price for the stock purchase option. Pretty good. The flip side is that owning the option increased the volatility of my portfolio as a whole. It was great when the option increased in value, but it was also tough to watch when it decreased.
The strategy of purchasing an option with an exercise date well over a month into the future (i.e. June 19 call purchased on April 29), and a strike price well below the current share price (i.e. $80 strike vs. $88.50 share price), seemed to be a conservative approach. I will look to make a similar trade when RH's share price decreases below $90 again.
On April 29, Common Cents purchased an $11.00 call option. I will assume RH was @ $88.50 (it ranged between $87.5 and $90.7 that day) at that time and that I purchased my usual lot at that price. Typically, I would need to earn 8% on my typical total purchase amount (i.e. share price multiplied by number of shares) before I would be willing to sell for a profit. That means that RH would have to increase to a price of $95.60 before I would sell. However, to earn an equal return in total dollars as the stock purchase option, I bought an $11.00 call option and sold it for $12.00. When my option hit $12.00, RH share price was at $91.50, or an increase of 3.4% from the original $88.50 price.
In summary, when trading options, I was able to get an equal return in total dollars with a 3.4% increase in share price relative to an 8% increase in share price for the stock purchase option. Pretty good. The flip side is that owning the option increased the volatility of my portfolio as a whole. It was great when the option increased in value, but it was also tough to watch when it decreased.
The strategy of purchasing an option with an exercise date well over a month into the future (i.e. June 19 call purchased on April 29), and a strike price well below the current share price (i.e. $80 strike vs. $88.50 share price), seemed to be a conservative approach. I will look to make a similar trade when RH's share price decreases below $90 again.
Tuesday, May 12, 2015
YTD Performance Update: May 2015
YTD performance (as of 4/30/15): +5.35%
S&P performance (as of 4/30/15): +1.92%
Common Cents Portfolio is up by 3.43%!!
Portfolio Composition by Position:
S&P performance (as of 4/30/15): +1.92%
Common Cents Portfolio is up by 3.43%!!
Portfolio Composition by Position:
AAPL: 12%
RH: 12%
V: 9%
CLNE: 7%
BP: 7%
AGNC: 5%
LUV: 5%
HD: 4%
T: 5%
GLD: 3%
CASH: 32%Portfolio Composition by Sector/Industry (excluding cash):
Energy: 22%
Technology: 20%
Retail: 19%
Financial Services: 15%
Real Estate: 8%
Industrials: 8%
Communication Services: 8%
Sunday, May 10, 2015
Initiating a Position
Now that we have all the tools we need to value stocks, we can finally develop a method for researching a potential new position within our portfolio. There are a few very important particulars to research about your company/stock of interest: how it makes money, how well it has done in the past at making money, what sector/industry it belongs to, and what factors can move the stock in either direction.
If you have an online brokerage, such as Fidelity, Scottrade, or E*Trade, you probably have research reports available to you at no cost. For a great majority of larger companies, Standard & Poor's publishes a report that outlines a lot of basics on your company, such as how it makes money, what factors have developed over history that have swayed the company's performance, what sector/industry it belongs to, what it's peer companies (competitors) are, and the S&P analyst's commentary on future performance. This is usually a good first stop to get a crash course on your prospective investment.
The 10-K SEC filing is a particularly cumbersome source that can have some very detailed information pertaining to how a company makes money. The 10-K is a yearly filing that describes any and all information that you are interested in or never wanted to know. I like to check the "risk factors" section to identify potential risks, obviously, and to develop a list of important metrics to keep track of. For instance, if a risk factor describes the heavy use of debt to fund operations until revenues grow substantially, I would keep track of the debt on the balance sheet and any news/analysis pertaining to such.
It is equally, or even more, important to understand the industry/sector of your prospective position and what factors influence that industry as it is to understand company-specific influences. Most of a stock's price change will be influenced by its industry. If you own an oil stock, and oil goes down, no matter what oil stock you own, it will go down as well. There's simply no way around it. The best you can hope for is that it will go down less than comparable oil stocks, and when oil turns favorable again, that it will go up more.
Once you have an understanding of how your company makes money, and what factors influence the stock price, you will then want to check on management's execution. The best resource for this, in my opinion at least, is to read the earnings conference calls. SeekingAlpha.com is my sole resource for these transcripts. You can gain access to insights from management as well as the short-term concerns that are on analysts minds during the call. You may even want to read the most recent two or three to see how management's dialogue has changed. News and research articles can be a good resource to help gauge how the investment community has received the earnings releases.
Now that you have a good gauge on your prospective company, you may want to compare it to its competitors. You can compare earnings histories, management's growth plans, valuations/growth, and any other relevant information. If you know you want to have a position in the oil sector and have a company in mind in which you'd like to invest, you may want to consider that a competing company in the oil field may be better run and have cheaper valuation metrics.
Once you learn how your company makes money, what factors have influenced it recently, and what factors will potentially influence it in the future, you are ready to make your first purchase! You may be eager to make this purchase, but you can do yourself a huge favor if you decide on a fair valuation to purchase the stock at and wait until it reaches that valuation.
Common Cents Take: While it is exciting to establish a position, it is very important to do your homework on the company prior to making your purchase. If you do not perform the research, you will not have conviction (at least justifiable conviction) in the stock. The market will easily bluff you out of your position with misdirection when you could be adding to your position at a great bargain. And remember, equally important as conviction is valuation. I really love Starburst, but I don't plan on buying a pack for $30. Alright, enough chatter-let's open that account and make that purchase!
If you have an online brokerage, such as Fidelity, Scottrade, or E*Trade, you probably have research reports available to you at no cost. For a great majority of larger companies, Standard & Poor's publishes a report that outlines a lot of basics on your company, such as how it makes money, what factors have developed over history that have swayed the company's performance, what sector/industry it belongs to, what it's peer companies (competitors) are, and the S&P analyst's commentary on future performance. This is usually a good first stop to get a crash course on your prospective investment.
The 10-K SEC filing is a particularly cumbersome source that can have some very detailed information pertaining to how a company makes money. The 10-K is a yearly filing that describes any and all information that you are interested in or never wanted to know. I like to check the "risk factors" section to identify potential risks, obviously, and to develop a list of important metrics to keep track of. For instance, if a risk factor describes the heavy use of debt to fund operations until revenues grow substantially, I would keep track of the debt on the balance sheet and any news/analysis pertaining to such.
It is equally, or even more, important to understand the industry/sector of your prospective position and what factors influence that industry as it is to understand company-specific influences. Most of a stock's price change will be influenced by its industry. If you own an oil stock, and oil goes down, no matter what oil stock you own, it will go down as well. There's simply no way around it. The best you can hope for is that it will go down less than comparable oil stocks, and when oil turns favorable again, that it will go up more.
Once you have an understanding of how your company makes money, and what factors influence the stock price, you will then want to check on management's execution. The best resource for this, in my opinion at least, is to read the earnings conference calls. SeekingAlpha.com is my sole resource for these transcripts. You can gain access to insights from management as well as the short-term concerns that are on analysts minds during the call. You may even want to read the most recent two or three to see how management's dialogue has changed. News and research articles can be a good resource to help gauge how the investment community has received the earnings releases.
Now that you have a good gauge on your prospective company, you may want to compare it to its competitors. You can compare earnings histories, management's growth plans, valuations/growth, and any other relevant information. If you know you want to have a position in the oil sector and have a company in mind in which you'd like to invest, you may want to consider that a competing company in the oil field may be better run and have cheaper valuation metrics.
Once you learn how your company makes money, what factors have influenced it recently, and what factors will potentially influence it in the future, you are ready to make your first purchase! You may be eager to make this purchase, but you can do yourself a huge favor if you decide on a fair valuation to purchase the stock at and wait until it reaches that valuation.
Common Cents Take: While it is exciting to establish a position, it is very important to do your homework on the company prior to making your purchase. If you do not perform the research, you will not have conviction (at least justifiable conviction) in the stock. The market will easily bluff you out of your position with misdirection when you could be adding to your position at a great bargain. And remember, equally important as conviction is valuation. I really love Starburst, but I don't plan on buying a pack for $30. Alright, enough chatter-let's open that account and make that purchase!
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