Dark Horse Trader’s Hedge: Money Changes Everything for JBL, LCC and LDK
Thu, Jan 27, 6:32 PM ET, by Sabrient.com
Money Changes Everything for JBL, LCC and LDK
by Scott Brown of Sabrient
Ah honey how could you do it
We swore each other everlasting love
She said well yeah i know but when we did
There was one thing we weren’t
Really thinking of and that’s money–
Money changes everything
Money, money changes everything
We think we know what we’re doin’
That don’t mean a thing
It’s all in the past now
Money changes everything – Cyndi Lauper
Cyndi wasn't really telling us anything we didn't know when she belted out "Money Changes Everything" all over the airwaves in the 1980's. It was true then and probably even more so now as we try to print our way out of recession and into a more robust recovery. I will leave the argument over the correctness of policy to people way smarter and/or louder than I am. Our mission is to find opportunities combining Sabrient's rules- based rankings with Phil Davis's option strategies so that your "money changes everything" positively.
The Dark Horse Traders' Hedge (DHTH) virtual portfolio needs to add 3 long positions using the Phil Davis Buy/Write Strategy to replace WRLD, VECO and WDC which were called away last Friday. As always, we will analyze the reasoning and strategy behind each position individually.
U.S. Airways Group, Inc. (LCC) announced earnings Wednesday, and the stock performance was a clear sign that money—or in this case earnings (synonymous to us)—changed everything for the company. The 13 Analysts that follow LCC had been expecting a profit of $0.06 heading into Wednesday, but LCC delivered a surprising $0.17 profit for the 4th quarter on in-line revenues. All compared to a -$0.49 in the same period a year ago. Despite the improving results, LCC is still trading at a trailing 12 month P/E of 5.14 and forward P/E of 4.57.
These are the type opportunities we look for because at the end of the day we want to buy earnings and growth as cheaply as possible (also known as GARP). By utilizing the Phil Davis Buy/Write Strategy (as we did with WRLD, VECO, IM, RDWR and WFR) we can enter a position in our virtual DHTH portfolio on LCC at a 15-20% discount to the price it is trading at today. LCC is trading at $11.05 today and the June 2011 $11 call can be sold for approximately $1.31 and June 2011 $11 put for $1.29. By entering Â½ of the desired position today, we gain the exposure we seek in LCC for $8.45/share.
Jabil Circuits Inc. (JBL) has been at or near the top of Sabrient VCU ranking system for the past month and is in what I like to refer to as "the sweet spot" for adding to the DHTH Virtual portfolio. JBL also has 13 analysts that make forecasts on the company's earnings and are looking for the company to deliver $0.50/share for the Feb 2011 quarter (JBL is on an August fiscal yearend). There is much to like about the company at this point but in particular I would point to the 12% expected earnings growth rate over the next 5 years that can be acquired for a forward P/E of 8.34 (actually less, because we will be using the Buy/Write strategy to enter at a 15-20% discount).
This is one of the key measures we should look for in selecting positions as we want to purchase as much future growth as possible for the least possible multiple. Remember that trailing 12 months "Don't mean a thing. It's all in the past now" as Cindy Lauper told us. Future stock price movement will be most correlated to forward earnings adjustments, and the cheaper we can buy those the better.\
JBL is trading at $20.61 today and the June 2011 $21 call can be sold for approximately $1.90 and June 2011 $21 put for $2.40. By entering Â½ of the desired position today, we gain the exposure we seek in JBL for $16.31/share.
LDK Solar Co. (LDK) is the third addition to the DHTH virtual portfolio. LDK just completed a $149 million secondary offering at a 5% discount to the expected price. I like adding exposure to the Solar Energy space and believe LDK is our best option for doing so at this point. Trina Solar (TSL) runs a close second. LDK is selling at a forward P/E of 6.13 versus an expected earnings growth rate of 25% for the next 5 years. Twenty analysts following the company expect $2.12 for 2011.
Money and earnings change everything for investors, so we are adding 3 long positions to the virtual Dark Horse Traders' Hedge portfolio using the Phil Davis Buy/Write Strategy, which provides us opportunities to buy growth at a reasonable price.
LDK is trading at $12.91 today and the June 2011 $13 call can be sold for approximately $2.08 and June 2011 $13 put for $2.09. By entering Â½ of the desired position today, we gain the exposure we seek in LDK for $8.74/share.
Buy 300 shares (calculated based on entering Â½ position using virtual $100k portfolio) at approx. $11.05.
Sell 3 (each contract represents 100 shares) LCC June $11 calls at approx. $1.31.
Sell 3 LCC June $11 puts at approx. $1.29.
Cost basis on LCC approx. $8.45.
Buy 200 shares (calculated based on entering Â½ position using virtual $100k portfolio) at approx. $20.61.
Sell 2 JBL June $21 calls at approx. $1.90.
Sell 2 JBL June $21 puts at approx. $2.40.
Cost basis on JBL approx. $16.31.
Buy 300 shares (calculated based on entering Â½ position using virtual $100k portfolio) at approx. $12.95.
Sell 3 LDK June $13 calls at approx. $2.08.
Sell 3 LDK June $13 puts at approx. $2.09.
Cost basis on LDK approx. $8.75.
Dark Horse Trader's Hedge
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
SDI Glossary: "Analyst" Definition
SDI Glossary: "price" Definition
SDI Glossary: "Money" Definition
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