I’ve been buying a few new stocks this month instead of just writing call options against the same old ones.
Xerox is one that looks good to me. It’s currently selling at $8 a share, so it’s cheap to acquire. A number of analysts think it has a true value of $10. The reason I like it is because I see it getting out of the printing business, which is declining and very competitive, and into the technical support business, which is growing.
More than half of Xerox’s revenue from tech services comes from multi-year equipment rental contracts, which are not going away soon. Then there are the sales of supplies that go with this. Tech services are now about 60 percent of operating profits. So my thoughts are that the price reflects the “old” Xerox, but there is a new Xerox appearing and it will improve the price over time.
Another stock I’m looking at buying is Staples. This is the No. 1 one office supply company in the world, and at under $15 a share it seems fairly valued. I think business is expanding in the U.S., even if at a slower rate than many would hope, and thus a business supply company should benefit over time. And when I shop there I’m always impressed by the service and the extent of product and inventory. In addition, at my local store they now have a computer repair department. That’s really something everyone needs.
On the other side of the coin, gold and gold mining has not proven to be a very good investment during the last quarter. The steady increase since 2006 has leveled off, and that may be a sign that a decline will begin soon. I am hedging my small holdings in gold mining by selling calls for premium income.
Another area of investment that I’ve gotten out of is non-U.S. equities. We all know about Spain, Italy and Portugal not doing well, but I’m suspicious of France — especially now that Hollande won the presidency. If France goes down, Germany will be heavily pressed to carry all of Europe by itself. And third world countries in general don’t look good to me. Take a look at the chart:
A stock that still does look good to me, but is too expensive for me to afford is Apple. In spite of its spectacular price rise, the price-earnings ratio is still favorable. But to buy 1,000 shares of apple would require about $600,000 today. So instead of buying the stock, I’m writing put spreads on it every month. Here’s how that works:
With Apple stock at say $600 a share, I sell 10 puts at a strike price of $550. That means that I agree to buy 1,000 shares of the stock during the next 30 days if requested to do so, at a price of $550 per share. Of course, the buyer of the put will only request me to do so if the stock goes down to $550 or less, because otherwise the buyer could sell the stock for $600 or whatever in the public marketplace.
In exchange for my promise, the buyer pays me a premium, lately about $8,500.
To protect myself from even the small likelihood that the stock will decline that far over the next 30 days, I buy a 30-day put at the strike price of $440. I pay $7,000 for that. This means that if I am forced to buy the stock at $550, I have a contractual right to sell it at $440. Thus I am protected against losing more than $10,000 (10 points times $1,000 for each point between $550 and $450) less the amount of net premium I collected. So I’ve received a net of $1,500, which I will be able to keep unless the stock goes down below $550. If I can do that, say, 10 times a year, adjusting the strike price to keep 10 percent below the stock price, and if the stock doesn’t go down 10 percent in any one month period, I will end the year with about $15,000 in profit. So far, for the past 6 months it’s worked well.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.