Mitigating Risk, Accentuating Returns and Realizing Gains - 27.9% Return

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

I’ve written a series of articles detailing the utility of options trading and how an investor can leverage a long position in an underlying security to mitigate risk, augment returns and generate cash. This strategy comes with two alternatives, in the end, depending on whether or not one desires to realize gains and relinquish his shares or remain long the security of interest. I’d like to highlight Salesforce.com Inc. (NYSE:CRM) as an example for this covered call strategy. I’ll be highlighting how I’ve successfully accentuated my returns via leveraging the underlying security in the form of collecting option premiums over a 20-month span. In this example, I decided to ultimately realize gains generated from the underlying appreciation of the stock combined with the options income and relinquish my shares. Taken together, the synergy of the options income and appreciation of the underlying security generated a realized gain of 27.9% over this timeframe.

I’m utilizing a high growth technology stock that’s at the intersection of syncing the customer and enterprise relationship via social, mobile and cloud platforms. Salesforce is a contentiously debated aggressive growth stock that trades on lofty valuations. Salesforce is marginally profitable and thus difficult to assign a valuation as measured by traditional metrics such as the price-to-earnings multiple (P/E ratio) and the PEG ratio. Due to its rapid growth, expanding footprint, major partnerships with Fortune 500 companies (i.e. Home Depot, GE, Wells Fargo, Coca-Cola, etc.), expansion into international markets and its overall ubiquity in terms of its consumer relationship management (CRM) platform, it's reasonable to see why investors are willing to pay a premium. Much of its revenue is deferred as a result of its subscription-based model thus deferred revenue is often discussed on earnings calls. Deferred revenue is not yet realized revenue however it’s been received by the company. Since Salesforce delivers its service over time, this received amount isn’t reported as traditional revenue since the service hasn’t been rendered. Due to these factors and the difficulty of placing an accurate valuation on Salesforce, options in the form of covered call writing may be an effective way to leverage this growth stock while mitigating downside risk. Salesforce offers the right balance of volatility, liquidity and a high level of interest which gives rise to reasonable yielding premiums on a bi-weekly or monthly basis. This set-up bodes well for those who are long Salesforce (or a stock similar in nature) and desire to leverage options trading to augment returns and mitigate risk throughout the volatile nature of this underlying security. Salesforce’s recent string of earnings has impressed investors, and covered call options may accentuate this underlying equity return. Writing covered calls in an opportunistic and/or disciplined manner may mitigate losses and smooth out drastic moves in this underlying security. Continue reading "Mitigating Risk, Accentuating Returns and Realizing Gains - 27.9% Return"

IBB - Biotech Catches Fire... Finally

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

Biotechnology has been a difficult space to deploy capital over the previous ~18-24 months. This cohort plummeted over and over again from both sides of the political isle as the 2016 presidential race unfolded. Between Hillary Clinton, Bernie Sanders and Donald Trump taking aim at drug pricing via speeches, Twitter, and other social media platforms, largely attributed to the entire cohort selling off. The sustained sell-off lead to the entire cohort to sell off from all-time highs of $400 to $240 or 40% in only six months as measured via the iShares Biotechnology Index ETF (NASDAQ:IBB). From February of 2016 through June of 2017 IBB traded in a tight range from $250 to $300 while Donald Trump continually fired shots against the healthcare sector. Any healthcare related stocks became volatile on the heels of any statement or tweet from Donald Trump. Shortly after the inauguration, Trump stated that drug companies are “getting away with murder” when speaking to the drug pricing issue. Now he’s come out and stated that he’s working on a “new system where there will be competition in the drug industry.” Every time any of these remarks were tweeted, they immediately resulted in a downtrend across the entire biotech cohort. As the new proposed health care legislation enters its initial stages in Congress, a level of certainty has entered the picture, and the drug pricing threats are not perceived to be as bad as initially feared. Recently the index has had a resurgence moving from $284 to $321 or 13% over the past month. As the political headwinds continue to abate, I feel the index has room to continue its upward trend. Continue reading "IBB - Biotech Catches Fire... Finally"

Disney Quietly Retreats - Buying Opportunity

Noah Kiedrowski - INO.com Contributor - Biotech


The Quiet Buying Opportunity

The Walt Disney Company (NYSE:DIS) has quietly retreated from its recent highs of $116 to sub $104 thus presenting a buying opportunity in this media juggernaut heading into earnings. We’ve all heard the endless bickering over its slumping ESPN franchise. Although ESPN makes up a disproportionate amount of the company’s revenue, all of its other franchises are posting healthy growth hence Disney will be relying less and less on its ESPN franchise over the coming years. Disney’s perpetual stock slump leading up to its recent resurgence was almost entirely attributable to the decrease in ESPN subscribers and subsequent revenue and profit declines from that franchise. The ESPN franchise within the Media Networks segment generates revenue/operating income that is disproportionate to the amount of the company’s overall revenue and operating profit. Thus, one can see why investors were spooked after consecutive significant declines in ESPN subscribers and thus financial numbers over the past three years. Excluding ESPN, Disney has been executing well and reporting record numbers throughout all of its other business segments. Disney has a deep and diversified enough entertainment portfolio that makes a compelling case that these ESPN fears are overblown. Disney offers a compelling long-term investment opportunity considering the growth, pipeline, diversity of its portfolio, share repurchase program and dividend growth in light of this recent retreat.

Long-Term Narrative and Positive Analyst Sentiment

I’ve been a long bull of Disney (DIS) stock, particularly since the post-ESPN induced sell-off throughout 2016. Since the lows of October 2016, Disney has seen a huge appreciation in stock price, breaking out to above $116 per share before this current downtrend. This upswing has been on the heels of multiple catalysts such as of reporting record annual results, breaking the all-time worldwide box-office record, witnessing a slew of analyst upgrades, Iger extending his contract as CEO, ESPN woes subsiding, Shanghai Disney opening and Disney’s movie line-up announced through 2020. This inflection point coincided with Doctor Strange, Moana and Star Wars Rouge One in calendar Q4 of 2016 followed by record openings for its live action film, Beauty and the Beast and Guardians of the Galaxy 2. The stock fell from the $120s in late 2015 to the high $80s and had been stuck in the $80-$90 range all throughout 2016. That stock slump offered investors an opportunity to purchase a high-quality company at a significant discount. Continue reading "Disney Quietly Retreats - Buying Opportunity"

Is Amazon Threatening CVS Health?

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

CVS Health Corporation (NYSE:CVS) has been stuck in a sideways trend since selling off over 24% from August through November 2016. CVS fell from an all-time high of ~$112 per share in 2015 to ~$70 in November of 2016 wiping out 38% of its enterprise value. Since its high of $112 in 2015, a slew of issues negatively impacting its growth and marketplace have plagued the stock. Firstly, the political backdrop was a major headwind for the entire pharmaceutical supply chain from drug manufacturers to pharmacies/pharmacy benefit managers (i.e. CVS and Walgreens) and the drug wholesalers in-between (i.e. McKesson and Cardinal Health). Secondly, recent marketplace trends forced CVS to cut guidance for Q4 2016 and the full-year 2017 numbers. CVS stated that “unexpected marketplace actions that will have a negative impact on our Q4 2016 results and a more meaningful impact on our outlook for 2017”. Thirdly, CVS lost a contract with the Department of Defense which carries tens of millions of prescriptions on an annual basis. A new restricted network relationship between Prime Therapeutics and Walgreens impacts CVS Pharmacy’s participation in selected fully-insured networks in several key states and in many cases make CVS Pharmacy a non-preferred provider for Medicare Part D as well. These prescriptions tend to be the most profitable prescriptions as well. Lastly, Amazon’s purchase of Whole Foods has incited rumors that Amazon is looking to gain entry into the pharmacy space via leveraging the Whole Foods physical footprint of store fronts. I’ve written several articles contending that CVS presents a compelling investment opportunity in the ever expanding healthcare space. My investment thesis was based on proposed sector consolidation (Rite Aid and Walgreens), aging population and growth in long-term care facilities and the pharmacy benefit management segment. All of this in a backdrop of CVS being highly acquisitive, continuing to deliver robust earnings growth, revenue growth, growing dividends and has an aggressive share buyback program in place. It’s a matter of time before CVS will trend higher and in the meantime investors will be paid to wait via dividends and share buybacks. The wildcard may be the Amazon threat with its first real pivot after acquiring Whole Foods with subsequent potential in entering the pharmacy space as well. Continue reading "Is Amazon Threatening CVS Health?"

AbbVie Put/Call Combination Produces 400% Greater Return

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction and Set-Up

Below I’ll discuss my year-long call/put combination using AbbVie as an example. I’ve successfully been able to obtain a 15.3% return based on the current stock price while the buy and hold strategy would've only yielded 3.6% return. This is greater than a 400% difference in overall returns for this given stock over the past year. Leveraging the coupling of calls and puts around a core position over time can accentuate total returns and mitigate risk on a given stock. As discussed in more detail below, covered calls and covered puts can be combined to one's advantage. This is especially true in large-cap, dividend-paying stocks that tend to trade within a narrow range for long periods of time. AbbVie Inc. (NYSE:ABBV) is a prime example that fits this narrative and thus the stock of choice for this piece. Over the past two-plus years this stock has traded in a tight range between $55 and $65 per share while paying a dividend of ~4% on an annual basis (Figure 1). The company has strong fundamentals, financial stability and a robust pipeline for potential growth and sustainability. The goal here to initiate a position in AbbVie using a covered put to purchase the stock at a lower price than it's currently trading at a future date while collecting a premium in the process. If the stock isn't assigned then walk away with the premium and freed up cash that was earmarked for the potential purchase. If the stock is assigned, then shares are purchased at the agreed-upon price (strike price), less the premium for the actual purchase price. Now we've entered the position via leveraging a covered put, now the shares can be leveraged for covered calls to extract additional value throughout the holding of the stock while collecting the dividend. Ideally, we want to enter the position via a covered put and endlessly sell covered calls while collecting the dividend. However if the stock is called away during the selling of a covered call then this process can be repeated while being cognizant of the x-dividend dates to enhance overall returns.

Chart of AbbVie Inc. (NYSE:ABBV)
Figure 1 – AbbVie’s tight trading range over the past 2-plus years
Continue reading "AbbVie Put/Call Combination Produces 400% Greater Return"