Abercrombie and Fitch Sets Itself Up for More Disappointment

disappointment

 

(A version of this article appears on TheStreet.com)

With low expectations shareholders of Abercrombie and Fitch (ANF) were rewarded during Thursday’s after hours trading as it was announced that the company experienced higher than expected sales for the fourth quarter to date.

Embattled CEO and Chairman Michael Jeffries needed a boost after calls for his resignation and having been the recent recipient of Herb Greenberg’s “Worst CEO of 2013 Award.” The 15% surge, if maintained into trading to end the week will leave shares only about 30% below their 52 week high.

Perhaps lost in the translation are the nuances contained in the report that sent shares soaring that may set Abercrombie and Fitch share holders up for more disappointment in the future. Manufactured good news has a way of doing that once reality hits and it is difficult to interpret today’s press release as anything other than a very favorable spin on a company and a personality much in need of spin.

For the period in question, which ended on January 4, 2014, the company actually reported decreased total sales, but found some solace in the fact that its direct to consumer sales were at its highest level of total sales than ever before. Of course, as the total pie shrinks a component may look comparatively better by simply not shrinking as much. The details of the direct to consumer activities was lacking. Its growth, was by all accounts, relative.

While sales were reported to be better than expected they represented a 4% decrease in the United States and a 10% decrease in international sales. Improved guidance was based on the nine week period ending before much of the east coast freeze that is reported to have stalled mall traffic. It’s unclear how nature’s elements will project forward as the first quarter becomes the object of focus. Additionally, reliance on”ongoing cost reduction efforts” is rarely a strategy for growth. Jeffries’ one year contract extension may require something more substantive than smoke and mirrors to further extend the engagement. Marketing the company as “We’re Not Sears” is not likely to provide a prolonged bounce, much as today’s press release may be suspect.

But I don’t really care about any of that, because Abercrombie and Fitch, for all of its dysfunction and sometimes embaarrassing behavior of its CEO, has been one of my favorite stocks since May 2012. During that period of time I’ve owned shares on 18 occasions.

Abercrombie and Fitch hasn’t been a holding for the faint of heart during that period, nor for anyone abiding by a buy and hold strategy.

As a punctuated buy and hold investor, my sales have been dictated by the call contracts I routinely sold on holdings, almost always utilizing in the money or very near the money strike levels.

Abercrombie and Fitch

Perhaps coincidentally the average cost of those shares has been $38.64, which was just slightly higher than the after hours trading peak after its more than $5 climb. During the period in question shares were initiated at $35.15 and soared as high as $55.23 almost a year to the date of that opening position. A perfect market timer could have sold shares at the peak ans achieved a 59% return with dividends.

Not only am I not a perfect market timer, but I’m also not very patient and would have had a hard time holding onto shares for a full year. Instead my shares were held for reasonably short periods of time, other than one lot currently open for 4 months. During that time the cumulative return has been 56% while the shares themselves have appreciated less than 11% from the date of first purchase.

With some of my shares set to expire on Friday January 10, 2014 amd some others the very next week, there is a chance that I will be left with no shares, thanks to a well timed press release.

However, I have no doubts that Abercrombie and Fitch will find a way to undo investor goodwill and will see its price come down. When it does, I will be there, once again, eager to pick up the wounded shares of of a company that would be embarrassed to have me as a customer.

Weekend Update – October 13, 2013

This week I’m choosing “risk on.”

For about 6 months I’ve been overly cautious, having evolved from a fully invested trader to one starting most weeks at about 40% cash reserves and maintaining about 25-30% by week’s end after initiating new positions.

Despite the belief that something untoward was right around the corner, the desire for current income through the purchase of stocks and the sale of options has been strong enough to temper the heightened caution on an ongoing basis for much of the past half year.

With uncertainty permeating the market’s mood, eased by late last week’s glimmer of hope that perhaps a short term debt ceiling increase may be at hand, “risk on” isn’t the most likely of places to find me playing with my retirement funds, but that’s often where it’s the most interesting, especially if the risk is one of perception more than one of probability.

While we may all have different operational definitions of what constitutes “risk” I consider beta, upcoming known market or stock moving events, the unknown, past price history and relative performance. Tomorrow the formula may be entirely different, as may tolerance for risk or willingness to burn down the cash reserves.

However, trying to dispassionately look at the current market and all of the talk about a correction, one metric that I’ve been using for the past few months reminds me that we’re doing just fine and that risk is still tolerable, even in the context of uncertainty.

Although I continue to believe that we can’t just keep moving higher, I’m not quite as dour when seeing that we are essentially at the same levels the S&P 500 stood on May 21, 2013 and June 18, 2013.

Those dates reflect relative high points, each of which gave way to the FOMC minutes or a press conference by Federal Reserve Chairman Bernanke.

In fact, we’re actually at a higher level than either of those two previous peaks, now trailing only the all time high of September 18, 2013 by less than 1.5%. So all in all, not too bad, especially since that 50 Day Moving Average that was breached by the S&P 500 earlier in the week was quickly remedied and the 200 Day Moving Average remains relatively distant.

From May 21 to June 5, then from June 18 to June 24, August 2 to 27 and finally September 19 to October 6, we have gone down a combined 16.7% in a cumulative trading period of 13 weeks or the equivalent of a quarter.

What more do you want? Armageddon?

For the past few months I’ve been focusing increasingly on new positions that have been trading below the May and June highs and preferably under-performing the S&P 500 at the same time. However, within that framework I’ve focused increasingly on near term dividend paying stocks and those more likely to fall into the “Traditional” category, typically low beta and attempting to avoid any known short term risk factors.

That has meant fewer “Momentum” positions and fewer earnings related trades. But up until Friday’s continuation of the hope induced rally, I had a number of “Momentum” stocks on my radar, all of which I had already owned and anticipated being assigned, but ripe for re-purchase in the pursuit of risk heightened premiums, but with less risk than readily apparent.

As it turned out Abercrombie and Fitch (ANF) got caught up in The Gaps’ same stores problem and whip-sawed in trading and I ultimately rolled over the position. Meanwhile, Mosaic (MOS) fell as investors were somehow surprised that Potash (POT) adjusted its guidance downward to reflect lower prices stemming from a collapse of the cartel.

As it would turn out Phillips 66 (PSX) was assigned, but soared, making it too expensive for repurchase, but that can change very quickly.

This week there are two deadlines. One is the end of the October 2013 option cycle, but the other is October 17, 2013, which Treasury Secretary Jack Lew proclaimed to be the day after which none of his “tricks” would be able to sustain the Treasury’s count and be able to pay our bills.

In a word? That’s when we would see the United States go into default on its obligations.

Under Senate questioning last week Lew acquitted himself quite well and demonstrated that he wasn’t very patient with regard to suffering fools. Uncharacteristically there appeared to be less self-aggrandizing statements in the form of questions coming from the committee members.

It may not be entirely coincidental that minutes after Lew’s appearance, House Speaker Boehner’s office announced that the Speaker would be making a statement reflecting upcoming meetings with the Administration, reflecting the possibility of some agreement.

For those that remember past such budgetary crises, you’ll recall that the market typically reacted to the hopes and then crashed along with the dashed hopes, in an eerily rhythmic manner.

On Saturday morning, word came from Eric Cantor (R-VA) that President Obama rejected the House offer. Unusually, GOP leadership skipped the opportunity to step up to the microphone to push their version of righteousness.

This week, in anticipation of the possibility of dashed hopes as may come from an appearing setback, my definition of “risk on” includes positions already trading at depressed levels.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

For dividend lovers this week offers Footlocker (FL), Colgate (CL) and Caterpillar (CAT). All under-performing the S&P 500 YTD.

Colgate, however, is higher than its June 2013 high and has a surprisingly high beta, despite the perceived sedate nature of being a consumer defensive stock. Perhaps that combination makes it a “risk on” position for me. Coupled with a dividend that is lower than the overall S&P 500 average it may not readily appear to be worth the time, but then again, how much additional downside should accrue from a US default?

I already own two lots of Footlocker and three is generally my limit, as it precluded including Mosaic in this week’s recommendations. Footlocker doesn’t report earnings until the December 2013 option cycle, so a little bit of risk is removed, although in the world of retail you are always at risk for any of your competitors that may still report monthly comparison data, just look at the pall created by The Gap (GPS) and L Brands (LTD) this past week.

While a pall was created by L Brands and it is higher than those referenced high points it is now down a tantalizing 10% in a week’s time. I’ve already owned shares on five separate occasions this year and have been waiting for an opportunity to do so again. It is a generally reliably trading stock that had simply climbed too far and for a month’s time traveled only in a single direction. That’s rarely sustainable. The combination of premium and dividend makes L Brands worthy of consideration in a sector that has been challenged of late. The lack of weekly options makes ownership less stressed by day to day events for those otherwise inclined to like weekly options.

Not to be outdone, Joy Global (JOY) is a stock that’s been worth owning on 7 distinct occasions this year. It has consistently traded in tight range and has been able to find its way home if temporarily wandering. High beta, well underperforming the S&P 500 and lower than both of the two earlier market high points continues to make it an appealing short term selection, especially with earnings still so far off in the future.

I’ve been waiting to add shares of Caterpillar for a while, having owned it only four times in 2013, as compared to nine occasions in 2012. However, the upcoming dividend makes another purchase more likely. Despite the thesis advanced by short seller Jim Chanos against Caterpillar, it has, thus far continued to maintain its existence in a tight trading range, making it an excellent covered option candidate.

JP Morgan Chase (JPM) reported its earnings this past Friday and reported a loss for the first time under Jamie Dimon’s watch. Regardless of your position on the merits of the myriad of legal and regulatory cases which have resulted in spectacular legal fees and fines, JP Morgan has acquitted itself nicely on the bottom line. While there is still unknown, but tangible punishment ahead, for which shareholders are doubly brutalized, I think a sixth round of share ownership is warranted at this price level.

Williams Sonoma (WSM) was one of the first stocks that I purchased specifically to attempt to capture its dividend and have it partially underwritten by an option premium. It fell a bit by the wayside as weekly options appeared on the scene. However, as uncertainty creeps into the market there is a certain comfort that comes from a monthly or even longer term option contract. WHile it has come down nearly 15% in the past two months and is now priced lower than during the May and June market highs, Williams Sonoma’s dirty little secret is that it has still outperformed the S&P 500 YTD by a whisker.

SanDisk (SNDK) had its eulogy written many years ago when flash memory was written off as being simply a commodity. Always volatile, especially in response to earnings, which have seen plunges on each of those last two occasions, now may not be the time to believe that “the third time is a charm,” although I do. Despite that, my participation, if any, would be in the sale of out of the money puts, as the options market is implying a move of approximately 7% and that may not be aggressive enough, given past history.

FInally, Align Technology (ALGN) reports earnings this week. In the business of making orthodontic therapy so easy that even a monkey could do it, the company’s prospects have significantly improved as its treatment solutions are increasingly geared toward children. That’s important because their traditional customer base, adults, views orthodontic treatment as discretionary and, therefore, represents an economically sensitive purchase. But most anyone with kids knows that orthodontic treatment isn’t discretionary at all. It can be as close to life and death as you would like to experience. This kind of orthodontic care represents a new profit center for many dental offices and a boon to Align Technology. While I expect good earnings numbers, shares have already had a 13% price decline in the past two weeks. I would most likely consider entering a position by means of selling out of the money puts. In this case for a single week’s position, if unassigned, as much as a 12% price drop could still yield a 1.3% ROI, as the options market is implying a 9% earnings related move.

Traditional Stocks: JP Morgan, L Brands, Williams Sonoma

Momentum Stocks: Joy Global

Double Dip Dividend: Caterpillar (ex-div 10/17), Colgate (ex-div 10/18), Footlocker (ex-div 10/16)

Premiums Enhanced by Earnings: Align Technology (10/17 PM), SanDisk (10/16 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk. 

Weekend Update – October 6, 2013

This is the time of year that one can start having regrets about the way in which votes were cast in prior elections.

Season’s Misgivings

The sad likelihood, however, is that officials elected through the good graces of incredibly gerrymandered districts are not likely to ever believe that their homogeneous and single minded neighbors represent thoughts other than what the entire nation shares.

That’s where both parties can at least agree that is the truth about the other side.

Living in the Washington, DC area the impact of a federal government shutdown is perhaps much more immediately tangible than in a “geometric shape not observed in nature” congressional district elsewhere. However, there is no doubt that a shutdown has adverse effect on GDP and that impact is cumulative and wider spreading as the shutdown continues.

It’s unfortunate that elected officials seem to neither notice nor care about direct and indirect impact on individuals and financial institutions. In war that sort of thing is sanitized by referring to it as “collateral damage.” As long as it’s kept out of sight and in someone else’s congressional district it doesn’t really exist.

Pete Najarian put it in terms readily understandable, much more so than when some tried expressing the cost of a shutdown in terms of drag on quarterly GDP.

Of course, the real challenge awaits as we once again are faced with the prospect of having insufficient cash to pay debts and obligations. But for what it’s worth at least the rest of the world gets a much needed laugh and boost in national ego, while McGraw Hill Financial (MHFI) and others ponder the price of their calling it as they see it.

At the moment, that’s probably not what the economy needs, but in the perverse world we live in that may mean continued Federal Reserve intervention in Quantitative Easing. While “handouts” are decried by many who don’t see a detriment to a government shutdown, the Federal Reserve handout is one that they are inclined to accept, as long as it helps to fuel the markets.

However, as we are ready to enter into another earnings season this week many are mindful of the fairly lackluster previous earnings season that just ended. While the markets have recently been riding a wave of unexpected good news, such as no US intervention in Syria, continued Quantitative Easing and the disappearance of Lawrence Summers from the landscape, we are ripe for disappointment. We were spared any potential disappointment on Friday morning as the release of the monthly Employment Situation Report fell victim to someone being furloughed.

So what would be more appropriate than to re-introduce the concept of stock fundamentals, such as earnings, into the equation? During this past summer, when our elected officials were on vacation, that’s pretty much where we focused our attention as the world and the nation were largely quiet places. While no one is particularly effusive about what the current stream of reports will offer, a market that truly discounts the future already has its eyes set on the following earnings season that may begin to bear the brunt of any trickle down from a prolonged government shutdown.

At the moment, sitting on cash reserves, I am willing to recycle funds from shares that have been assigned this Friday (October 4, 2013), but am not willing to dip further into the pile until seeing some evidence of a bottoming to the current process that had the S&P 500 drop 2.7% since September 19, 2013 until Friday’s nice showing pared the loss down to 2%. But I need more evidence than a tepid one day respite, just as it will take more than a resolution to the current congressional impasse to believe that we wouldn’t be better served by an unelected algorithm.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I’m certain many people miss the days when a purchase of shares in Apple (AAPL) was a sure thing. While I like profits as much as the next person, I also enjoy the hunt and from that perspective I think that Apple shares are far more interesting now as we just passed the one year anniversary of having reached its peak price and tax related selling capitalizing on the loss will likely slow. Suddenly it’s becoming like many other stocks and financial engineering is beginning to play a role in attempts to enhance shareholder value.

Without passing judgment on the merits of the role of activist investors it doesn’t hurt to have additional factors that can support share price, particularly at times that the market itself may be facing weakness. Apple has increasingly been providing opportunities for short term gains as its price undulates with the tide that now includes more than just sales statistics and product releases. Capital gains or shares, an attractive dividend and generous option premiums make its ownership easier to consider at current prices. However, with earnings scheduled to be reported on October 22, 2013 I would likely focus on the sale of weekly option contracts as Apple is prone to large earnings related moves.

While Apple has done a reasonable job in price recovery over the past few months amid questions regarding whether its products were still as fashionable as they had been, Abercrombie and Fitch (ANF) hasn’t yet made that recovery from its most recent earnings report that saw a more than 20% price drop. As far as I know, and I don’t get out very much, talks of it no longer being the “cool” place to buy clothes aren’t the first item on people’s conversational agenda. The risk associated with ownership is always present but is subdued when earnings reports are still off in the distance, as they are currently. In the meantime, Abercrombie and Fitch always offers option premiums that help to reduce the stress associated with share ownership.

Ironically, the health care sector hasn’t be treating me terribly well of late, perhaps being whipsawed by the fighting on Capitol Hill over the Affordable Care Act and proposed taxes on medical devices. Additionally, a government shutdown conceivably slows the process whereby regulated products can be brought to the market. Abbott Labs (ABT), whose shares were recently assigned at $35 has subsequently dropped about 5% and will be going ex-dividend this week. Although the dividend isn’t quite as rich as some of the other major pharmaceutical companies after having completed a spin-off earlier in the year, I think the selling is done and overdone.

For me, a purchase of MetLife (MET) is nothing more than replacing shares that were just assigned after Friday’s opportune price surge and that have otherwise been a reliable creator of income streams from dividends and option premiums. At the current price levels MetLife has been an ideal covered call stock having come down in price in response to fears that in a reduced interest rate environment its own earnings will be reduced.

International Paper (IP) is an example of a covered call strategy gone wrong, as the last time I owned it was about a year ago having had shares assigned just prior to its decision to go on a sustained rise higher. While frequently cited by detractors as an argument against a covered option strategy, the reality is that such events don’t happen terribly often, nor does the investor have to eschew greed as share price is escalating or exercise perfect timing. to secure profits before they evaporate. I’ve waited quite a while for its share price to drop, but it is still far from where I last owned them. Still, the current price drop helps to restore the appeal.

Being levered to China or even being perceived as levered to the Chinese economy can either be an asset or a liability, depending on what questionable data is making the rounds at any given moment. Joy Global (JOY) is one of those companies that is heavily levered to China, but even when the macroeconomic news seems to be adverse the shares are still able to maintain itself within a comfortably defined trading range. With Friday’s strong close my shares were assigned, but I would like to re-establish a position, particularly at a price point below $52.50. If it stays true to form it will find that level sooner rather than later making it once again an appealing purchase target and source of option related income.

With the start of a new earnings season one stock that I’ve been longing to own again starts out the season. YUM Brands (YUM) is an always interesting stock to own due to how responsive it is to any news or rumors coming from China. Over the past year it’s been incredibly resilient to a wide range of reports that you would think were being released in an effort to conspire against share price. Food safety issues, poor drink selection during heat waves and Chinese economic slow down have all failed to keep the share price down. While the current price is near the top of its range I think that expectations have been set on the low side. In addition to reporting earnings this week shares also go ex-dividend the following day.

A little less exciting, certainly as compared to Abercrombie and Fitch is The Gap (GPS). In a universe of retailers going through violent price swings, The Gap has been an oasis of calm. It goes ex-dividend this week and if it can maintain that tight trading channel it would be an ideal purchase as part of a covered call strategy.

While The Gap isn’t terribly exciting, Molson Coors (TAP) and Williams Co. (WMB) are even less so. While I usually start thinking about either of them in the period preceding a dividend payment they have each found a price level that has offered some stability, thereby providing some additional appeal in the process that includes sale of near the money calls.

Finally, I have a little bit of a love-hate relationship with Mosaic (MOS). The hate part is only recent as shares that I’ve owned since May 2013 have fallen victim to the collapse of the potash cartel. In a “what have you done for me lately” kind of mentality that kind of performance makes me forget how profitable Mosaic had been as a covered call holding for about 5 years. However, the recent “love” part of the equation has come from the serial purchase of shares at these depressed levels and collecting premiums in alternation with their assignment. I have been following shares higher with such purchases as there is now some reason to believe that the cartel may not be left for dead.

Traditional Stocks: International Paper, Molson Coors, Williams Co.

Momentum Stocks: Apple, Joy Global, MetLife, Mosaic

Double Dip Dividend: Abbott Labs (ex-div 10/10), The Gap (ex-div 10/11), YUM Brands (ex-div 10/9)

Premiums Enhanced by Earnings: YUM Brands (10/8 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

Weekend Update – September 8, 2013

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

Once things get back to “normal” it will seem just like old times as we are likely to give up the relative trading calm of the past two months and re-introduce a rapidly alternating volley of ups and downs as melodrama plays out in the nation’s capital. Watching the hairpin reversal as Russian Premier Putin suggested supporting the other side of the conflict and then watching a more gradual reversal during President Obama’s somewhat somnolent press conference is more like what we have become accustomed to seeing.

This morning’s Employment Situation Report which seems perfectly timed as the gateway to next week’s return to “business as usual” neither delighted nor frightened and gave no clue as to whether the “taper” is coming sooner rather than later. The revisions to previous months gave some solace that perhaps a delay was in order.

My metric is a simple one. It was the packed parking lot of a rural Delaware Fastenal (FAST) retail outlet that I saw two weeks ago that may have been part of the announcement yesterday of improved August sales for the company that has an early and ongoing part in lots of construction and industrial applications.

With those packed parking lots at Fastenal, or at least one packed parking lot, the current conventional wisdom regarding heavy machinery may be unwarranted. I currently own shares of Caterpillar (CAT), Joy Global (JOY) and Deere (DE) and I believe that all three are fairly priced to either open new positions or add to existing ones. Their moves higher during Friday’s trading makes me less likely to take that plunge immediately, although Deere is coming off an explicable large decline on Thursday and may be most enticing.

The question may no longer be when the dreaded taper is coming but by how much and has the market already discounted its early appearance.

I think it has and the expectation is for a $10-15 Billion taper to start off the process. Any short term adverse response to the initiation of the taper would likely give way to rally mode once again if surprises are few.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

With potential military action coming against Syria as early as September 9, 2013, timing of new purchases may be critical, as you might expect a near term market decline upon action and perhaps a relief rally afterward. My preference this week would be to tread slowly with creating new positions and perhaps focusing on sectors that may be a bit more resilient to the specter of armed conflict.

Healthcare in one such sector and I will be looking to replace assigned shares of Baxter International (BAX). The fact that Merck (MRK) will be ex-dividend this week makes that a likely choice, particularly as it has been trading in a very narrow range for the past 3 months.

Although Eli Lilly (LLY) is not ex-dividend this week, it is down about 10% from its recent high level and has some price support at about the $50 level. I think that it is a good defensive position in the event of a market that begins reacting to external events.

Retail has been a very mixed bag this earnings season but suddenly laggards like JC Penney (JCP) and even Sears Holdings (SHLD) have seen some buying support. While there is suggestion that their resurgence may come at the expense of retailers such as Macys (M), it is difficult to find fault with Macys at its current price and likely relative immunity from a Syria related market decline. Besides, it goes ex-dividend this week and offers an attractive option premium all helping to reduce risk of ownership.

The Gap (GPS) is another retailer that has been said to be at risk if some of the retail laggards start to catch-up. I’ve been waiting a while for The Gap’s share price to decline, but following a 13% drop from its recent peak, I think the time may now be here.

LuLuLemon Athletica (LULU) has been in the news this year for lots of reasons, some good and some not so good. While it may offend a portion of the shopping public by not offering an expanded selection of sizes and offending another portion of the public by having removed the defective too sheer products off the shelves, it has been a retailing success story and can be an exciting stock to own if you like that sort of thing. If you do, LuLuLemon reports earnings this week and it does have a history of explosive moves and occasionally throwing in some unexpected surprises, such as the departure of a respected CEO.

Shares still haven’t quite recovered from its most recent 20% earnings related decline. However, those who have a tolerance for risk may find good opportunity in either buying shares and selling deep in the money calls or selling deep in the money puts. For me, the most appealing action at the moment is selling $62.50 strike weekly puts that would return approximately 1.3% in the event that shares fall less than 11% upon earnings. The option market itself is expecting an approximately 9% move in either direction.

Lexmark (LXK) is a great example of a company that has re-invented itself and appears to be doing well by having done so, at least in the metric that matters to most – its share price.

About a year ago Lexmark announced that they were exiting the printing business, as if anyone knew that they had any other kind of business. With printers having become a low margin commodity and widespread reports that people were using printers far less as tablets have penetrated the market, the timing seemed opportune to find more cyan pastures. Following a significant drop in share price over the past 3 weeks Lexmark appears to be fairly priced, although there is still more downside potential following an impressive rise higher over the past six months.

While the Energy sector is always a risky play, especially during the uncertainties that may arise during conflict, a company such as Williams Cos. (WMB) may have some degree of immunity from events far away, as its natural gas operations are focused in North America. It does go ex-dividend this week and although I have two pe-existing lots at the current price, it too has traded in a narrow range providing a degree of safety while still offering very attractive returns from option premiums, dividends and potentially share appreciation, as well.

Finally, Abercrombie and Fitch is an always exciting purchase. Along with the rest of the teen retailers it has been punished this earning’s season and because of its high profile it is often used as an example of their precarious market position. While many are quick to say that Abercrombie is no longer considered “cool” by their target demographic and how fickle that audience is, my interests always revolve around short term trading opportunities and not long term prospects or liabilities. Shares are really well over-sold and there are no near term head winds. Abercrombie always offers an exceptional option premium relative to the risk and its regular price gyrations offer opportunity to escape or re-enter positions with frequency, making it an ideal covered call position for the investor with some tolerance for that kind of excitement.

Traditional Stocks: Caterpillar, Deere, Eli Lilly, The Gap

Momentum Stocks: Abercrombie and Fitch, Lexmark, Joy Global

Double Dip Dividend: Macys (ex-div 9/12), Merck (ex-div 9/12), Williams Co (ex-div 9/11)

Premiums Enhanced by Earnings: LuLuLemon (9/12 AM)

Remember, these are just guidelines for the coming week. The above selections may be become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

Weekend Update – August 25, 2013

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” selections this week (see details).

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

Remember, these are just guidelines for the coming week. The above selections may be become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The over-riding objective is to create a healthy income stream for the week with reduction of trading risk.