Saturday, June 30, 2012

The Intelligent Investor

It's time for another installment in my The Intelligent Investor series.

On page 348, Graham covers his seven statistical requirements for inclusion in the defensive investors portfolio. His seven criteria are:

1. Adequate Size of the Enterprise
2. A Sufficiently Strong Financial Condition
3. Earnings Stability
4. Dividend Record
5. Earnings Growth
6. Moderate Price/Earnings Ratio
7. Moderate Ratio of Price to Assets.

Today we'll finish up by covering 4-7.

Friday, June 29, 2012

Option Strategy

I have 2 option strategies that I like the most and then a third that I don't have enough positions built up to think about at the time.

1. I like selling put options since you can essentially set your entry price and get paid a premium to wait for the price to come to you. The downside to selling puts is that you could have possibly bought in at a lower price should the markets make a big downward move.

2. Buying call options in the form of LEAPs. Long dated call options. The plus for this is that you can get the right to buy the shares at a predetermined price at some point in the future. I like this whenever I feel that long term the stock price should return to the value that I expect, higher than the strike price + premium. The reason I prefer LEAPs to shorter duration calls is that you get more time for things to play out. The downside is that you can be left with nothing to show for it if the stock price takes longer to materialize or if other factors change.

3. Selling call options. I haven't really dabbled too much into these mainly because you have to have significant positions built up. At least 100 shares per contract that you want to sell. What I like about them is that you can get essentially a second dividend on the shares in the form of the premium. This premium can drastically increase the compounding of your capital. I would prefer to sell shorter duration call options, 3 months or less. The reason I prefer to sell shorter duration calls is because stocks don't typically move as far and as fast as they have the first 3 months of this year. The obvious downside is that you're risking losing the shares should the option be expired.

I'll be posting more information on the calculations that I go through for each option strategy. A lot of people hear about options and are scared away but I feel they offer an opportunity to get the entry price you want or to sell at a given price that you feel the shares are overvalued at. They can increase the compounding which as Albert Einstein is quoted as saying is "The most powerful force in the universe."

Wednesday, June 27, 2012

Put Options Explained

A lot of people hear the word options with respect to stocks and think it's a high risk venture. While options are for everyone I feel they definitely have a place in a portfolio. I prefer selling put options to call options which I will explain why in a future post.

Put options, in a nutshell, are a contract between two parties where they agree to exchange the underlying stock at a specified price known as the strike price by a certain date. The buyer of the put has the right but not the obligation to sell the underlying by the expiration date at the strike price, where the seller of the put has the obligation to purchase the underlying if the option is exercised. The buyer has to pay the seller of the put option the premium for the right to sell the shares. Option contracts for stocks are based off 100 share lots. Therefore 1 contract is really referring to 100 shares.

Sunday, June 24, 2012

Wedding Day!!

Today I'm getting married to Ms. Lynsy Martin. I can't wait to get to spend the rest of our lives together as one.

Thursday, June 21, 2012

The Intelligent Investor

It's time for another installment in my The Intelligent Investor series.

On page 348, Graham covers his seven statistical requirements for inclusion in the defensive investors portfolio. His seven criteria are:

1. Adequate Size of the Enterprise
2. A Sufficiently Strong Financial Condition
3. Earnings Stability
4. Dividend Record
5. Earnings Growth
6. Moderate Price/Earnings Ratio
7. Moderate Ratio of Price to Assets.

Tuesday, June 12, 2012

Monday, June 11, 2012

Recent Transaction

This is going in the Recent Buy section even though I didn't buy anything. I sold a put contract for Intel today expiring July 20, 2012. The strike price is for $25 and I sold it for $0.53 per share or $53. By selling this put contract I was able to receive $53 less commission for a total of 1.35% return on the $2,500 in capital being tied up. So over the 39 days til the contract expires that equates to a 13.38% annual return. Not bad, especially considering that Intel is currently selling for $25.98. This put contract will give me a solid return if it goes unexercised and if it does get exercised that's actually what I'm looking for. If the put contract does get exercised my cost basis on the 100 share lot will be $25 less the premium ($0.53) + the commission ($7.95 + $0.06) = $24.55. At the current annual dividend rate of $0.90 per share that will give me a YOC of 3.67% which is 8.00% better than the current yield.

If you remember from my stock analysis on Intel , the average fair value was $30.40. I also set a 3.50% target entry YOC which corresponds to the $25.71 cost basis. The reason I sold the put option contract is because it is giving me a good return either way. Ideally the contract would be exercised with the stock price just slightly under $25 but above my $24.55 entry price.

All the returns are after-tax returns. I've assumed that I will be in the 25% marginal tax bracket at the end of the year.

Sunday, June 10, 2012

Why I prefer DG Stocks to Bonds

With today's low interest rates a lot of income seeking investors have switched to DGI. I would like to think that many would be converted to stick with DGI because it offers much more protection in your purchasing power than bonds do. The ultimate goal of investing is to wind up with more purchasing power than you started with at some point in the future. I believe that bond investors will end up severely behind the ball especially with the current low interest rates that treasuries are offering. The 10 year treasury yield is currently 1.63%. We'll assume that the dividend yield is 2.50%although you can get a much better yield from stable companies like KO, JNJ and PG. We'll also assume that the dividends are increased annually at 7.0% and that dividends are not reinvested. Inflation will be taken as 3.00% and $10,000 will be invested in both.

Friday, June 8, 2012

Powder Ready

It seems I was a little late for the last pullback but I now have some dry powder available for the next one that is sure to come. I'll be setting up some limit orders today on MCD, INTC, AFL and possibly just buy outright some JNJ. It'll be great to get to start adding to my portfolio again. Now I just need to practice some patience. It's been awhile since I've had capital ready to deploy and while I know I want to get it out there and working for me a better time will come.

I'm also considering selling out of my WMT position in my Roth IRA since there's no tax consequences. I've made over 15.50% since late April when I purchased on the dip due to the bribery scandal. I'm not overly enthusiastic about the entry price because it could be better. The YOC is only 2.71% which is decent but not where I normally try to purchase at. If I sell that'll be more available to put towards a better opportunity when combined with the contribution I'll be making later this month. Time to crunch some numbers to see where WMT stands.

Net Worth Update - May 2012

May was another down month for my net worth but overall it was worth it for what I did to lower it. My debt is now gone so I'll get to start saving a lot more of my income. My first back to back negative month just happened of course that's going to start happening as more and more of my net worth is tied to the movements of the markets. There was another round of wedding payments in May which helped to lower my net worth. For the month I contributed just under $900 to my 401k between my contributions and the employer match plus another $475 to the ESPP. From my take home pay, I saved $320 to my savings accounts and $2,987 for extra debt service. Overall my net worth was down $911 for the month.

Monday, June 4, 2012

Income Update - May 2012

May was right in line with April as far as spending. My minimum expenses and total expenses were pretty much even over the month which is good since they didn't go up but I didn't make a lot of progress on lowering them more. My minimum expenses were $1,549.48 which includes costs related to rent, utilities, car, all food expenses, phone and minimum debt service payments. My total expenses did actually improve slightly over April by almost $30 but I consider that just noise and not anything related to actions I took to lower them. My potential retirement income for the month totaled $34.70 and my FI changed to $109.51. Most of the decrease in my FI was due to the 30 year treasury rate falling throughout May. My PRI would replace 2.24% of my minimum expenses in May and the FI would cover 7.07%.

Saturday, June 2, 2012

Dividend Update - May 2012

May was a so-so month but better than April with its 3 payouts. I had a total of 5 payouts across my accounts. My dividend payments will start to increase here over the rest of the year with lots of fresh capital being deployed to dividend growth stocks over the coming months.

Dividend Income 2012
Company Dividend Amount Shares Purchased
Wells Fargo (WFC) $2.89 0.090
Proctor & Gamble (PG) $5.67 0.088
Intel (INTC) $10.20 0.365
Alcoa (AA) $0.90 0.105
May Total $18.98
2012 Total $137.08

Friday, June 1, 2012

Intel Stock Analysis

With the recent pullback in the markets and especially in tech I figured I would take a look at Intel Corporation (INTC). I currently own just over 45 shares of Intel and would be interested in adding more at the right price. Intel closed on Thursday 5/31/12 at $25.84.

Company Background:

Intel Corporation designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan. The company offers microprocessors that process system data and controls other devices in the system; and chipsets, which sends data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and CD, DVD, or Blu-ray drives; system-on-chip products that integrate its processing functions with other system components, including graphics, audio, and video onto a single chip; wired network connectivity products; and wireless connectivity products. It also provides mobile phone components comprising baseband processors, radio frequency transceivers, and power management integrated circuits; and mobile phone platforms, such as Bluetooth wireless technology and GPS receivers, software solutions, customization, and interoperability tests. In addition, the company offers endpoint security, network and content security, risk and compliance, and consumer and mobile security software products for consumer, mobile, and corporate environments to protect systems from malicious virus attacks, as well as loss of data. Further, it develops and licenses embedded and mobile device software products that comprise operating systems, virtualization technologies, middleware, and development tools; and provides NAND flash memory products, which are used in solid-state drives, portable memory storage devices, digital camera memory cards, and other devices. The company markets its products primarily to original equipment manufacturers, original design manufacturers, and industrial and communications equipment manufacturers in the computing and communications industries.

DCF Valuation:

Analysts expect Intel to grow earnings 11.80% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a DCF analysis with a 11% discount rate yields a fair value price of $45.23. This means that at $25.84 the shares are undervalued by 43%.

Finally Gone

My last payment for my high interest debt is officially paid. It's such an awesome feeling to have that burden gone. That's an extra $230 of monthly cash flow that will be going to saving. And the best part is that it's 4 months ahead of schedule since I was originally targeting a payoff in October of this year.