Gilead Sciences: A buy, Sell or Hold?

gild-2

Many money managers have made Gilead a top investment pick when interview on some popular business shows. I never buy a stock based solely on the recommendation of a media personality. However, I will put it on my watch list and do some fundamental research and study some chart patterns.

Back in November of 2014, I decided to dollar cost average some Gilead shares using a strangle option strategy. I ended up owning 200 shares at $102.00 and made some nice profits selling covered calls. Unfortunately, the share price has been in free fall since Aug of 2015. See the chart below:

gild

I managed to reduce my average cost down to $90.50 but Gilead tumbled to a record low on Feb 8th after the company provided guidance for fiscal 2017 revenue, which missed analysts’ expectations. See press release:

The research-based biopharmaceutical company said it expects fiscal 2017 net product sales of $22.5 billion – $24.5 billion, below the Capital IQ consensus estimate of $27.98 billion.

Gilead reported late Tuesday Q4 non-GAAP earnings of $2.70 per share, a dime better than the analyst consensus on Capital IQ. Revenue was $7.32 billion, vs. expectations of $7.16 billion.

HCV product sales, were $3.2 billion for the fourth quarter of 2016, compared to $4.9 billion for the same period in 2015.

Price: $65.93, Change: -$7.20, Percent Change: -9.85

Is Gilead turning into a value trap or a real value investment?

valuetrap-300x250

This stock is cheap with a PE ratio of 6.68 compared to the biotechnology industry average of 34.55. Gilead has a 3.13% dividend yield which is the highest within the industry. It has one of the highest ROEs of all companies in the biotechnology & drug industries. Although, EPS growth at Gilead is declining, it is still above the industry average.

The biggest problem with this stock is the biotech industry is experiencing positive revenue growth as a whole but Gilead has been unable to grow revenues and is losing market share. This negative trend has been continuing from the previous year when revenue growth at Gilead was -13.94% while the biotech industry was up some 202.65%.

I hate throwing good money after bad in the hopes of breaking even. So I am not big on averaging down on a losing position. I have been fighting a losing battle on this stock for quite a long time. However, I am anticipating a dead cat bounce off the bottom if some deep value or dividend investors decide to buy. I think that I should take a lost and buy something else. What do you think?

Do you own Gilead, are you going to average down, sell for a lost or are you going to continue to hold?

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Dogs of the Dow: A winning strategy in 2016

The “Dogs of the Dow” strategy was popularized by Michael O’Higgins in his 1991 book “Beating the Dow.” The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average with the highest dividend yield. The investor would allocate an equal amount into each of these 10 stocks and hold them for the entire year. They are called investment “Dogs” because rising dividend yields tend to be a function of falling prices.

Typically, an investor would need to only rid about two to three stocks every year and replace them with different ones. The stocks are typically replaced because their dividend yields have fallen out of the top 10, or occasionally, because they have been removed from the DJIA altogether. The strategy’s simplicity is one of its most attractive attributes.

The premise of this investment style is that the Dow laggards, which are temporarily out-of-favor stocks, are still good companies because they are still included in the DJIA. Therefore, holding on to them is a smart idea, in theory. Once these companies rebound and the market has revalued them properly, you can sell them and replenish your portfolio with other good companies that are temporarily out of favor.

Companies in the Dow have historically been very stable companies that can weather any market decline with their solid balance sheets and strong fundamentals. Furthermore, because there is a committee perpetually tinkering with the DJIA’s components, you can rest assured that the DJIA is made up of good, solid companies.

The 2016 returns:

Dogs of the Dow = 16.1%

Dow Jones Industrials = 13.4%

S&P 500 = 9.5%

Here are some historical returns:

Investment Symbol 2011 2012 2013 2014 2015 1 Year 3 Year 5 Year 10 Year Since 2000
Dogs of the Dow 16.3% 9.9% 34.9% 10.8% 2.6% 2.6% 16.1% 14.9% 10.6% 7.9%
Dow Jones Industrials 8.4% 10.2% 29.7% 10.0% 0.2% 0.2% 13.3% 11.7% 9.1% 6.3%
S&P 500 2.1% 16.0% 32.4% 13.7% 1.4% 1.4% 15.8% 13.1% 9.1% 5.8%

Variations of the Dogs

Because of this strategy’s simplicity and its returns, many have tried to alter it in an attempt to refine it, making it both simpler and higher yielding. There is the Dow 5, which includes the five Dogs of the Dow that have the lowest per share price. Then there is the Dow 4, which includes the 4 highest priced stocks of the Dow 5.

A contrarian strategy of favoring the worst over the best doesn’t always work out, but it often does. Consider the worst-performing stock in the 30-member Dow Jones Industrial Average in 2015 was Wal-Mart. The retailer’s shares produced a dividend-adjusted loss of 26.6% in 2015 but was up 14.3% in 2016 including dividend. In contrast with Nike which had a big gain of 31.4% in 2015 but had loss of 17.4% in 2016!

The Dogs of the Dow for 2017

Symbol Company Price Yield
The Dow stocks ranked by yield 12/31/16 12/31/16
VZ Verizon 53.38 4.33%
PFE Pfizer 32.48 3.94%
CVX Chevron 117.70 3.67%
BA Boeing 155.68 3.65%
CSCO Cisco Systems 30.22 3.44%
KO Coca-Cola 41.46 3.38%
IBM International Business Machines 165.99 3.37%
XOM ExxonMobil 90.26 3.32%
CAT Caterpillar 92.74 3.32%
MRK Merck 58.87 3.19%

Dogs of the Dow strategy is not fool-proof

Dow Industrial Average is price-weighted but the Dogs of the Dow assumes equal weighting which can explain some performance differences over the long-term. Part of the outperformance can also be attributed to differences in overall dividend yields.

The Dogs of the Dow is a simple stock picking strategy and can be very effective over the long-term. Owning 10 of highest yielding stocks of the 30 Dow stocks which are out of favor with Wall Street gives the investor some downward protection and some extra income.

What do you think about “Dogs of the Dow?”

Disclaimer: This post is for discussion purposes only!

 

Bull Call Spread: An Alternative to the Covered Call

call-spread

Most new option traders start with a covered call strategy. You buy 100 shares of company xyz and you sell one option that has a near month expiry date. One objective of this strategy is to earn extra income from the option premiums which hopefully expires worthless. Short term options decline in value very quickly if the stock price remains fairly flat or falls a little in value.

The covered call strategy is limited by the amount of capital you have to invest. Many popular stocks are trading over $100 like Apple ($114.90), Netflix ($123.75) and Facebook ($119.40) so buying 100 shares of these three companies would require about $35,805 of your capital.

An alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. Instead of buying the underlying stock in the covered call strategy, the bull call spread strategy requires the investor to buy deep-in-the-money call options instead.

To illustrate the difference, I am going to select 3 bull call spreads for the above three popular stocks. Disclaimer: These trades are for educational purposes only and are not recommendations.

Quotes as of 10:00 a.m. on Dec 13, 2016

Example #1

Buy 100 shares of Apple at $114.90 sell one call option Jan 20 at $115.00 for $2.60

Call spread: Buy 1 Jan 20 $105 call for $10.45 – sell one call Jan 20 at 115.00 for 2.60

Example #2

Buy 100 shares of Netflix for 123.75 – sell Jan 20 call at $130 for $4.50

Call spread: Buy one Jan $120 for $9.15 – sell Jan 20 call at $130 for $4.50

Example #3

Buy 100 shares of Facebook for$119.40 – sell Jan 20 call at $120 for $3.10

Call spread: Buy one Jan 20 $110 for $10.45 – sell Jan 20 call at $120 for $3.10

Now, the capital required to purchase 100 shares of each of these three stocks is $35,805 minus $1020.00 from selling the covered call options equals $34, 785. The bull call spreads requires a total outlay of $3,005 minus $1020.00 from selling the exact same covered calls equals $ $1985.00

Only time will time if these bull call spreads are good, bad or ugly. Stay tune for a follow-up post in the new year.

Another suckers rally in oil stocks?

opec

Over the past year there has been a lot of talk regarding the possibility of OPEC either freezing or cutting production. The Organization of the Petroleum Exporting Countries (OPEC) on Wednesday agreed to its first oil production limits in eight years, triggering an oil rally. The new norm for crude prices could be between $50 and $60 going forward.

OPEC has said it is seeking to secure 600,000 barrels per day of cuts from non-OPEC producers, and that Russia has committed to temporarily cut production by about 300,000 barrels per day in the first half of 2017. Russia and other non-OPEC producers are set to meet with OPEC on Dec. 9.

The key to all of this is whether these cuts will be implemented. Plus market watchers are also questioning whether the oil group will cheat. The sharp oil-price rally may well be short-lived, as oil production has been turning the corner in the U.S., with the rig count up 50 percent from lows in May.

Extracting oil from the Permian Basin, which spans west Texas and southeast New Mexico, is less expensive than it is in many major fields.

“Basically, $50 is good for Permian Basin stocks,” said Paul Sankey, senior oil and gas analyst at Wolfe Research. Pioneer Natural Resources and EOG Resources expanded their presence in the region in the last few months, and Sankey said the two companies would also benefit from $50 oil.”

In Conoco Phillips’ third-quarter conference call, management said the company was adding three rigs to its operations in the North Dakota Bakken oil fields for a total of four rigs in the region.

“The Trump Wild Card”

Cutting corporate income taxes will make U.S. shale producers more profitable and they could have extra cash to produce more oil. Less banking regulations could also allow more bank loans to the energy industry. Could Trump impose tariffs on imported oil? He is after all unpredictable!

The oil futures market has quotes for monthly contracts that are being offered at $53.00 for the first quarter of 2017 and $55 for the rest of the year. The trading volumes of contracts changing hands is very low which could be a bullish sign that oil producers believe that higher prices are coming.

Now over the last two years, I have avoided investing in oil stocks and posted many articles regarding the oversupply problem. I am currently doing research on some U.S. shale oil producers. Unfortunately, the fundamentals haven’t changed and most companies are still losing money at current oil prices.

What do you think?

Is this another suckers rally because hedge funds are rushing in to cover their short positions or is this the start of a bull market in the oil patch?

 

 

 

 

 

Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.

hole-in-one

 

Rolling options can turn a profitable option trade into a loss

call-put

One of the hardest things to do as an investor is to control your emotions when making investment decisions. It is even more difficult for option traders because all options have an expiry date. Plus option prices are very volatile which can be difficult to ignore.

My dollar cost average using an option strategy for buying 200 shares of Royal Caribbean has been an emotional roller coaster ride. I took a position on Oct 11 with the intention of either making 11.2% return in 38 days or owning 200 shares at an average price of $68.84 per share. The chart below illustrates the price movement over the past 16 days.

rcl

I get nervous when a stock price falls 3.5 % two days before earnings are released. I seriously thought about buying back the call & put options and selling my shares for a loss. However, the whole point of this strategy was to own 200 shares of Royal Caribbean. Nothing really has changed, under normal conditions I would have bought 100 shares at $72.22 on Oct 11 and bought another 100 shares at $68.00 for an average price of $70.11 per share.

My option strategy, up until Oct 27 has reduced my paper loss to $68.84 – $68.00 = $0.84 divided by $68.84 or 1.2% compared to $70.11 – $68.00 = $2.11 divide by $70.11 or 3%. The next day, RCL released their earnings that surprised on the upside. See the chart below: 

rcl1

Now I am faced with more challenging set of opportunities.

  1. Do I buy back the Nov 18 call & put options which brings my cost base down to $69.92 and I hopefully sell my 100 shares on Monday for $74.40 ( 6.4% return)
  2. Do nothing for the next 22 days and hope that the shares don’t fall back below $72.50 and make 11.2%
  3. Do I roll my options forward by buying back the Nov 18 options and sell the Dec 16 $72.50 call for $4.10 and Dec 16 $72.50 put for $2.20?
  4. Do I get greedy? Buy back the Nov 18 options and sell the Dec 16 $75 calls for $2.64 and the puts for $3.30?

Analysing the risk / reward of rolling my options to Dec.

Scenario (1): What happens if the shares of Royal Caribbean are trading below $72.50 on Dec 16?

Under choice # 3, call option expires and I buy 100 shares at $72.50 bring down my purchase price per share to $66.20 for the 100 addition shares plus 69.92

Under choice # 4, I still buy 100 shares at $72.50 bring down the purchase price per share to $66.56

Scenario (2): What happens if the shares of Royal Caribbean are trading above $72.50 but below $75.00 on Dec 16?

Under choice # 3, I sell my 200 shares for $$14,500 – $6,620.00 – $6,992.00 = profit of $888.00 or 6.72%

Under choice # 4, I will own 100 shares at $69.06 plus my 100 shares at $69.92

Scenario (3): What happens if the shares of Royal Caribbean are trading above $75.00 on Dec 16?

Under choice # 3, nothing changes, I still make $888.00 or 6.72%

Under choice # 4,  buying back the Nov 18 options, I reduced my cost base on the 100 shares to $69.92 – the Dec 16 put option of $3.30 – call option for $2.64 = $63.98 per share. I will be force to sell at $75.00 for a profit of $11.02 or 17.2% 

Two factors that I am weighting are the Fed is considering raising interest rates in December combine with tax loss selling could spark a market correction. Now, Choice # 3 is out of the question, less change of being profitable than choice # 2, 6.72% in 48 days compared to 11.2% in 20 days.

Now, I still have until Nov 18 to decide if I want to change the perimeters of my original trade. However, I do run the risk that the purchaser of the Nov 72.50 call option will force me to sell my 100 shares before Nov 18th if the stock price continues to the upside.

What choice would you make if you were in my shoes?

Remember this old saying “Bulls & Bears make money and Pigs get slaughtered.”

Do you have what it takes to be a DIY investor

risk

Having worked as a financial advisor, I have encountered people who just don’t understand basic money management. So paying for financial advice makes a lot of sense. However, there are more tools available for the do-it-yourself investor than ever before. All of the online trading firms offer an array of charts, quotes, research and educational materials.

So, is there anything wrong with do-it-yourself investing? No, of course there isn’t. I don’t knock anyone who invests without the guidance and expertise of an experienced professional. Here are just a few of the reasons why:

  1. There are more “age-based” portfolio products also known as target-date mutual funds and index funds. These funds of funds can plot out an investment course over a lifetime which is close to having your portfolio on autopilot.
  2. We also have the rise of the robo-advisors. These highly advanced computer programs armed with algorithms, data, and speedy processing power can offer you advice on investments and planning. Major financial services firms that have built reputations to help do-it-yourself investors have invested great sums of money into these.
  3. The majority of financial advisors are commissioned based. It is difficult to find good advisers willing to look after small investment accounts. Plus investment products that they sell you can have hidden fees that you make or may not be aware of.

Now, before you quit your day job, do you have what it takes to be a DIY investor? Here are some of the factors you may want to consider when deciding whether or not to employ the help of a financial services professional or go it alone. This is by no means an exhaustive list, but I’ve identified 7 factors I think should rise to the top before making the decision.

1.    Investing takes time

  • Will you make time to reassess your personal financial situation , after your honeymoon, after the birth of a child, upon your retirement, upon a divorce or even after the death of a loved one?
  • Will you make time to take steps to start adjusting your investment portfolio ahead of major life changing events the way you’re supposed to?
  • Will you make time to follow-up on each individual investment in your portfolio? To check recent news? To rebalance your account?

2. Discipline

  • Do you have the discipline to do the research to pick and choose, buy and sell and follow?
  • Were you one of the ones who didn’t open your brokerage or 401(k) statement in 2001 or in 2008?
  • Did you bail out of every investment and convert to cash at the market bottom in 2009?
  • Did you forget how to be a long-term investor?

3. Confidence

  • Do you tend to overreact to stressful situations?
  • Did you buy that stock when it came down in price, just like you said you would the last time you checked out the quote?
  • Are you afraid of making a mistake and unwilling to take a lost?

4.  Risk management

  • Do you have a strategy, or do you kind of go with whatever is working or being touted on TV or in a newsletter?
  • Mistakes happen. Every investor, including Warren Buffett, makes investment mistakes along the way. But how you handle them and what you learn from them are much more important. Mistakes are unavoidable when it comes to investing.
  • Have you taken proper steps like diversification to help mitigate costly mistakes, which is what risk management is all about?

5. Experience

  • We all start out as novices so are you willing to learn by taking courses, reading investment books, financial newspapers ….?
  • Do you have any peers or a mentor that will share investment mistakes with you.?
  • Have you worked with people who have lived through various markets and economic downturns? Can you learn  which strategies they used to get them through the tough times?

6. Staying current

  • Are you a news junkie?
  • Do you follow economic stats?
  • Are you up to date on Federal Reserve policy?
  • Do you follow politics?
  • Do you keep up with foreign events?

7. Sweating the details or thriving on them

  • Has your portfolio grown in value? Would a mistake be more costly as a result?
  • Are you aware of holding periods regarding capital gains treatment?
  • Are you taking undue risk in trying to juice your passive income in this low-interest-rate environment?
  • Do you know which assets are best in a retirement account and which are best in a regular taxable account?

After you think deeply about the seven factors above, you may conclude you are strictly a do-it-yourself investor or find you need the help of a professional or decide that you are somewhere in between. That’s okay, we are in an era of choices and that’s the way it should be.

Here’s the key. Investing is not an easy thing to do successfully. Bear markets make all of us look like unsuccessful investors while they last. This is often when investors walk away from the market. Make sure you have a strategy that includes the possibility of losing money, the certainty of corrections and bear markets.