Wednesday, July 20, 2016

Three Round Out Buys

Earlier this month I reported selling several stocks, including three winners (NTTRS, O – but only half), three more winners (TDWPCAVA) and four more positions (PMCVXSTWDMDP).

My reason for this sudden selling spree is that I want to prepare DivGro for options trading. Recall that I'm hoping to boost dividend income by selling options against some of my DivGro positions. Each option controls 100 shares. Covered call writing, the strategy I'm most interested in, requires that I own 100 shares for every call option I write.

Many of my DivGro positions consist of fewer than 100 shares, so I would have to round out the number of shares to 100 (or multiples of 100) before writing covered calls. Today's article is about buying shares to round out 3 positions and to make them eligible for options trades.

So, the first thing I did before buying these shares was to consider 3 things:
  1. pick stocks that have option value
  2. pick stocks that are nearly rounded out
  3. pick stocks that are trading near fair value
Stocks with option value allow more flexibility when setting up trades. You can choose between different strike prices and different expiration dates. With this round of trades, I looked for positions with close to 100 shares (or multiples of 100 shares). Such positions would be less costly to round out. Finally, I wanted to find stocks that are trading near fair value. With the markets trading in record high territory, most of the stocks in my portfolio are trading at a premium.

The following positions most closely matched the 3 criteria mentioned above:

Round Out Buy #1



18 July 2016: Bought 20 shares of ABBV at $64.00 per share.

AbbVie Inc. (NYSE:ABBV) is a world-wide, research-based biopharmaceutical company that develops and markets products to treat conditions such as chronic autoimmune diseases, including rheumatoid arthritis, psoriasis and Crohn's disease; hepatitis C; human immunodeficiency virus (HIV); endometriosis; thyroid disease; Parkinson's disease; complications associated with chronic kidney disease and cystic fibrosis, and other health conditions. ABBV was incorporated in 2012 and is based in North Chicago, Illinois.

I already own 80 shares of ABBV, so with this buy I'm rounding out to a total of 100 shares. Average yield on cost (YoC) is 3.64% and my cost basis per share is now $62.67. DivGro's projected annual dividend income increases by $45.60.

Here is an updated chart showing my buy prices:

Following is a table containing updated ratings of ABBV from various sources:

 Dividend.com's DARS Rating 3.5/5 (Recommended) 
 Morningstar Rating ★★★★☆ Economic Moat: Narrow 
 S&P Capital IQ's Stock Report ★★★★☆ Buy Quality Ranking: NR 
 TheStreet Quant Rating A (Buy)
 The Motley Fool's CAPS Rating ★★★★☆ 
 Thomson Reuters StockReport+ Neutral (6/10) 
 TipRanks Analyst Consensus Rating  Moderate Buy (9 analysts) 
 Value Line Ranks Safety: 3 Timing: 3 Financial Strength: 
 Zacks Rank (Style Score)  4-Sell †VGM: (B•A•F) B
 †VGM: (Value • Growth • Momentum) and combined VGM score

Valuation

According to Tipranks, based on 9 ranked analysts offering 12-month price targets in the last 3 months, the average price target for ABBV is $69.33. Morningstar's fair value estimate is $73.00 while S&P Capital IQ has a fair value calculation of $115.80.

I use the fundamental analysis tools available at finbox.io. The site provides several stock valuation models and a very convenient summary of the average fair value estimate of several models with default settings. For ABBV, finbox.io's fair value is $71,47 (see below).

Looking at the earnings- and price-correlated F.A.S.T. Graphs chart for ABBV for the available 6-year period, we can estimate a fair value of $85.36 for the normal P/E Ratio of 15.1 (see below).

Ignoring the lowest and highest of these estimates, the average fair value is $76.61. That means my buy price of $64.00 is discounted by about 16%.
 

Round Out Buy #2



18 July 2016: Bought 50 shares of GILD at $87.08 per share.

Gilead Sciences, Inc (NASDAQ:GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines. The company’s primary areas of focus include human immunodeficiency virus, liver diseases such as chronic hepatitis C virus infection and chronic hepatitis B virus infection, oncology and inflammation, and serious cardiovascular and respiratory conditions. GILD markets its products through commercial teams and in conjunction with third-party distributors and corporate partners. The company was founded in 1987 and is headquartered in Foster City, California.

I already own 50 shares of GILD, so with this buy I'm rounding out to a total of 100 shares. Average yield on cost (YoC) is 1.99% and my cost basis per share is now $94.49. DivGro's projected annual dividend income increases by $94.00. 

Here is an updated chart showing my buy prices:

Following is a table containing updated ratings of GILD from various sources:

 Dividend.com's DARS Rating 3.5/5 (Recommended) 
 Morningstar Rating ★★★ Economic Moat: Wide 
 S&P Capital IQ's Stock Report ★★★★ Strong Buy Quality Ranking: B+ 
 TheStreet Quant Rating B (Buy)
 The Motley Fool's CAPS Rating ★★★★ 
 Thomson Reuters StockReport+ Neutral (6/10) 
 TipRanks Analyst Consensus Rating  Moderate Buy (13 analysts) 
 Value Line Ranks Safety: 3 Timing: 5 Financial Strength: 
 Zacks Rank (Style Score)  2-Buy †VGM: (A•A•C) A
 †VGM: (Value • Growth • Momentum) and combined VGM score

Valuation

According to Tipranks, based on 13 ranked analysts offering 12-month price targets in the last 3 months, the average price target for GILD is $114.40. Morningstar's fair value estimate is $124.00.
The average fair value estimate of GILD, according to finbox.io, is $106 (see below).

Looking at the earnings- and price-correlated F.A.S.T. Graphs chart for GILD for a 7-year period, we can estimate a fair value of $155.95 for the normal P/E Ratio of 12.7 (see below).

Ignoring the lowest and highest of these estimates, the average fair value is $119.20. That means my buy price of $87.08 is discounted by about 27%.



Round Out Buy #3


18 July 2016: Bought 15 shares of RAI at $53.29 per share.

Reynolds American, Inc. (NYSE:RAI) is a holding company. Through its subsidiaries, RAI manufactures and sells cigarettes and other tobacco products in the United States. The company also provides electronic cigarettes. It distributes its products primarily through direct wholesale deliveries from a local distribution center and public warehouses. RAI was founded in 2004 and is headquartered in Winston-Salem, North Carolina.

I already own 185 shares of RAI, so with this buy I'm rounding out to a total of 200 shares. Average yield on cost (YoC) is 5.79% and my cost basis per share is now $29.03. DivGro's projected annual dividend income increases by $25.20. 

Here is an updated chart showing my buy prices:

Following is a table containing updated ratings of RAI from various sources:

 Dividend.com's DARS Rating 3.4/5 (Neutral) 
 Morningstar Rating ★★★☆☆ Economic Moat: Wide 
 S&P Capital IQ's Stock Report ★★★★ Strong Buy Quality Ranking: B+ 
 TheStreet Quant Rating A+ (Buy)
 The Motley Fool's CAPS Rating ★★★★ 
 Thomson Reuters StockReport+ Positive (8/10) 
 TipRanks Analyst Consensus Rating  Moderate Buy (2 analysts) 
 Value Line Ranks Safety: 2 Timing: 1 Financial Strength: 
 Zacks Rank (Style Score)  3-Hold †VGM: (D•D•C) D
 †VGM: (Value • Growth • Momentum) and combined VGM score

Valuation

Morningstar's fair value estimate for RAI is $48, while S&P Capital IQ has a fair value calculation of $52.90. According to Tipranks, based on 2 ranked analysts offering 12-month price targets in the last 3 months, the average price target for RAI is $52.50.

The stock valuation models at finbox.io with default settings indicate a fair value estimate of $53.27 (see below).

Looking at the earnings- and price-correlated F.A.S.T. Graphs chart for RAI for a 7-year period, we can estimate a fair value of $41.27 for the normal P/E Ratio of 15.8 (see below).

Ignoring the lowest and highest of these estimates, the average fair value is $51.13. Since I paid a $53.29 per share, I paid a premium to fair value of about 4%.



Special Note

Although I now own 200 shares of RAI, only 100 of these shares are in my Scottrade account where I can execute options trades. The other 100 shares are in my IRA account at FolioInvesting where I can't trade options.

Summary

 
I bought shares of ABBV, GILD, and RAI to round out my share counts to 100 shares (or multiples of 100 shares) so I can write covered calls on these stocks. 

These buys add $164.80 to DivGro's projected annual dividend income, which now totals $10,126.98.

Market volatility, as measured by the CBOE Volatility Index (VIX), is quite low right now at 11.50:
When volatility is low, options premiums will be relatively low, and vice versa. As a consequence, I don't expect to execute any option trades until I can get more favorable options premiums.
 
Thanks for reading! What do you think of these buys? Do you trade options? Please let me know in the comments section below.


6 comments :

  1. Basic questions on Covered Calls... Should all 100 shares be in same account, or can they be scattered in different accounts
    If they can be scattered, I assume at least they all be under same brokerage firm with whom you are writing covered calls, right?
    Thanks

    ReplyDelete
    Replies
    1. Hi Richard -- I'm not sure about scattered in different accounts, but I'm pretty sure the shares would need to be at the same brokerage. They would need to be able to assign the shares if they're called away...

      Delete
    2. The shares must be in the same account at the same brokerage firm.

      Delete
    3. Thanks for clarifying, Chuck!

      Delete
  2. Love to see another blogger getting on the options bandwagon!

    ReplyDelete
    Replies
    1. I'm climbing on, slowly! Thanks for the encouragement...

      Delete

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