Fertilize your portfolio and watch it grow

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Kevin Kersten 03/31/2014

The calendar may say spring, but with snow and cold weather that just won't warm up, people are more than ready for spring to be here. People want to be planting gardens, watching flowers bloom and mowing lawns instead of getting stuck on an icy highway, facing blizzards or shoveling feet of snow at a time. With more golden rays of warm sunshine falling as each day lengthens, the snow can only last so long and soon spring will be in full bloom.

As the snow melts and warm days arrive, people will get their lawns ready for summer, tilling the garden and planting all the seeds they were thinking about while snowbound. Soon, people will be fertilizing their lawns and gardens and giving away extra vegetables to all their neighbors.

As you pick up fertilizer at the store you may not think much about the companies that make your plant food or fertilizer, but there is an investment opportunity there.

The Scotts Miracle-Gro Company ( SMG ) has trended higher over the last year from $42 a share to a recent $60. The company has a $3.7 billion market capitalization and a 2.9% dividend yield. The stock is highly seasonal, losing money in two quarters of the year and making money in two quarters of the year. This should not be surprising as it books 77% of revenue comes in during the warm second and third quarters (in the northern hemisphere). This is a fertilizer company and most people don't fertilize their lawn in January. Looking at the full year's profit numbers, the company made $2.58 in 2013; $1.82 in 2012; and 1.84 in 2011. Analysts think SMG will pull in earnings close to $3.15 in 2014 on a 3% sales growth and margins rising about 1% to 36%.

U.S. sales make up 83% of the business while the International sales make up 17%. Consumer sales make up 90% of the revenue while Scotts lawn service makes up 9%. The company is dependent on Home Depot ( HD ), Lowe's ( LOW ) and Walmart ( WMT ) for 68% of their sales.  SMG is also cutting costs and expects an extra $20 million in cost savings in 2013 and an extra $60 million by 2016.

We all know adding fertilizer makes the garden grow better or the lawn look a little nicer. You can get a deeper green color, a more full lawn and your neighbors will envy you if you treat it right. The right combination of fertilizers will also make your garden grow prize-winning produce.

And just like putting some fertilizer on the garden can make it grow a little more, you may be able to do the same thing with your investments. There are strategies that can make higher returns from a stock that doesn't grow as fast as you might like. You can sell a covered call on the stock and receive premium that will boost your returns 3%. While a covered call will make you portfolio a little more productive, it will also limit your growth, kind of like cutting the grass twice a week so it stays the perfect length. A covered call does cap the maximum return a stock will give you, but if you move the strike price up, you can set this in an area where you will be happy with it.  


Chart courtesy of stockcharts.com

Take a look at a covered call on Scotts Miracle Gro ( SMG ). With the stock at $60.32, the September 65 call still leaves this stock a little room to grow and has a 1.75 bid. The 58.57 (60.32-1.75) net debit has an 11% assigned return over the next six months with a 23% annualized return rate.  The stock needs to rise about 7.7% over the next six months in order to be assigned. If the stock stays flat you will pull in 2.9% more than if you didn't sell the call. Using covered calls you won't get the highest returns of everyone in the market, but you can reliably boost returns on a variety of stocks.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: SMG , HD , LOW , WMT

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