With the holiday season already here, 2013 is coming to a
close and it has been an interesting year. This year started out
with some hard mandatory cuts to government spending. The Euro
debt crisis which took up all the media attention from last year
has become old news. Unemployment is still high in Europe, so it
would not be proper to say the problems are fixed, but they are
out of the news. Domestically, a compromise budget deal went
through Congress, setting the stage for the next two years.
Edward Snowden made the news this year as he told the whole world
that our government is watching over every email and phone call
in order to keep us safe. But on the other hand, they can't
get the Obamacare website up and running. President Obama
disclosed that might not get to keep your current health plan,
and signups have been off to a very slow start. When will we
learn trusting politicians is risky business?
Unemployment has been coming down towards 7.3%, but many
people have chosen to leave the workforce. The stock market has
done really well so far this year and for all the worry we had
last year at this time it has turned in a stellar performance.
The S&P 500 recently closed above 1800, a big 26% move up
from the 1426 level where it started the year. The Dow Jones
Industrial Average closed at 16,167, up 23.3% from where it
started the year.
Late last year, on December 17, 2012, my pick for trade of the
year was a position on CBS (
) and it did quite well.
At the time we said:
) is a diversified media company competing with the likes of
), News Corp (
) and Time Warner (
) that have been doing well recently. The stock has a Five STARS
S&P rating. Revenues for 2012 should grow 6% while revenues
for 2013 are expected to grow 7.5% to $16.2 billion. While
the CBS brand television network is the most visible of the
company holdings, it also owns CNET, Simon and Schuster
publishing, Showtime Networks, 130 radio stations, local TV
stations and more…
The stock is trading near 35 and has been in a steady upward
trend from the 20-range two years ago. The company has spent 1.7
billion in the last two years buying back stock, a program it
recently replenished to continue… Take a look at a covered call
on CBS. An investor can buy the stock and sell the January 2014
35 call for a 31.05 net debit, which will give us about a 13%
simple return. The trade has about 13% of downside protection
with an annualized return rate near 12%. The stock pays a
dividend yield of 1.3%."
Like the rest of the market, CBS has done well this year. In
fact, it has almost done too well. The stock is at $59.79 so it
looks like a very safe bet it is going to stay above the 35
level. When we put on this trade we were not expecting such a
huge rally in the stock market. That is a 70% rise over the last
year! When we pick trades we always look for the best stock for
the trade and at times we can pick ones that are so good they go
up way more than expected. Nonetheless, if you did this covered
call trade you will pick up a 13.3% annualized return rate
between the covered call premium and the dividend.
As we look forward to the coming year, we could be in for
volatility. A lot of companies have been buying back shares and
while earnings have been growing there are concerns that buybacks
might be masking a lack of real growth. People are still very
concerned about the Obamacare rollout, and the Federal Reserve --
which got a new chairman -- will now start slowing the
quantitative easing that has helped fuel the stock market rally.
The Federal Reserve has printed a lot of money trying to keep
interest rates down which has helped the stock market but could
cause problems in the future.
Over the last year people have actually turned off the news.
Without an election and a steady stream of crises, the news
networks have seen a drop in viewership. People are turning on
other channels and getting on with life. The economy has been bad
for a while, but it seems as if many people are completely over
talking about it. They just want to go on with their lives. It
could be the natural reaction of a long period of economic
hardship or it could just be my perception.
Whether you flip on the TV, go out to an amusement park or
chances are when you want to take the grandkids and get away from
things you will still be affected by Disney (
). Disney is one of the largest media around companies owning
ABC, the Disney Channel, and ESPN. The company also owns the
"happiest place on earth" and gets royalties from branded items.
Analysts expect sales to rise 6.7% in 2014 and 5.8% into 2015.
Earnings per share have been growing the last several years, 2011
saw $2.52 a share, 2012 produced $3.13 and 2013 made $3.38 a
With Disney at 72.20 the January 2015 77.50 covered call has a
trade that caught our attention. If you buy the stock you can
sell the June 77.50 call for 4.35 at the same time for a net
debit of 67.85. This trade has 6.0% of downside protection, a
14.2% simple assigned return rate and a 13% annualized return
rate (for comparison purposes only). With the stock market
performance of the past year it could be tempting to hold
positions long, but with the stock market near highs it would not
be surprising to see them take a breather or enter a correction
at some point. DIS should be a good play for sports,
entertainment, fun and investing.