A stock picked using a value investing technique is a way a lot of investors find stocks they like for the long term. There are other favored techniques such as technical signals and trends, but investors often favor the valuation method as a way to get a dime stock for a nickel.
An audio podcast of this article is available at: poweropt.com/podcasts/2007_08_29_Value.mp3
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“Call options can be written every month on the stocks you own. This is because the highest premiums are realized over single-month periods, rather than two or more months out in time. The stocks you choose to hold or buy should be stocks you plan to own for a long period of time. They should be steady growth stocks that have done well over the long term and can be prudently held even if a market decline occurs.”
A little about value investing:
In his book, ‘New Markets, New Strategies: Wealth-building Habits for Intelligent Investing ,’ Jason Trennert (a famed Wall Street analyst) points out, “Unfortunately, many individual investors, without the training, time, or confidence of professional investors, spend far less time than they should determining the value of the stocks they buy.” However, investors who have spent time trying to re-read something from a college investing class or if they have tried to digest some of the weighty tomes offered by investment experts, it’s easy to get discouraged.
In the book, he offers several methods for quickly evaluating a stock and the right market environment.
To assess whether it is the correct market environment, Trennert described a simple and commonly used formula. Historically the sum of the inflation percentage (can be found at bls.gov/cpi/) and the average P/E of S&P 500 companies, has been 20. When this figure falls below 20 it is overall a good time to buy and when the figure is above 20, it is historically not a good time to buy.
Right now, the CPI is 2.4% and the S&P 500 average P/E is 17.1. The sum of these two numbers is 19.5. So, the market looks OK from this standpoint.
Simple Value Method for Picking an Individual Stock:
A very simple way to pick a value stock is with the Price to Earnings to Growth ratio. This calculation takes a company’s P/E and divides it by the expected earnings per share growth over the next year. Of course, the expected earnings are always a nebulous creature and hard to nail down.
Laying the questions regarding the reliability of earnings estimates aside, it is typically thought a value stock has a P/E/G ratio of less than one. An overpriced stock would have a P/E/G of greater than one. This is just a rule of thumb, because companies with earnings growth expected in the distant future will often not fit into this model.
Setting up the Search:
Fortunately, an investor doesn’t have to constantly go through these calculations themselves. Using a simple search engine, like the one found at PowerOptions will identify stocks fitting these criteria. In addition, the search will generate a list of the most potentially lucrative option trades.
The search generating the covered call option trades below looked for stocks with a P/E/G ratio of less than 1. In addition, it screened out all stocks in the financial sector. This was done because stock prices in the financial sector have recently tanked and although they may be a good value, investor confidence has been affected and the trades may be a little risky for a short term outlook.
Covered Call Opportunities:
The following September Option trades have 25 days until expiration. The October trades have 53 days until expiration.
|Covered Call Search|
|Huaneng Power Intl. Inc.||HNP||43.68 (-4.31)||HNPJI||07 OCT 45.0 (53)||$2.50||41.18||5.7||6.1||9.3|
|Biovail Corp. Intl.||BVF||16.99 (-0.22)||BVFJW||07 OCT 17.5 (53)||$0.65||16.34||3.8||4||7.1|
|Huaneng Power Intl. Inc.||HNP||43.68 (-4.31)||HNPII||07 SEP 45.0 (25)||$1.50||42.18||3.4||3.6||6.7|
|Linn Energy LLC||LINE||34.35 (+0.38)||QGJJG||07 OCT 35.0 (53)||$1.15||33.2||3.3||3.5||5.4|
|Frontline Ltd.||FRO||44.40 (-1.72)||FROJI||07 OCT 45.0 (53)||$1.60||42.8||3.6||3.7||5.1|
|Huaneng Power Intl. Inc.||HNP||43.68 (-4.31)||HNPJH||07 OCT 40.0 (53)||$5.30||38.38||12.1||4.2||4.2|
|Enerplus Resources Fund||ERF||39.97 (-0.83)||ERFJH||07 OCT 40.0 (53)||$1.40||38.57||3.5||3.6||3.7|
|Vodafone AirTouch PLC||VOD||30.97 (-0.66)||VODJF||07 OCT 30.0 (53)||$2.00||28.97||6.5||3.6||3.6|
Competitors for HNP include: and Korea Electric Power Corp. (KEP).
Competitors for BVF include: Eli Lilly & Co. (LLY), Teva Pharmaceutical Industries Ltd. (TEVA), Watson Pharmaceuticals Inc. (WPI), King Pharmaceuticals Inc. (KG), and Penwest Pharma. Co. (PPCO).
Competitors for LINE include: Equitable Resources Inc. (EQT), Petroleum Development Corp. (PETD), and Belden & Blake Corporation (private).
Competitors for FRO include: General Maritime Corp. (GMR), Overseas Shipholding Group Inc. (OSG), Teekay Corporation (TK), Double Hull Tankers Inc. (DHT), Nordic American Tanker Shipping Ltd. (NAT), Tsakos Energy Navigation Ltd. ASA (TNP), TOP Tankers Inc. (TOPT), and Ultrapetrol (Bahamas) Ltd. (ULTR).
Competitors for ERF include: PrimeWest Energy Trust (PWI), Provident Energy Trust (PVX), and Vermilion Energy Trust (private).
Competitors for VOD include: Orange PLC (private), TelefÃ³nica O2 Europe plc (private), T-Mobile International AG & Co. KG (private), NTT DoCoMo Inc. (DCM), Deutsche Telekom AG ADR (DT), and Millicom Intnl. Cellular S.A. (MICC).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions‘ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations.
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