Krafty Investing in a Turnaround

Kraft Foods (KFT) reported an unexpected jump in profits earlier this week as its commodities hedges and price hikes made up for the rising costs of raw materials. The world’s second largest food producer ended up turning a profit of 4% during the second quarter, which has added credibility to its three-year turnaround plan.

Kraft Foods also has many strong believers, including billionaire Warren Buffett. The Oracle of Omaha first disclosed a position at the end of 2007 and has since boosted it to 138.3 million shares. Buffett believes that the company has a strong brand portfolio, generates consistent free cash flows, and is substantially undervalued.

Recently, Kraft Foods has struggled with a sharp increase in the cost of raw materials that it uses to manufacture its foods, such as cocoa and wheat. Such a rise put Kraft in a difficult position – it could either take a hit on its profit margins or raise prices and risk losing customers. The company decided to raise prices and the strategy seems to have worked.

Strong financial performance this quarter combined with such confident backing from the world’s great investor makes Kraft Foods a stock worth considering for any investment portfolio. After all, it is a strong brand that isn’t going to die anytime soon, the world’s greatest investor is backing it, and shares are trading right near their 52-week lows.

One great way to purchase shares of Kraft Foods is to purchase LEAPS – or long-term equity anticipation securities. These are essentially long-term stock options that have expiration dates set two years or more into the future. For many investors, they offer a way to leverage money without taking on as much risk as a margin account.

Currently, the 25 January ’10 LEAPS are trading at around $7 per contract. This means that investors can purchase the right to 100 shares of Kraft Foods stock for just $700 right now instead of paying $3,083 for the full 100 shares. The premium, however, means that the stock must rise above $32 per share before it is worth money.

Given the turnaround potential at Kraft Foods a $32 per share price over the next two years doesn’t seem that unlikely. It is also important to remember that you can exercise or sell the options at anytime before expiration. The less than $2 premium over the market price also makes these rights very cheap by any measure.

In the end, investors who are looking for a cheap way to mimic Warren Buffett’s Kraft Foods trade may want to consider purchasing LEAPS while they are at such cheap levels. The symbol for the LEAPS discussed in this article is YTWAE.

Also see: Using LEAPS as a Stock Substitute

Following Ackman on Target

Target Corporation (TGT) is trading near its 52-week lows after being hit hard by a weak consumer spending environment. However, at least one activist investor has been increasing his bets on the future prospects for the hard-hit retailer. William Ackman recently boosted his stake in Target and now has an economic interest in as much as 12% of the firm. The activist investor insists that the retailer’s shares will hit $120 per share during the next two years as the economy recovers.

Investors looking to build a stake in Target without risking a lot of money may want to check out the LEAPS options available on the stock. After all, William Ackman himself utilized options to build a large part of his stake. The most popular LEAPS available on the stock are the 50 January ‘10 calls, which are trading at $8.75 with 60,655 contracts open. The implied price stands at just $58.75 compared to Ackman’s target of $120 per share. Needless to say, there is a slight discount.

Why does Ackman like Target? In an interview with BBC, Ackman noted that companies should be valued based on the present value of their future cash flows. These cash flows should be projected at least 20 to 50 years out, and therefore should take into account several recessions. So, why should investors change how much they feel the company’s worth during these recessions when the long-term value remains the same (assuming the fundamentals are intact)? Target is a strong retailer that he believes still holds the same promise.

Ackman also noted in earlier communications with Target that he believes there is a lot of value tied up in its real estate. As a result, short-term value could be unlocked through lease-backs followed by share buybacks. The company has also already sold off its credit card division, which netted a healthy amount of money and reduced its credit risk. The only problem is, these actions can only be done when the economy is doing well.

In the end, those that believe in Ackman may want to check out purchasing Target LEAPS. The man - who correctly called MBIA’s decline and forced McDonalds to restructure - is increasing his stake and even raising new money to invest. LEAPS can be an effective way to leverage up and follow the coat-tails of a successful investor.

CYBX Sees Unusual Options Volume

Cyberonics Inc. (CYBX) shares continued their move higher last week as an increasing number of investors placed bullish options bets. Friday’s option volume came in at an unusually high 8,794 contracts, which is 14x greater than its 609 contract per day average. Currently, the majority of the open interest is centered around the October ‘08 and January ‘09 expiration dates. The fact that the open interest is predominantly calls suggests many investors are bullish on the stock long-term.

Earlier this month, Canaccord Adams reiterated their “buy” rating on Cyberonics and raised their 24-month price target from $28.75 to $29.00 per share. However, shares have now come close to touching these levels and show no signs of slowing. The key catalyst behind the move is an anticipated partnership to marke tits implanted depression treatment. Meanwhile, its epilepsy treatment technologies continue to grow at a quick rate.

Cyberonics expects to do between $134 million and $138 million in sales for fiscal 2009 after reporting $121.2 million in sales in fiscal 2008. The troubles finding a partner for its depression technologies has made earnings hard to predict, but the company did say that it expects improved pricing and geographic expansion for its epilepsy treatment. This combination of bullish news and hopeful prospects have kept the share price near their 52-week highs.

Cyberonics is a neuromodulation company engaged in designing, developing, selling and marketing medical devices that provide Vagus Nerve Stimulation (VNS) therapy for the treatment of epilepsy and depression. VNS Therapy System includes a generator to provide the appropriate stimulation to the vagus nerve, a lead that is attached to both the generator and the vagus nerve, associated equipment to assist with necessary implantation surgery, instruction manuals and magnets to suspend or induce stimulation manually.

Using LEAPS as a Hedge

Warren Buffett recommends that individual investors purchase a basket of stocks and hold it over the long term. The legendary investor has rarely sold any of his holdings and managed to become one of the richest people in the world following this strategy. Unfortunately, many investors don’t have the patience or confidence that Mr. Buffett possesses. Read more

Brocade Options Jump on Forecasts

Brocade Communications Systems (BRCD) options surged higher Thursday after meeting with investors at the Wachovia Nantucket Equity Conference. Some 31,626 option contracts traded hands, which is 11x the average daily volume of 3,007 option contracts. The majority of these trades took place at the October ‘08 level with strike price centered around $8 and $9. The move suggests that many investors are bullish on the stock over the next couple of quarters.

The data storage company topped analyst estimates during its last quarterly earnings, with revenues rising 2.8% and an even stronger growth in net income. Cash flow from operations also doubled to $111 million, with both gross margins and operating margins increasing for a year ago. And finally, Brocade said that its average selling price of its products in the second quarter declined “in the low single digits” compared to a year ago, which is relatively modest.

Strong fundamentals has many investors bullish on Brocade’s stock. So far, it appears that the company has avoided the majority of the credit crisis and slowdown in consumer and corporate spending. Its margins remain strong while it has only lowered prices moderately. Presumably, this good news combined with bullish forecasts led to strong convictions at the conference that it recently attended. In the end, the technology company remains very strong.

Brocade Communication Systems is a supplier and storage area network equipment and a provider of data center networking solutions that help enterprises connect and manage their information. The company offers a line of data center networking products, software and services that enable businesses to make their data centers more reliable and adaptable. The family of products include directors, switches, routers, embedded switches and other equipment.

FPL Group Options Surge Higher

FPL Group (FPL) shares have trended downward so far this week, but a flurry of options activity has left many investors guessing. Some 14,487 option contracts changed hands, which is 11x the stock’s daily average volume of 1,274 contracts. The majority of the transactions were the 70 September ‘08 calls followed, which saw some 5,115 contracts change hands. Typically, such volume in call option contracts is a very bullish sign for investors in the stock.

Some experts believe that this date may coincide with the construction of its first commercial-scale solar power plant in Florida. The Martin Next Generation Solar Energy Center will be built at FPL’s existing Martin Plant site and provide up to 75 megawatts of solar thermal capacityin an innovative hybrid design that will connect to an existing combined-cycle power plant. The facility is expected to be online by the end of 2009 and completed by 2010.

Other experts, like MSN’s Jim Jubak and CNBC’s Jim Cramer, simply believe that it is a strong utility company. FPL Group is not only the leading producer of wind power in the United States and the country’s largest generator of electricity from solar thermal power plants, but also yields a relatively strong 2.6 percent. However, the next earnings report set for July 31st has many investors worried about buying in just now.

FPL Group is a high quality, efficient and consumer-driven organization focused on energy-related products and services. With annual revenues of over $15 billion and a growing presence in 27 states and Canada, FPL Group is widely recognized as one of the country’s premier power companies. Florida Power & Light Company, one of its subsidiaries responsible for this project, serves 4.5 million customer accounts in Florida already.

Analyst Upgrade Sends Options Soaring

Aruba Networks (ARUN) shares surged nearly 20 percent over the past week after being upgraded by a major analyst. Lazard Capital upgraded Aruba Networks from Hold to Buy and set a price target of $8 per share. The analyst believes that the business is picking up momentum while further checks indicate that overall business at quarter-end is strong. The reasonable valuation, attractive long-term growth prospects, and improved near-term fundamentals give it potential.

Aruba Networks options also saw unusually high trading on Wednesday when the upgrade was announced. Over 7,600 option contracts traded hands, which is 20x the average daily volume of 382 option contracts. The 5 January ‘09 calls are the most active with an open interest of 2,143 contracts. This implies a price of $6.30 per share, which is still well below the $8 per share number put forth by Lazard Capital.

Aruba Networks dropped sharply back in early February after it lowered its forecast for 2008; however, many investors believe that the fundamentals behind the company have changed. Recently, such beliefs were confirmed with a narrower-than-expected loss in the third quarter and fourth quarter guidance in line with analyst estimates. In the end, things are improving and at least one analyst is convinced that shares are undervalued.

Aruba Networks delivers the enterprise network to users, wherever they work or roam, by providing user-centric networks that expand the reach of traditional port-centric networks. User-centric networks integrate adaptive wireless local area networks (WLANs), application continuity services and identity-based security into a system that can be deployed as an overlay to existing enterprise networks.

Recoup Your WM Investment Losses

Washington Mutual (WM) shares are down more than 20 percent today and 60 percent so far this year. The nation’s largest savings and loan reported a staggering $3 billion loss, which is the biggest quarterly loss in its history. The banking giant was also forced to increase its loss reserves to more than $8 billion to cover its worsening mortgage loan portfolio. Washington Mutual plans to counteract this through cost cutting, but some investors are doubting its capital reserves.

Investors in Washington Mutual looking to make their money back need to answer a critical question at this point: Do you think Washington Mutual will eventually turn around? If the answer is no, then the investor should immediately sell their shares while they still can instead of hoping for a miracle. If the answer is yes, then there is a LEAPS options strategy that may be able to help them recover their losses more quickly and get paid cash now!

The LEAPS stock repair strategy involves purchasing one at-the-money LEAPS call while simultaneously writing two out-of-the-money LEAPS calls. The result is an immediate premium payment - in most cases - as well as a reduced breakeven point, since the strategy is essentially doubling down at no cost to reduce the cost basis. Here’s how the position can be constructed on Washington Mutual using LEAPS options:

Purchase one 2.50 January ‘10 calls for $2.70.
Write two 7.50 January ‘10 calls for $1.50.

The net result is a positive $30 for your bank account and a greatly reduced breakeven point. All of your shares would be sold at $7.50 or above, since the two written call options would be called away. However, any more upwards before that would raise the price of both options - along with your underlying stock - to help offset your losses. The success of this strategy obviously depends on your initial purchase price.

Boost Your RAME Returns

RAM Energy Resources (RAME) may be on the wrong side of recent energy trades, but that could mean opportunity for options investors. The 5 August ‘08 calls are trading at around $0.40 with the underlying stock trading at $4.98, which means a covered call can be established for a profitable 8.03% profit as of yesterday’s close. However, LEAPS investors know that an even better return can be realized through the use of a diagonal spread.

Establishing a diagonal spread involves purchasing one in the money LEAPS contract while simultaneously writing a short term call option. The key to a profitable diagonal spread is making sure that the call option is never exercised, while also ensuring that the underlying stock does not decline too much. Based on RAME’s recent trading activity, this may be a profitable position to establish in order to maximize profits.

RAM Energy’s 2.50 March ‘09 long-term calls are trading at around $2.50, which implies a $5.00 price. Assuming that the investor purchases a single contract, it will cost them $250 to establish the position. Writing the shorter term call will then generate $0.40 at current prices. The result is a 16% return on investment as opposed to an 8% return on investment with the standard covered call. This is also realized in well under one month since it is an August ‘08 call.

If the underlying stock remains at its current price, then the profit from the transaction would be 16% minus transaction costs. However, if the underlying stock rises past the price, then the investor will be forced to exercise the long-term options and deliver on the shares. The result will be higher transaction costs, but also a slight additional gain. The big risk is if the underlying stock declines sending the shares down below the gains of the written option.

Given RAM Energy’s recent trading activity, there is a good chance of a successful trade. Shares have been trading down in recent months, moving from a 52-week high of $6.84 to a low of $4.17. Currently, the stock is back on the way down, trading at $4.80 after a sharp move down today. However, given the sharp move downwards and large number of options interest in the $5 call, there is a good chance that the stock could remain where it is or even recover to above $5.

Options Point to Positive Earnings

Cadence Design Systems Inc. (CDNS) shares continued their rally today after unusual options trading activity earlier this week. The software company saw 9,616 contracts change hands, which is 18x its average daily volume of 529 contracts. Interestingly, this trading comes just a day before the company’s earnings report, set to hit the market at 4:00PM Eastern after today’s market close. The activity suggests a positive earnings anouncement at close.

Shares of Cadence have been trading near their 52-week lows after dropping sharply back on January 30th when it issued Q1 and FY2008 guidance far below analyst estimates. The stock then fell even further after it made a $1.6 billion offer to purchase Mentor Graphics Corporation. The original offer was rejected, but now Mentor Graphics has hired bankers to evaluate the offer. Obviously, the consummation of this transaction would involve taking on significant debt.

Cadence Design Systems develops electronic design automation software and hardware. The company licenses software, sells or leases handware technology, and provides design, methodology and education services throughout the world to help manage and accelerate electronics product development processes. Its range of products and services are used by electronics companies to design and develop integrated circuits and electronics systems.

« Previous Page — Next Page »