Private Education May See Bright Future

Apollo Group [[APOL]], DeVry [[DV]], Career Education [[CECO]] and Corinthian Colleges [[COCO]] have all been strong performers as the deteriorating job market incentivized many to continue their education instead of seek employment. However, this trend is only sustainable if future employment prospects improve. Luckily, this recession may be the perfect storm for private education companies.

The inverse relationship between employment and education is well-documented. A quick look at the unemployment rate charted over the same frame as private education stock prices demonstrates these trends. People tend to seek education at the government’s expense when employment is not available in order to productively occupy their time. However, this is only sustainable if employment recovers.

According to the Bureau of Labor Statistics, unemployment sits at 7.6 percent compared to approximately 4.7 percent during this time last year. The decrease in employment is certainly not a good sign, but historically an unemployment rate of 7.6 percent is not all that devastating. In fact, the 50-year historical unemployment rate is 5.9 percent while the worst in history was 24.9 percent during the Great Depression.

Investors looking to make a long-term play on these companies without putting much capital at risk may want to consider purchasing long-term options called LEAPS. These Long-term Equity AnticiPation Securities offer investors the benefits of stock ownership down the road without the risk of committing a lot of capital at the present moment. This means a higher return on investment, but at the cost of a higher breakeven point and a complete loss if shares drop below the strike price.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to make money with LEAPS!

Burlington Jumps on Buffett Buy

Burlington Northern Santa Fe Corporation [[BNI]] shares moved sharply higher after billionaire investor Warren Buffett’s Berkshire Hathaway purchased 4.3 million shares ahead of earnings. The move represents a vote of confidence on the part of the legendary investor and puts the investor’s total stake at more than 20 percent of the nation’s second largest railroad.

It is no secret that Burlington Northern is cheap with a price-earnings to growth ratio of just 0.81, indicating that the stock is undervalued given its growth rates. The stock also generates strong levered free cash flows of $1.52 billion with relatively low debt, making it a clearly Buffett-worthy investment. Finally, investors are also able to get some downside protection from a 2.5 percent dividend yield.

Investors looking to gain exposure to the upside of Burlington Northern without putting as much capital at risk may want to consider long-term options called LEAPS. Currently, investors can purchase the right to 100 shares anytime during the next 359 days, at $65 per share, for just $1,050 down now. This compares to $6,500 required to buy the underlying stock. The downside is the $75.50 breakeven point.

See “Using LEAPS As a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to profit from LEAPS options.

Forestar Group Options Present Opportunity

Forestar Group, Inc. [[FOR]] shares have recovered over the past month, but the real estate firm’s call options may be the real opportunity for profit. Long-term investors who are bullish on Forestar’s prospects may want to consider establishing a covered call position to squeeze some extra profits out of their investment. However, with earnings coming up, is there a less risky way to profit?

Forestar’s $7.50 February 2009 call options are trading at a premium of $1.35 per contract with shares trading at just $7.80 a piece. This means that investors can purchase 100 shares for $780 and immediately resell the rights to those shares for $135, which will net them a 13.49% return on their investment in just about a month’s time.

The risk is that Forestar could fall after its earnings announcement scheduled for February 4th. The real estate business hasn’t exactly been in the best shape, especially for the single-family residential and mixed-community investments that the firm owns. So, is there another way to capitalize on these high options premiums without all the risk?

Long-term options called LEAPS can be used as a substitute for the underlying stock in a covered call. Instead of purchasing 100 shares of Forestar for $780, investors can purchase the rights to 100 shares over the next 218 days at $5.00 for only $450 down. This means that investors can invest just $450, sell the rights for $135, and realize a 30% return on investment.

The risk in this strategy is that Forestar shares fall sharply lower. While there is 30% downside protection by the premium sold, the option’s market is more illiquid and it may be difficult to sell. That’s why it is recommended that investors using this strategy are long-term investors looking to own the stock regardless of where the price goes in the short term.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to profit from LEAPS.

Overstock Options Present Opportunity

Overstock.com, Inc. [[OSTK]] shares are almost as cheap as its products after continuing their drop today. Retail sales data came in lower for a sixth straight month as consumers continued to tighten their spending. However, there is one deal at Overstock that investors may be overlooking – the premiums on their call options. As a result, covered call investors may be able to benefit handsomely.

The $10 February 2009 call options are trading with a premium of $1.35 per contract despite a stock price of just $9.89 per share. This means that investors can purchase 100 shares of stock for $989 and immediately sell the rights to acquire that stock at $10 for $135 – a 13.65% return on investment in just about a month. However, there’s another way investors can profit using long-term options.

Investors worried about Overstock’s future may not want to commit that much capital to a position. Instead, they may want to consider using long-term options called LEAPS as a stock substitute in a covered call write. Currently, the $5 January 2010 LEAPS calls are trading at an ask price of $6.20 per contract. Using this as a substitute would reduce the capital by about a third while jumping the ROI.

The resulting diagonal spread – that is, a covered call with LEAPS – would cost $620 to establish and provide a return on investment of 21.77%. The downside is that investors may be faced stuck holding the options if the price declines or sell at nearly breakeven, since the bid price of $5.10 plus the $1.35 gained barely offsets the $6.20 purchase price (not including commissions).

See “A Better Covered Call Alternative” for more information on this strategy or see our Tools & Products section for more ways to make money using LEAPS.

Place a Prudent Bet on ProLogis’ Future

ProLogis [[PLD]] has nearly tripled from its 52-week lows, but many investors remain cautious ahead of its earnings announcement. The self-managed real estate investment trust operates a network of industrial distribution properties that has remained profitable despite a turbulent real estate market. Continued access to financing has kept its deal flow alive while its operating income remains strong. So, is now the time to invest in this REIT or is there trouble looming ahead?

ProLogis’ problems began when the REIT cut its funds from operations (FFO) guidance for 2008 and 2009 last October. Standard & Poor’s reacted by cutting the firm’s credit rating to BBB- with a negative outlook, which is one of the lowest levels before so-called “junk” status. The ratings agency, along with many analysts, reasoned that lower cash flows were bad news with a $9 billion mountain of debt. If the company couldn’t afford its debt service, the results could be disastrous.

ProLogis was quick to react by announcing a plan that included re-financing or re-negotiating debt maturities on its balance sheet and in its property funds, halting new development starts, shrinking the development pipeline, de-levering the balance sheet, and retaining capital through G&A cuts and a reduction of the dividend. These actions were implemented to improve the REIT’s balance sheet and reduce the risk of failure going forward.

These plans ended up doing the trick for ProLogis and shares quickly tripled to their current levels. However, many investors remain cautious as mere plans do not guarantee results. The company still has a large amount of debt on its balance sheet and, while the real estate market shows some promise of turning around, there is still a lot of work to be done. So, how can investors get involved with this stock without putting a lot of capital at risk?

Long-term options called LEAPS are one way to gain exposure to a stock’s upside without committing a lot of capital. Currently, ProLogis has $5 January 2010 LEAPS calls available for an asking price of $8.60 per contract. This means that investors can purchase the rights to 100 shares of ProLogis anytime during the next 367 days for just $860 down right now. The breakeven point on the position is therefore $13.60 per share, which is a small premium from the current share price.

Investors looking to make an additional extra buck may be interested in a covered call opportunity. The $12.50 February 2009 call options are trading with a premium of $2.00 per contract. This means that LEAPS investors can purchase their long-term options for $860 and immediately resell the rights for $200 to realize a 23.2% return on investment in just about a month. If the stock goes down, you still own the rights and if the stock goes up you can sell for a profit!

See “A Better Covered Call Alternative” or “Using LEAPS as a Stock Substitute” for more information on this strategy or checkout our Tools & Products for more ways you can profit from using LEAPS.

Invest in Kraft Prudently with LEAPS

Kraft Foods Inc. [[KFT]] has strong fundamentals, excellent leadership, impressive stockholders and one of the best brand portfolios in the world. Despite these facts, the stock continues to trade near its 52-week lows as investors continue to sell regardless of intrinsic value. So, how can long-term investors build a strong position without losing out on any upside?

The first thing investors should look for is value with a catalyst. Kraft shares are trading lower despite a strong, recession-resistant brand portfolio and a healthy balance sheet. Meanwhile, lower commodity prices and an increasing move towards cooking at home could provide the catalyst needed to help boost earnings and the stock’s price. So, how can investors take a position without much capital?

Long-term options called LEAPS may be a prudent way for long-term investors to get involved in Kraft. Currently, the $25 January 2011 LEAPS calls are trading for $5.24 per contract with some 482 contracts open. This means that investors can purchase the rights to 100 shares anytime between now and January 21, 2011 for just $524 right now. The breakeven point would then be $30.24 per share.

The downside is that long-term options do not offer the strong dividend yield seen right now. However, LEAPS investors can treat their long-term options as a stock substitute and write shorter term call options against the position to collect premiums in a covered call. The risk is that they will be forced to sell earlier than expected, but it does provide some income in addition to capital gains.

See “Using LEAPS as a Stock Substitute” and “A Better Covered Call Alternative” for a more in-depth look at these strategies as well as our Tools & Products section for more ways to profit using LEAPS.

How to Recoup Rambus Losses Using LEAPS

Rambus Inc. [[RMBS]] shares plummeted today after the technology firm received an unfavorable ruling in a case against Micron Technology (MU). U.S. District Judge Sue Robinson ruled that 12 of Rambus’ patents are now unenforceable against Micron after a lengthy battle. The technology firm is no stranger to such patent lawsuits as it licenses its technology to companies for royalty fees. So, what does this ruling mean and how can investors recover their losses?

Rambus is well known among chip manufacturers for engaging in court battles over its intellectual property and its stock price tends to rise and fall on the ruling of these cases. For example, shares soared two months ago after the firm received a positive pre-trial ruling in California against Hynix Semiconductor, Samsung Electronics, Nanya Technology and Micron, who allegedly infringed upon certain aspects of Rambus’ patents. Shares may have fallen as a result of today’s ruling, but if history is any guide, the stock may recover on future litigation on the bullish side of things.

Investors confident in an eventual recovery in Rambus shares may want to consider instituting a stock repair strategy using long-term options called LEAPS. The strategy involves building an options position around an existing stock position in order to lower the breakeven point without committing any additional capital. This is done by purchasing one long call while simultaneously writing two calls for every 100 shares owned. The premiums collected then offset the cost of the call while the 100 shares covers the second written call and the long call’s upside decreases the breakeven point.

See “Recouping Losses with the Repair Strategy” for more information on how to implement this strategy and check out our Tools & Products for more ways to profit from LEAPS.

Dollar Retailers Stand Strong Despite Economy

Family Dollar Stores [[FDO]], Dollar Tree [[DLTR]], 99 Cents Only Stores [[NDN]] and other dollar retailers may be the last growing segment in retail. Family Dollar announced higher-than-expected earnings and boosted its outlook as more budget-conscious consumers flocked to the cheapest retailers in the market. Meanwhile, even discount retailers like Wal-Mart Stores [[WMT]] and Target Corporation [[TGT]] reported slower growth as the economy continues to take a turn for the worst.

Family Dollar reported first quarter profits that rose $59.3 million, or 42 cents per share, up 13.5% from the same quarter a year earlier. The dollar retailer also predicted that same-store sales would increase 3% to 5% with earnings per share between 48 cents and 52 cents during the second quarter. These numbers compare to Wal-Mart, which today announced cuts to its fourth-quarter earnings forecast while warning that its January sales may end up flat.

So, are the dollar retailers a buy at these levels? One of the best measures of value is the PEG ratio, which compares the price-earnings multiple to growth numbers. Family Dollar and 99 Cents Only Stores are currently trading with PEGs of around 1.40, which is in line with Wal-Mart but higher than the industry. Dollar Tree’s PEG ratio is a little more reasonable at 1.19.

Investors looking to take advantage of these values and outlooks may want to consider purchasing long-term options called LEAPS instead of stock. These options give investors the right, but not obligation, to purchase the stocks at a set price anytime over the next one or two years at a fraction of the cost. See “Using LEAPS as a Stock Substitute” for more information on this strategy.

DKS Options Present Opportunity

Dick’s Sporting Goods, Inc. [[DKS]] beat out the competition last year and many analysts expect the winning season to continue. The sporting goods retailer has certainly felt the pains of slower consumer spending, but quickly took action to scale back 2009 store opening plans and cut costs. As a result, Dick’s Sporting Goods remains one of the best positioned sporting goods retailers in the market.

Last quarter, Dick’s Sporting Goods reported Q3 results that were in-line with analyst estimates while the retailer remains adequately capitalized. Inventories came in at 4.4% less per square foot than in 2007, which is good news when sales are expected to slow. The company expects Q4 earnings of $0.47 to $0.54 with comparable sales stores expected to drop 10% to 6% for the quarter.

Investors looking to establish a position in Dick’s Sporting Goods for the long-term have a unique opportunity to offset any near-term losses. The $15 January 2009 call options on the stock are currently trading at $0.90 per contract. This means that investors can make $90 by writing calls for every 100 shares they own. Since shares are trading at around $15 now, this represents a 5.8% return.

This return can be further boosted by using long-term options called LEAPS as a substitute for common stock when writing the call options. Currently, the $10 January 2010 LEAPS calls are trading for just $7.30 per contract. This means that investors can purchase the rights to 100 shares for $730 and write a $90 shorter-term call option to realize a return of 12.3% in just ten days!

Of course, the risk with both of these strategies is that Dick’s Sporting Goods may announce some negative news that will send shares down. So, investors executing this strategy should be willing to hold the stock long-term if necessary. In the end, this is a quick way to make some money while getting involved with DKS stock at these cheap levels.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to make money in today’s market.

Are Fertilizer Companies Set to Rebound?

Potash Corp. of Saskatchewan [[POT]], The Mosaic Company [[MOS]], Agrium Inc. [[AGU]] and other fertilizer producers may be sitting near their 52-week lows, but many experts insist that demand for fertilizers will rise when the credit markets are expected to improve over the next year. So, what’s the best way for investors to play these stocks going forward?

The unprecedented reduction in fertilizer use by farmers on a global basis comes largely as a result of the lack of credit. Many farmers are unable to obtain the credit needed to purchase fertilizer while others are holding out until the last second for fire-sale prices. Meanwhile, international demand has dried up thanks to a perfect storm of events – a drought in Argentina and the freezing of credit markets in Brazil and Russia.

The result had been disastrous for fertilizer companies in the fourth quarter of 2008. Nitrogen sales fell 20 percent while potash and phosphate sales declined nearly 50 percent. However, the three companies insist that the trend is demand deferral rather than demand destruction – that is, the sales will come back strong when the markets improve. The only demand destruction was seen in corn, which fell due to lower oil prices.

Many experts agree that nitrogen prices may have hit their lows as demand for the farmer’s choice fertilizer is expected to rise ahead of the growing season. Meanwhile, potash prices actually moved to a record high of $872.50 per ton at the Port of Vancouver for overseas sales. Regardless, the stocks themselves seem to correlate with corn and oil demand rather than their financial results. As a result, investors may have to wait for a recovery in these commodities before the stock soars.

One way for investors to buy into these stocks now at a fraction of the cost is through buying long-term options called LEAPS. These options provide investors with all the upside of the underlying stock at a fraction of the upfront cost. The result is a leveraged position – lower cost for the same gains – with less money at stake to lose in the event of further price erosion. The trade-off is that, if the price drops below the strike price, investors could lose their entire investment.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our new e-book, Trend Trading on Steroids, for our preferred strategy using LEAPS to profit off long-term trends.

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