Cashing in on Obama’s Infrastructure Plan

The stock market rallied on Monday after Barack Obama unveiled his economic stimulus program. The president-elect promised to create the largest public works construction program since the inception of the interstate highway system a half century ago. The plan is designed to create millions of jobs while also providing a boost to the economy and improving the quality of life in the United States.

Obama’s infrastructure news may have sent a chill up the spines of some economists, but many investors are looking forward to the opportunities that will present themselves. Companies dealing with infrastructure may be the next big stocks in 2009 and beyond as this plan unfolds. So, what are some of the key stocks to watch?

A large part of Obama’s plan deals with constructing new roads and highways while building new schools and public structures. All of these projects require a commodity, which means that the prices of many commodities and their miners may rise. These companies include everything from fertilizer companies like Potash (POT) to coal companies like James River Coal Company (JRCC).

Construction companies will be the other large beneficiary of these projects. Companies that manufacture construction and mining equipment, like Caterpillar Inc. (CAT) and Deere & Company (DE), stand to rise sharply as the need for equipment rises. Meanwhile, specialty builders like Vulcan Materials Company (VMC) and Cemex (CX), may also see sharp gains.

So, what’s the best way to play these companies? Many investors are turning to long-term stock options called LEAPS (or long-term equity anticipation securities) to best capitalize on the trends with limited risk. These options give investors the right to purchase shares, often for up to two years, at a fraction of the cost of ownership. The result is increased leverage, lower cost, and the long timeframe desired.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or visit LEAPSInvestor.com for information on LEAPS options.

Treasure amid the Market’s Shipwreck

American factory orders came in higher than expected in July. The dollar saw gains against the euro for its 10th straight session. Crude oil and commodities continued their decline to multi-month lows. It’s not hard to see why some investors are seeing sunny skies ahead.

Time for a Turnaround

Those who are old enough should not be that surprised either – stagflation is not a new phenomenon. The financial media, perpetually predicting a doomsday, has the public obsessively focused on the “housing meltdown”, “credit crisis”, and “soaring commodities”.

Now, I’m not saying that investors should ignore the financial media, because they do have some valid points. Agricultural stocks like Potash Corporation (POT) and Monsanto (MON) have racked up gains while companies like Home Depot (HD) and Target (TGT) have racked up losses.

Investor and consumer sentiment are now at all-time lows – but so are stock prices. American icons like Warren Buffett and Bill Miller may be sitting on heavy losses, but they are digging deep into their wallets to buy more stock. So should you.

After all, it was the best investor of all time that said “be fearful when others are greedy and be greedy when others are fearful.” Now is the time to be greedy…

Finding Treasure among Trash

Profitable, growth-orientated companies trading at steep discounts to their intrinsic value are the underpinnings of a quality stock portfolio. Lucky for you, there are many such opportunities in today’s market.

Retailers like Target (TGT) and Sears (SHLD) have already staged impressive turnarounds, but still trade well below their 52-week highs. Meanwhile, large technology names like eBay (EBAY) and Cisco Systems (CSCO) are also available on the cheap.

Not everything is on sale, however. Some stocks deserve to be cheap. Financials and real estate investment trusts, among others, should probably be avoided until the market paints a clearer picture of where they are headed.

Another one of my favorite Warren Buffett quotes is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Don’t take risks on stocks just because they are cheap – make sure they are well-known, quality companies.

The Best Way to Cash in

Investing in a turnaround is risky, but can pay off handsomely. One way to tilt odds in your favor is to diversify your holdings and use leverage to increase your upside. Unfortunately, diversifying requires a lot of capital and leverage works in two directions.

Luckily, there is a solution. Investors looking to multiple their upside while reducing their downside may want to consider long-term equity anticipation securities (or LEAPS). These long-term options allow investors to focus on a long-term timeframe while realizing the advantages of options.

LEAPS options can give investors the right to purchase shares at a fraction of the cost of purchasing the underlying shares. This means investors have more money to diversify, less money at stake per stock, and more leverage – a win, win, win situation.

Get Airborne with Aeropostale

Aeropostale, Inc. (ARO) shares are up more than 45 percent in 2008 despite a drop in consumer spending and a rise in inflation. The clothing retailer saw its same-store sales rise 13 percent in July and raised its second-quarter profit forecast, citing better than expected sales and gross margins. The performance comes in sharp contrast to competitors like Ambercrombie & Fitch (ANF) that reported falling same-store sales and new pressures on margins, and demonstrates strong brand strength despite the poor economy.

Investors bullish on Aeropostale during the long-term may want to consider LEAPS options. Currently, the 35 January ‘10 LEAPS are trading at a $9.00 premium. The breakeven on any position is therefore $43.71, or 25.9% higher than the current market price, within the next 515 days. Considering the stock has already moved more than 45 percent in 2008 and an economic recovery may be just on the horizon, many experts view these long-term options as a bargain at these levels.A

Aeropostale stock appears reasonably priced in today’s market with a PEG ratio of just 1.04. However, two analysts recently downgraded the stock saying that there may be better better entry points for the stock. The analysts also expressed concerns that year-ago comparisons will soon get more difficult, but noted there is still nothing wrong fundamentally with the company. Essentially, they are betting that there will be a pullback in which to add more shares later.

Investors should also carefully watch Aeropostale’s upcoming second-quarter earnings numbers to be announced on August 21st. Many are expecting the results to come in above last year, but some are concerned that expectations may be too high. The declining economy also has some concerned that the outlook would be lower-than-expected. As a result, prudent investors may want to consider waiting until after the results before purchasing a stake in the retailer.

Visit LEAPSInvestor.com for more information on this LEAPS strategy.

U.S. Coal Future Burns Bright

The future of U.S. coal is burning bright and long-term options may be the best way to capitalize on the trend. Growing demand in China combined with higher comparable valuations abroad will create a catalyst for the U.S. coal industry, according to many experts. The environment may also spark an unprecedented number of domestic and cross-border mergers and acquisitions. Investors looking to take advantage of these trends with leverage and limited risk should consider purchasing LEAPS options.

China is expected to generate the majority of demand for coal over the next decade. The fast-growing developing market economy requires coal to supply 80 percent of its energy needs, which makes it the largest consumer of coal in the world. The country may also be the largest producer of coal, but it may still become a net importer within the next couple of years. The increased demand in China has helped jumpstart global coal prices, which have risen substantially over the past year.

Investors looking for a safe way to play these increases in coal prices may want to consider purchasing the Market Vector Coal ETF (KOL) for a diversified portfolio of companies. The most actively traded calls options are the September 50 calls followed by the October 48 calls. However, the January 35 puts have the largest open interest, indicating that at least some investors remain bearish on coal over the next year despite the bullish news. Notably, this ETF contains international companies as well.

Those investors looking for more direct exposure to U.S. coal plays may want to check out James River Coal Company (JRCC), which is one of the more volatile players in the industry operating out of Kentucky and Indiana. The firm is trading down after reporting wider-than-expected losses thanks to bad weather, higher costs, competition for skilled labor, and detrimental hedging contracts. To make matters worse, the pricing increases of 2008 weren’t yet realized because of the way futures work.

Luckily, these are problems that are either temporary or can be solved. Investors should expect strong pricing through the remainder of 2008 and even stronger pricing throughout 2009. Meanwhile, the pricing of 2009 to 2011 contracts came in at $125, which is higher than expected. Pressured profit margins from struggling coal prices and higher costs are also set to recover thanks to lower oil prices and continuously strengthening demand from China for worldwide coal supplies.

Investors looking for other potential U.S. oil plays should look at how long their contract obligations go out. Those selling more to the spot markets stand to benefit more quickly and directly from higher coal prices. Additionally, those dealing exclusively in the United States may hold greater potential because of the higher coal quality and lower valuation relative to others thanks to the lower value of the U.S. dollar. Long-term options can also help increase leverage and help diversify through multiple companies in the sector via a lower total cost per position.

Readers can learn more about LEAPS options and strategies by visiting LEAPSInvestor.com.

Full Steam Ahead for CSX

CSX Corporation (CSX) is still refusing to seat two of four dissident director nominees as it hopes an appeals court decision will disqualify a block of shares voted by activist hedge fund Children’s Investment Fund. The independent inspector of elections has found that four of five TCI nominees won election during the June 25th annual meeting, but if the appeals court upholds the fact that TCI violated securities laws, it could mean a complete loss for the activist hedge fund.

So, why should investors be watching this situation closely? Activist hedge funds are well known for unlocking value in their target companies. In the case of CSX, TCI believed that it could profit from a potential leveraged buyout of the firm back in December 2006. By January of 2007, TCI had acquired more than 10% of the company and was discussing the plan with investment bankers. By April, TCI knew it was not going to get what it wants passively and began a proxy contest.

A victory in the proxy contest would be great news for shareholders as the hedge fund may seek a leveraged buyout at a substantial premium. However, even if a buyout does not occur, it is likely that the activist fund will take some actions to unlock shareholder value. After all, investors are all concerned about the same thing - making money off of their investment. Unfortunately, investors won’t know the outcome of this proxy fight until September when the courts are expected to make a decision.

Railroads also represent a growing industry. A recent Barron’s article noted that Americans may finally see rail travel as attractive, as sky-high fuel prices continue to push up driving and flying costs. More, railways are carrying more freight with trucks being bogged down with high diesel prices, traffic delays, and other negative influences. The U.S. Chamber of Commerce itself sees an 88% increase in demand over the next quarter of a century.

Warren Buffett has also beefed up his stake in the railroad industry. His Berkshire Hathaway has amassed an 18% equity stake in the Burlington Northern Santa Fe (BNI), which is the second largest publicly traded U.S. railroad company. The billionaire investor also counts many other smaller lines among his holdings. Since Buffett is known for buying on the cheap, many investors see this as a great opportunity to get in at the industry’s bottom.

Investors in any case should be looking for two things: value and a catalyst. Warren Buffett’s interest in the industry is a clear indication to many that there is value in the industry. There is also a lot of fundamental data arising in support of an industry turnaround. Meanwhile, there is no better catalyst for investors than an activist hedge fund when you know they’re on your side. TCI’s involvement in CSX is just the catalyst needed to unlock value - now investors just have to see who wins in court.

Investors should also consider how to best profit from the situation. Since railroads may take awhile to turnaround, something long-term is preferrable. However, short-term volatility in the near future could push prices sharply higher or lower. As a result, LEAPS options may be the best choice for many. These long-term options allow investors to commit less capital to the position but retain the same upside as owning 100 shares (per contract). If things go bad, your losses are limited to the premium paid.

For more information on LEAPS options and additional investment ideas, visit LEAPSInvestor.com.

What are Your Biogen Options?

Biogen Idec’s (BIIB) stock took a dive Friday after the pharmaceutical company notified regulators of two new cases of a potentially deadly brain disease present in miltiple sclerosis patients using its Tysabri drug. The brain disease - known as progressive multifocal leukoencephalopathy (PML) - was already known to regulators after concerns first hit the market in 2005. The Food & Drug Administration decided to allow Tysabri to return to market in 2006 with a warning to potential consumers.

Biogen and its partner Elan said that more than 31,800 patients were taking Tysabri as of the end of June and second quarter sales alone reached a total of $200 million. Some analysts believe that more cases are likely and physicians may reduce the number of patients they start on the drug as they see more cases in the news. However, others are quick to point out how quickly the stock price jumped back after the first concerns were voiced in 2006.

The real question on the minds of investors is whether or not these cases or isolated or not. A growing issue would put pressure on sales and potentially hurt Biogen and Elan. The key factor is going to be what happens when you see patients being treated two and two and a half years out. Unfortunately, there is no data on this length of time, since the drug is still relatively new to the market. If cases rise during this time, that could obviously present problems.

However, other analysts point out that most of the value of Tysabri is already written off at these levels, which means that any positive news could equate to substantial upside. The reduced valuation could also help the rumored-buyout attract more interest from potential suitors. Biogen may represent a kind of acquisition risk, but if there are no problems with patients two years out then there could be a substantial recovery or even buyout at a hefty premium.

Many options traders have taken this into account and positioned themselves. Some 49,304 options traded hands on Friday, which is 10x the average one-month volume of 5,109 contracts, according to Schaeffer’s Research. The options seemed to be split between calls and puts, which suggests either undecided investors or several large straddle trades. The heaviest trading was seen on the 60 January ‘09 calls, which are relatively long-term bets.

Ultimately, these options traders are betting on a substantial move in Biogen over the next 166 days as a result of the uncertainty surrounding Tysabri. Meanwhile, analysts and investors remain divided on the long-term prospects of Biogen given this increased risk over its head - will it recover to reach new highs like the last time concerns mounted? Learn more about using LEAPS options in to take advantage of unusual situations at LEAPSInvestor.com.

A Smarter Way to Play U.S. Steel

U.S. Steel Corporation (X) shares jumped higher today after the company reported second quarter profits that more than doubled while also increasing its dividend in a vote of confidence. The domestic steel company announced net income of $668 million, or $5.56 per share, compared to analyst estimates of only $3.80 per share. U.S. Steel also boosted its earnings forecast for the third quarter, citing a positive pricing environment.

The big question now is whether or not steel prices are sustainable at these levels. Harbor Intelligence analyst Rodrigo Vazquez told SteelGuru.com that he expects sheet prices to soften in the fourth quarter due to continued economic weakness in the U.S. that could further erode end user buying activity and slow demand for steel. The analyst forecasts that the U.S. will show an overall steel demand decline of 3.6% for 2008.

Global steel demand, however, continues to show strong growth because of newly industrialized areas like China, Asia and the Middle East. Those areas alone are expected to consume 35% of the world’s steel for the year with Russia, South America, Saudi Arabia, and South East Asia also predicting growth of 10%. Combined, all of these forces are putting pressure on the supply of steel, which has resulted in the huge price increases we’ve seen in 2007 and so far in 2008.

Investors looking to get in on this action have a few options. Purchasing a block of U.S. Steel at current prices would cost around $16,540, which is much more than many investors feel comfortable spending. Purchasing the stock on margin is another option that would cost around $8,000, but also involve the additional risk of a margin call. A third option - and perhaps the best - is purchasing LEAPS calls as a stock substitute.

The 160 January ‘10 LEAPS are currently trading at around $50 per contract. This means that long-term investors can purchase the right to buy U.S. Steel at $160 anytime between now and January of 2010 for only $5,000. The breakeven on the trade is around $210 per share, which means shares need to move up 27.7% within two years in order to make money. Considering shares have already increased some 30% so far this year (and 13% today), this may not be a far-fetched bet.

LEAPS also offer a lot of additional leverage and protection, since only $5,000 in investment is required. If shares move to $250 per share, the LEAPS investor will have made an 80% return on their investment. This compares to a 51% return on the underlying shares if purchased right now. Meanwhile, if the stock declines, LEAPS investors can only lose the $5,000 they put in, which means underlying shares would lose more if they dropped more than 30% within the same timeframe.

In the end, U.S. Steel LEAPS can be an effective way to play the global demand for steel prices without spending a huge amount of cash and taking on a huge amount of risk. See Using LEAPS as a Stock Substitute for more information on this strategy and LEAPSInvestor for more LEAPS strategies trading ideas.

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.

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.

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