Earnings Play on Research in Motion: The Reverse Iron Condor

Research in Motion reports earnings on Thursday, and we think that there is potential for this stock to move a lot in either direction on the earnings report. The lingering bulls may be on their last leg on this one if they do not see something in this report that inspires them. At the same time, any news of anything bullish at all could send this one flying after its been sold off so hard. Either way, we expect Research in Motion to move a lot post-earnings. Is there any way to take advantage of a stock that may move violently without knowing the direction…yes.

Typically, individuals can use options to maximize gains in times like this. One great way to use options is by doing a reverse iron condor. By buying a bear put spread and buying bull call spread, you can know exactly how much you can lose, have an inexpensive position, and profit on a violent move in either direction. The reverse iron condor only loses on both sides if the stock does not move strongly. If the stock moves to the upside, the bull call spread will increase in value while the bear put spread goes to 0. The reverse happens on a violent move downwards.

We did some research on RIMM to see what types of moves it has made in the past ten years in the December earnings report. The stock has averaged a move of 12.71% from the day prior to earnings to the day after. The largest move was 53%. The smallest move was 1.7%, and the stock had only two years where the move was less than 5%.

So how to set up this trade?

We will look to set it up on Wednesday, and we are not sure exactly where RIMM will be trading on Wednesday. Let's estimate its trading around 16.50.

Step 1: We need to buy a bear put spread. We will buy the 16 put and sell the 15 put. Currently, that is trading at 0.40.

Step 2: We need to buy a bull call spread. We will buy the 17.50 call and sell the 19 call. Currently, that is trading at 0.16.

Now, we can configure our breakeven points by looking at the net debit between the two spreads at 0.56.

We subtract that from our bought put and add it to our bought call to find our breakeven points. That would mean we would breakeven on a downward move to 15.44 or a move to 18.06. That spread would be much closer at 16.50. Even with the spread at where it is, that would be a move of just at 5% to the downside and a move of 9.5% to the upside. When RIMM has gone up, it has never gone up less than 10%. On the way down, twice it moved over 5% out of four times. According to history, this trade should make us money. The best part of the trade is that it is very cheap.

The reverse iron condor is a great way to make money on Research in Motion (RIMM) earnings.

Good Investing,

The Oxen Group

Will Natural Gas Become the Leading Energy Source? A Bullish Outlook on the Industry

Petroleum and coal have for years fueled the United States economy, providing just less than two-thirds of our energy consumption in 2009. Going forward, much talk is made about moving towards clean energy sources, like wind and solar. These are speculative fields that, in my view, are not too practical from a cost perspective.

While wind and solar energy developments remain very much works in progress, I find that the natural gas industry is ready to go. It is anticipated that the known reserves will last us more than a century. In addition to being much more environmentally-friendly than our two leading energy sources in terms of CO2 emissions, natural gas is also in America's best interest as a matter of security. Fracking critics become increasingly questionable as economic dependency on hostile nations grows. 

But yet natural gas provided less than a quarter of 2009 energy consumption. There is tremendous growth potential. As a surveyor of several natural gas sites, I have seen the demand for this energy source from automobile manufacturing plans to the hungry wildcatters setting up sites. In this type of climate, the shift to natural gas provides ideal risk asymmetry. The question then naturally follows, which players of the industry should one invest in?

There were a few companies that I highlighted elsewhere that could outperform their peers. I provide some valuation and competitive analysis in the links below:

Chesapeake Energy (CHK): my financial commentary can be found here;

El Paso (EP): my financial commentary can be found here; and

BP plc (BP): my financial commentary can be found here

Of these three energy companies, I find myself most bullish, by far, on CHK. The natural gas company is diversified in several lucrative plays. It is also more structurally exposed to "striking a fortune" than competitors given its tremendous scale and strong acquisition growth capability. The market currently values the company at around 10x forward earnings, which I find to be a considerable discount to the cumulative intrinsic value of its plays. To the extent that it is well invested in other cheaper sources, Chesapeake is at once a safe investment and a lucrative one, in my opinion.

So, in opening up the discussion, I would like to know what your thoughts are on energy and the industry's undervalued competitors...

QNWWYANSJ5UY

Free Stock Analysis

BlackRock Has Reached Its Bottom, Has Strong Fundamentals

Along with other asset management firms, BlackRock (BLK) has seen a precipitous stock decline since the start of 2010, with its value down by more than one third. The financial corporation now trades at 12x and 10.6x past and forward earnings, respectively, and offers an appealing dividend yield of 3.74%. Despite this attractive valuation, many investors are concerned about BlackRock's beta of 1.56 and macro headwinds. Proportionate client concerns...

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The Natural Gas Boom To Fuel El Paso's Growth

In an earlier article that I published, I wrote about my bullish expectations for the natural gas industry, focusing on Chesapeake Energy (CHK). While I view Chesapeake's immeasurable upside as a manifestation for the industry as a whole, it is important to also note the smaller players that could eventually end up major winners.

El Paso (EP) is an energy company that operates two segments: pipeline and exploration & production. Management recently decided to... 

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Pentair: Undervalued Given Market Expansion and CPT Acquisition
Industrial manufacturer Pentair (PNR) has strong secular emerging market opportunities that will be enhanced by the Clean Process Technologies (CPT) acquisition, in my view, beyond what management was originally expecting. Integration of the buyout has come smoothly and revealed more synergistic value than the earlier-cited $20M and $10M worth of revenue and cost improvements by 2014. Indeed, CPT is presenting considerable cross-selling opportunities for Pentair in the emerging markets...
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Strong Yen Will Not Deter Honda's Growth
Amidst concerns over yen appreciation and macroeconomic stagnation in North America and Europe, many investors are understandably hesitant about Honda Motor (HMC). The automobile manufacturer has seen its stock price decline by more than one quarter for the year and is now trading near its 52 week low. I find myself in agreement with other analysts that the market has been too...
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Southwest-AirTran Merger Will Fuel Long-Term Value Creation
Southwest Airlines (LUV) is trading at a tremendous discount to intrinsic value considering the recent precipitous stock decline. Since Southwest completed its acquisition of AirTran in May 2, 2011, the stock has been down by more than a third. By the close of October 3, 2011, it was trading at its 52-week low of $7.35. What exactly is going on?...
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Best Buy Faces Margin Troubles, Pressing Challenges
The consumer electronics retailer Best Buy (BBY) has seen its stock price decline precipitously due to investor concerns about poor competitive position, macro challenges, and decreased consumer expenditures. Shareholder value is down by more than one third since the start of the year and the stock is trading around its 52- week low, less than half of the 52-week high. With multiples of 7.5 and 6.2 for past and forward earnings, respectively, the company is just slightly undervalued by most analyst estimates. Given the beta of 1.28...
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J.C. Penney is Overvalued In A Challenging Industry
Having brought activist investors Bill Ackman and Steve Roth on the board and elected Apple (AAPL) store genius Ron Johnson as CEO, J.C. Penney (JCP) must now work on tangibly proving its fundaments and creating value. The market has already factored in these catalysts, in my view, and is now waiting to see if the results accord...

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Bears At Family Dollar, Retailer Considers Wrong Alternatives
Discount retailer Family Dollar Stores (FDO) recently named Edward Garden of Trian Partners to the board under the agreement that his fund both withdraw its hostile bid and not acquire more than 9.9% of the outstanding stock without board approval. Trian currently owns 8.29% of the stock, while fellow activist investor Pershing Square owns 9.23%. Bill Ackman believes that the company is...
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Despite Budget Cuts, Lockheed Martin Will Outperform
With mounting fear over budget cuts to the Department of Defense, it has become clear that Lockheed Martin (LMT) and other security providers are destined for higher volatility as the trigger date approaches. While this will make for an obvious case study in political arbitrage, value investing is also relevant given the company's attractive multiples and jaw dropping dividend. The stock is currently trading at...
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Expedia: Undervalued And Well Positioned
With a 21.7% discount to its 52 week high and strong fundamentals, Expedia (EXPE) appears at first to be an attractive value play. The stock trades at 16.5x and 11.6x past and forward earnings, respectively, which is well below top competitor Priceline.com (PCLN). At the same time, the stock only offers a dividend yield of 1.1% and is currently rated by analysts more towards a "hold" than a "buy." I expect that the company...
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Kellogg Company (K)

Cereal-maker Kellogg has created a wide array of popular breakfast foods over the years. Despite their powerful brand, they are still remain behind General Mills and Kraft Foods.

Using a discounted cash flow model with a WACC of 10.4%, I find that the company is currently fairly priced by the market. On a last note: while I believe that its cost cutting measures and favorable margins are attractive, I find that the company is not doing enough to advertise and increase market share.

Google (GOOG): A Potential Modern Tech Empire

While analysts and students in business classes online have otherwise been keeping an eye on Google+, I do not believe that the market has come anywhere close to fully appreciating its value. Having recently acquired Motorola Mobility and Zagat, I see Google strengthening its position as a technology titan when it integrates its features into its social networking.

For clarification: By nature, I view myself more as an aspiring entrepreneur than a stock market investor. Accordingly, my valuation for Google has a special emphasis on "business strategy and direction" than what the typical Wall Street analyst might have. To be frank, valuing synergies in a potential business competition is more of an art than a science and can be susceptible to arbitrariness. At the same time, I do not think it would be fair to value Google without considering the upside it has for its upcoming business combination. With leading positions in the smartphone and search engine, I believe that there is tremendous amount of potential for value creation when Google+ becomes available to the general public.

To inquire about my valuation and forecasts on Google, email me at david.z.gould@gmail.com.

Bullish on Philip Morris International (PM)

Here is a stock that is uniquely positioned to attract the international market. PMI was spun off from the Altria Group in March 2008 to avoid the negative effects of domestic litigation. The decision has thus far proved successful, as the stock has appreciated by more than 38% while the S&P has been down more than 12% over the same time period. Emerging markets exposure, cost savings, dividend increases, and continued share repurchases will complement increases in market share.

Unlocking Value at The New York Times (NYT)

A while back activist investor and legendary hedge fund Harbinger Capital agitated for change at The New York Times. The campaign ultimately failed and Harbinger lost much of its AUM.

I have been conducting some research in NYT and believe that it is undervalued based on its long-term growth in online media. While I am doubtful that an activist will get involved in the stock again, I think that it would end up being a successful campaign if one were ever launched. A few key decisions could go a long way to unlocking shareholder value: cutting costs, spinning off assets, and moving to online media.

McDonald's (MCD): A Growth Stock with Emerging Markets Exposure

With the US economy stagnating, I have been researching multinationals who could sustainably grow abroad like they have domestically. McDonald's meets the mold.

The company offers a 2.83% dividend yield and is not overvalued given its size. It has low volatility, which makes it a safe investment in what could potentially be a double dip. I expect sales to increase roughly by 12.7% in 2011 and 5% more the following year.

What are your thoughts on this growth stock? Email me your thoughts at david.z.gould@gmail.com. It would be interesting to post others thoughts in a subsequent piece.

The Walt Disney Company (DIS): A Powerful Brand with Tremendous International Appeal

Sifting through Disney's SEC filings and analyst reports, I have come to the conclusion that Wall Street has not even begun to appreciate the amount of untapped potential Mickey Mouse has abroad. While management has taken steps in the right direction--via Disneyland Paris, Hong Kong Disneyland Resort, Tokyo Disney, etc.--it is just hard to not "wish upon a star" for more.

If this is a company that you are interested in, please send me an email.

Breakup at McGraw-Hill

Yesterday, McGraw-Hill gave notice that it plans on breaking up into two separate companies. One will be an education business, another will be a markets business. I have done some financial modeling on what these separate companies would look like in order to find out whether shareholder value was created through the activists. I believe that this was the right move for the 123-year old company and that splitting into four companies, re: Jana's requests, is not entirely necessary.

For any interests, do not hesitate to send me an email.

Union Pacific (UNP)

Union Pacific is the leading railroad company in the United States spanning 32K miles. Built up through consolidation, this relic of the Gilded Age is still dominating the market. I am bullish on top-line growth: 16% y-o-y in 2011 and 13% in  2012, according to my model. I also expect the rate of operating expense growth to decline from 11% in 2011 to 9.4% in 2012.

I believe that Union Pacific has a stellar executive management focused on value creation. As the economy picks up, I also expect that railroads will experience tremendous gains--especially those that are prepared to acquire competition.

To inquire about research or ideas, email me at david.z.gould@gmail.com.

Mattel, Inc.

Over the past few days, I have been studying Mattel, maker of Barbie toys. This iconic mid-cap company could be the scene of an activist play in the coming year based on its low price, healthy free cash flow, operating performance, and several other factors. MAT offers high dividend yields above 3.5% and favorable asymmetric risk. From what I have gathered thus far, MAT is a great company at a cheap price. I have estimated revenues to rise around 7% from 2010 to 2011 and around 4% from 2011 to 2012. My research findings may change in the coming time.

If you are interested in receiving a report on Mattel, contact me.

SEC Allows Shareholder Proposals for Proxy Access

While Rule 14a-11, a contentious Dodd-Frank reform granting limited proxy access, was defeated by litigation, its sister--Rule 14a-8--is very much alive. Rule 14a-8 effectively gives shareholders the right to submit a proposal for proxy access to be voted on at company annual meetings. Says SEC Chairman Schapiro,

"Last year, when the Commission adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. Through this procedure, shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis -- rather than a specified standard like that contained in Rule 14a-11.

Although the amendments to Rule 14a-8 were not challenged in the litigation, the Commission voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. The Commission's stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court's decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published."

By giving shareholders the right to vote on proxy access instead of a one-size-fits-all model, this increases "choice" while allowing for efficient reforms in corporate governance.

For reference, The Harvard Law School on Corporate Governance wrote a piece on this.