We nailed it that ipilimumab has been approved as expected on Mar 26 but I'm more happy for melanoma patients as I know how deadly this disease is and for the past 50 years there has been no new effective drug approved. At least there is some hope now for such patients! Unexpectedly, the FDA even approved the drug beyond what BMS applied for, i.e. a full approval vs a conditional approval for limited late stage patients. Such a positive surprise is always great for the market.
I was in the air on the way back to the US when this news was announced. Of course I didn't know it until I landed late in the evening and I wouldn't have a chance to cash my positions out. If I could act to sell my positions at the peak of BMY prices, I could have pocketed in $5000-$6000 for a 2 weeks trading. I hope you all have acted on it and got some extra cashes. I'd have to work on it next week. If BMY further appreciates, I may get more profits.
You may wonder how much principle I had to put in for this amount of profits. It would be a very large amount of cash if I bought the BMY stock itself, in the range of $50,000. I didn't. To tell you the truth, my principal was close to zero. Yes, right, almost NIL. How could I do that? It would only be possible via options. As I said many times, if options are used appropriately, it can significantly reduce your risk and magnify your profit potential.
I used a synthetic option combo to achieve this goal: low initial principal and large profit margin. Two components involved:
(1) Since I think BMY will appreciate if ipilimumab is approved, I don't think BMY will drop to below $24 in a few weeks. But even if I was wrong and BMY dropped to below $24, I'd be happy to buy the stock at such a low price given BMS is paying 5% dividends and I can also use call option sales to further juice the income and reduce the cost basis over time. So I sold $24 BMY put options expired in Apr. This portion brings me some free money, with which I reduce my cost to buy BMY call options as detailed below.
(2) I then bought BMY $26 call options expired in Apr at the same time. This portion is to bet that the stock will significant appreciate if ipilimumab is approved. Options have the leverage nature. If a stock increases in its price by 10%, its relevant in-the-money call option prices may increase by 50-100%, but you pay much less for options. This is exactly what has happened for my BMY call options. I paid at $0.72 per share and it increased to $1.9 at peak.
When I first set up this combo trade (prior to the Japan earthquake), I still had to pay something as my cost base but just a few hundreds. After the Japan crisis, everything was sold off and BMY was traded at around $25. I took the advantage to add more option positions for the BMS opportunity and it effectively reduced my cost base close to zero. This means I almost paid nothing to set this trade up and the worst scenario for me would be that I had to buy BMY at below $24, for which I would still be happy to do so.
I hope this real life example can increase your interest on options. It is a little bit complicated concept to understand but if you spend some time to study it, I'm sure you will get it straight and master it. It is worth your time and efforts if you really want to be successful in investing. I think you can start with the option basics here.
Sunday, March 27, 2011
Monday, March 21, 2011
Crisis means opportunities
I'm tied up with a business trip in Europe this week and won't have much time to write. But just a quick note regarding a great potential opportunity right now. I like the way CRISIS is expressed in Chinese, which means risks but also opportunities. In the investment world, opportunities are always associated with risks.
What is the most headlined crisis at the moment in the world? No question: earthquake in Japan and the associated nuclear crisis. I already told you about the great opportunity about the nuclear power sector, especially uranium stocks. At the same time, Japan itself is a great opportunity out there. Actually prior to the earthquake, Japanese stocks were already among the cheapest ones in the world. I know the Japanese market has been dead for over 20 years but when stocks are deep in the value, they will generate profits for you. Now, the crisis brought about a huge panic sale of everything and therefore the Japanese stocks have become even more valuable. I think you can call them easy money now given how cheap they are. The easiest way to buy Japanese stocks is via EWJ, a Japanese index fund ETF. I think it would be a great buy around $10. Of course, this is not for short-term trading or speculation but for long-term investment. It is very likely it may be volatile in the near term and may drop further. But in one or two years, we may see triple digit gains if we are patient enough.
What is the most headlined crisis at the moment in the world? No question: earthquake in Japan and the associated nuclear crisis. I already told you about the great opportunity about the nuclear power sector, especially uranium stocks. At the same time, Japan itself is a great opportunity out there. Actually prior to the earthquake, Japanese stocks were already among the cheapest ones in the world. I know the Japanese market has been dead for over 20 years but when stocks are deep in the value, they will generate profits for you. Now, the crisis brought about a huge panic sale of everything and therefore the Japanese stocks have become even more valuable. I think you can call them easy money now given how cheap they are. The easiest way to buy Japanese stocks is via EWJ, a Japanese index fund ETF. I think it would be a great buy around $10. Of course, this is not for short-term trading or speculation but for long-term investment. It is very likely it may be volatile in the near term and may drop further. But in one or two years, we may see triple digit gains if we are patient enough.
Tuesday, March 15, 2011
Is Nuclear Power Dead?
All the eyes around the world are watching Japan, especially regarding its nuclear crisis that is still unfolding. Needless to say, it is a natural disaster which is radiating its impact to all the important markets across the world. After all, it is the worst nuclear accident since the former Soviet Union Cheronbyl disaster in 1986. The price of uranium, the fuel for nuclear power plants, has been driven down over 50% almost overnight. The prices of all the uranium stocks are plummeting accordingly.
While we cannot underestimate the extent of this nuclear crisis, is it really the dead end for the future of the nuclear power? Absolutely not! Simply ask the question: do we have enough electricity? If you have any common sense, the answer is not at all. We need much more electricity than it can be produced. Not only Western countries consume more and more energy, the fast growing economies like China, Brazil and India require more and more electricity as well. In the US, about 20% of electricity is produced by nuclear power plants. What can fill the gap if all the sudden the nuclear power goes away? The world will be in a very dark hole if this happens. I think there is a panic reaction to what is happening in Japan, which is likely an overkill, just like what happened during the BP disaster with the deepwater drilling. Now no one is talking about it and everything returns to normal. Those who dared enough to put some money to work at the peak time of the BP disaster have definitely earned a good profit. Fortunately I was one of them.
So I'm closely watching the development of the Japanese nuclear crisis. As soon as there is any sign of easing of the crisis, I think the uranium market will recover. URA is an ETF which tracks uranium companies. No surprising it has dropped over 20% in the past few days. I already got in at the current price around $15 and will consider to add more if it further goes down. I'm confident this will turn out to be a good opportunity to invest in the long term uptrend for uranium.
While we cannot underestimate the extent of this nuclear crisis, is it really the dead end for the future of the nuclear power? Absolutely not! Simply ask the question: do we have enough electricity? If you have any common sense, the answer is not at all. We need much more electricity than it can be produced. Not only Western countries consume more and more energy, the fast growing economies like China, Brazil and India require more and more electricity as well. In the US, about 20% of electricity is produced by nuclear power plants. What can fill the gap if all the sudden the nuclear power goes away? The world will be in a very dark hole if this happens. I think there is a panic reaction to what is happening in Japan, which is likely an overkill, just like what happened during the BP disaster with the deepwater drilling. Now no one is talking about it and everything returns to normal. Those who dared enough to put some money to work at the peak time of the BP disaster have definitely earned a good profit. Fortunately I was one of them.
So I'm closely watching the development of the Japanese nuclear crisis. As soon as there is any sign of easing of the crisis, I think the uranium market will recover. URA is an ETF which tracks uranium companies. No surprising it has dropped over 20% in the past few days. I already got in at the current price around $15 and will consider to add more if it further goes down. I'm confident this will turn out to be a good opportunity to invest in the long term uptrend for uranium.
Friday, March 11, 2011
Ipilimumab: A Drug You Can Bet On
Bristol-Myers Squibb (BMS) is waiting for an important decision by the FDA and likely this will come by Mar 26, 2011, 2 weeks from now. We all know that BMS is facing a huge revenue gap due to significant patent losses of several billion dollar drugs. A success of an important drug will certainly provide some cushion to the losses. That's why the fate of ipilimumab is so important for BMS. Ipilimumab (Ipi) is a monoclonal antibody discovered by Medrex that was bought up by BMS. The initial indication for ipi waiting for the FDA's decision is advanced melanoma. This is the most deadly cancer, for which there has been no new drug approved in the past 50 years. Ipi may cause really serious side effects, which can be fatal such as GI perfection or serious autoimmune hepatitis etc. However, when a patient is facing a death that is guaranteed to come in about 6-9 months, will he or she really care about such potential side effects and give up the possibility of life-saving chance? Although ipi is not working for everyone, it is really amazing when it works. Per reports, some patients experienced something truly incredible such as disappearance of tumor mass on the skin or a total meltdown of the brain metastases (confirmed by the brain biopsy). I have always had a great faith on ipi and have no doubt that it will be approved some day. I think the day is coming finally. According to the published results, ipi has been shown to be able to prolong the survival of patients with end stage melanoma, which has never been demonstrated for any other drugs. I become more confident due to the fact that the FDA has canceled the scheduled ODAC, an expert advisory committee for oncology drugs when the FDA is unsure about something about a drug. To me this means the FDA is now sure about its approvability of ipilimumab. Can you imagine that the FDA will not approve a drug known to prolong the life of cancer patients?
I think there is a great chance to successfully bet the approval of ipilimumab in about 2 weeks. If approved, I think there will be some material upside of the BMS stock prices (BMY). Although it won't be a 50% jump due to the size of BMS, I think something around 5-10% is still very likely. A profit of this magnitude in 2 weeks is very attractive to me. It would be much more profitable if you can buy its call options. This is what I have done: I'm now owning BMY Apr $26 call options and waiting for the announcement.
I think there is a great chance to successfully bet the approval of ipilimumab in about 2 weeks. If approved, I think there will be some material upside of the BMS stock prices (BMY). Although it won't be a 50% jump due to the size of BMS, I think something around 5-10% is still very likely. A profit of this magnitude in 2 weeks is very attractive to me. It would be much more profitable if you can buy its call options. This is what I have done: I'm now owning BMY Apr $26 call options and waiting for the announcement.
Thursday, March 10, 2011
Good value in this financial supermarket
You probably won't believe what I'm talking about but I really believe there is some good value now in this company and it is the time to consider to get some shares of it. This is the company which used to be called Financial Supermarket since its products and services had and are still having covered almost all aspects in the financial world. It is kind of Walmart in Finance! However, this is probably one of the key factors which brought down the kingdom to the edge of collapse during the financial crisis in 2008. Needless to say, this bank as with almost all other banks got a near-death blow and its share price dived down from nearly $60 at its peak to below $2 when it bottomed in Feb 2009. However, it did survive with the help of the taxpayers' money from the US government as well as its significant restructure and reorganization in the past 2 years. Its share price has improved quite a lot from its nadir but is still struggling at the range of $4 to $5. You probably can guess by now which company I'm talking about. Yes, it is Citi Groups (C).
Don't get me wrong that I'm thinking Citi has fully recovered with no significant problems anymore. Far from it, especially it still has abundant garbage assets on its book and it is still too big in its scope. It would be much better for Citi to downsize itself by either splitting or selling non-key assets and functions so that it can more focus on its core business. Citi is apparently doing or considering to do that. The thing which attracts me most is that the book value of Citi is reported at about $5.5 per share; even better its tangible asset value is at about $4.5 per share. In other words, if Citi is totally liquidated today, Citi worths a cash value of about $4.5 per share even without taking into consideration intangible asset values such as goodwill etc. Therefore at its current share price, Citi is traded at a significant discount against its book value. Whenever a company is traded below its book value, the risk to me is quite limited. Is Citi still at risk of collapse? Absolutely but I think this is just a theoretical risk. Given its size and importance, you know what the US government will do if a huge crisis hits again. It is simply too big to fail according to the Obama and Bernanke's dictionary! Will Citi's share price drops again from the current level? Certainly possible! But I think such drops are likely limited and transient and if the US economy truly recovers, the financial institutions must lead first. I think Citi's share price is likely to increase 50% to 100% from this level in the next 1-2 years. Looks like the market is finally undergoing a correction, which may bring down stock prices for most of the companies. If you believe me about Citi, it is a good time to accumulate shares of Citi when it is still very cheap. Remember, the best time to buy stocks is when there is blood on the street with prevailing panic sentiments. Be Lonely is one of the keys to make money!
Personally I have used a combo of options (selling put and buying call) so that I don't pay anything upfront to hold a right to exercise for its unlimited upside and if the worst case comes with another crisis, I can buy Citi shares as low as $3 per share. Of course, this requires some quite sophisticated understanding of options. Actually simply buying Citi shares at this price is also a very good way to bet on its upside. I suggest to use a 25% stop loss to minimize the overall risk in case it is a wrong bet.
Monday, March 7, 2011
Stocks Worth Considered for DRIPs
As discussed in my previous blog, Dividend Re-Investment is one of most effective ways to generate consistent incomes over time. Does that mean you need to simply look for those companies which pay out high dividend yields, e.g. at 10-20%? Wrong! Generally speaking, those companies that pay a high dividend yield are usually those which are more risky ones; the high dividend yields are generally the result of a significant drop of the underlying stock price, which pushes up the yield significantly. In other words, don't blindly chase after high dividend stocks as you may be sorry to find later that they will either stop paying dividends soon or even go belly up. Of course there are exceptions such as real estate investment trust (REITs), which are required to pay out 90% of their earnings and therefore may involve high but stable dividends. But for long-term DRIPs, I'd avoid REITs unless you really know them very well.
So what companies I'd consider for DRIPs? I want to only include such companies which I know are very safe, will pay me dividends for long long time, and more importantly will increase dividends year after year. The following are the key criteria for such companies:
- Is an industry leader with a huge business moat and sustainable competitive advantage
- In an industry that is timeless or will be around for long time
- Has a huge cash load on the balance sheet to guarantee the safety of dividends
- Has a rock-solid record of consistent dividend growth over years
The following companies meet such criteria and have at least over 10 years of history of annual dividend growth over 10%:
- Johnson and Johnson (JNJ): current dividend yield 3.55%
- McDonald's (MCD): current dividend yield 3.20%
- Walmart (WMT): current dividend yield 2.33%
- Microsoft (MSFT): current dividend yield 2.40%
- Medtronic (MDT): current dividend yield 2.34%
- Chevron (CVX): current dividend yield 2.78%
After you decide what companies to be included in your DRIPs, how to set up the automatic system?
(1) Accumulate the shares of these companies patiently. While these companies are very safe and relatively cheap to buy at the current price in terms of their intrinsic values, I just don't believe the current overall stock market. I think there is a very real risk of a significant correction in the near future. If this happens, it will bring down all the stocks in a short term regardless of their fundamentals. The best way to accumulate shares is to use the dollar-averaging method: buy certain number of shares every several weeks or months till you reach the desired total amount for the stock.
(2) As soon as you buy at least one share of a stock, enroll into the DRIP for that company. I don't know if all the brokerages have the same way for the DRIP enrollment. You may need to do some research first to check about your broker or even call your broker agent to clarify. For my online broker, Etrade, it is very simple: there is a link for DRIP, in which you can specify which stocks you want to be enrolled into the DRIP. After that, you are on your way to receive increasing income over time as long as you keep doing that.
One final note: it is important that you enroll into DRIPs via your broker, not by calling the stock companies. You broker will automatically buy a fraction of shares of the underlying company for the dividend amount each time you receive a dividend. For example, if you have 100 shares of Stock A that is traded at $21 per share and receive $34 dividend, you will get 1.62 shares of stock A and it is free of commission fees. So you will have 101.62 shares in your account. Next time your dividend will be based on 101.62 shares, not 100. Over time, it is a powerful compounding machine, which will generate more and more income for you without your knowing it!
So what companies I'd consider for DRIPs? I want to only include such companies which I know are very safe, will pay me dividends for long long time, and more importantly will increase dividends year after year. The following are the key criteria for such companies:
- Is an industry leader with a huge business moat and sustainable competitive advantage
- In an industry that is timeless or will be around for long time
- Has a huge cash load on the balance sheet to guarantee the safety of dividends
- Has a rock-solid record of consistent dividend growth over years
The following companies meet such criteria and have at least over 10 years of history of annual dividend growth over 10%:
- Johnson and Johnson (JNJ): current dividend yield 3.55%
- McDonald's (MCD): current dividend yield 3.20%
- Walmart (WMT): current dividend yield 2.33%
- Microsoft (MSFT): current dividend yield 2.40%
- Medtronic (MDT): current dividend yield 2.34%
- Chevron (CVX): current dividend yield 2.78%
After you decide what companies to be included in your DRIPs, how to set up the automatic system?
(1) Accumulate the shares of these companies patiently. While these companies are very safe and relatively cheap to buy at the current price in terms of their intrinsic values, I just don't believe the current overall stock market. I think there is a very real risk of a significant correction in the near future. If this happens, it will bring down all the stocks in a short term regardless of their fundamentals. The best way to accumulate shares is to use the dollar-averaging method: buy certain number of shares every several weeks or months till you reach the desired total amount for the stock.
(2) As soon as you buy at least one share of a stock, enroll into the DRIP for that company. I don't know if all the brokerages have the same way for the DRIP enrollment. You may need to do some research first to check about your broker or even call your broker agent to clarify. For my online broker, Etrade, it is very simple: there is a link for DRIP, in which you can specify which stocks you want to be enrolled into the DRIP. After that, you are on your way to receive increasing income over time as long as you keep doing that.
One final note: it is important that you enroll into DRIPs via your broker, not by calling the stock companies. You broker will automatically buy a fraction of shares of the underlying company for the dividend amount each time you receive a dividend. For example, if you have 100 shares of Stock A that is traded at $21 per share and receive $34 dividend, you will get 1.62 shares of stock A and it is free of commission fees. So you will have 101.62 shares in your account. Next time your dividend will be based on 101.62 shares, not 100. Over time, it is a powerful compounding machine, which will generate more and more income for you without your knowing it!
Subscribe to:
Posts (Atom)