Ebay Now! and Selling the Straddle

I love a good channel trade - Ebay has bounced between $50 and $58 for a few months now and the wealth of data in this chart makes trading decisions easy.




















Pick up a few shares here in the low $50s and look for a flip when you have 10% or approach the blue line

Pull the reverse and short in the high $50s and cover when you have your 10%

Stops should be placed at range extremes .... any points poking out past the blue lines are viable "Alamo" points

Options - Sell the Straddle

Options can be used as an extension of channel trading  - if you consider the stock a buy in the low 50s (bottom of channel) and a sell in the high 50s (top of channel), try selling the following straddle.

• Write January 2014 Puts at $52.50 strike for $4.25
• Write January 2014 Calls at $57.50 strike for $1.88

This brings in $6.13 upfront and leave you with the following risks/obligations

Obligation to buy under $52.50

• If the stock drops under $52.50, you are obligated to buy shares from the put holder
• $52.50 - $6.13 = $46.37 .... we are only hurting if the stock drops under $46.37
• I am OK with this obligation as Ebay is a company I am comfortable owning

Obligation to sell above $57.50

• If the stock trades above $57.5, the call holder will excersize and make you sell shares at $57.5
• $57.50+$6.13 = $63.63 .... we are only hurting if the stock trades above $63.63

If the stock trades between $52.5 and $57.50, you keep the $6.13

If the stock trades between $46.37 and $63.63, you make something

This strategy brings in some nice income upfront - If you like Ebay as much as I do, consider buying shares at the same time the option trade is put on .... this does increase your exposure if the stock drops, but also nets an additional $5.50ish on the upside if the stock continues its dominant upward trend.

So why do I like Ebay?

I will expand on my analysis at a later date.... but for starters

Ebay is a great company for many reasons - strong revenue and profit growth (Revenue growth from $8bil in '09 to $14 last year), healthy business in recessionary environments (garage sale), great management, solid margins .... but what I like the most is their ability to innovate both organically and through acquisition.

Have you heard of Ebay Now!?

Ebay Now is a gut punch to Amazon. Using couriers, a $5 fee, and $25 minimum, shoppers in New York and San Francisco (only two test markets atm) can buy goods from local retailers and have them delivered in under an hour.

Impromptu party? Speakers and keg cups in one hour

Sandals broke walking around Central Park?

Date going well? Barry White CD and condoms (one of the most common uses)

Laptop fried before your big presentation? Boom! Laptop



Is it just a fad like Uber Ice Cream? I doubt it - one day delivery is an inevitability and Ebay's courier system is a smart/flexible counter to Amazon's massive warehouse expansions

$5 is a much smaller fee than I would have anticipated, and even with a $5 tip on top of that is a modest fee for most New York Salaries

Thats it for now!

7/29 - LLEN Update

I first posted about LLEN here

**8/1 $3.00 support has been broken! Great news! Cheaper shares coming. I will check back in around $2.50 (200ma)




LLEN came out with their annual number today ....

On $198mm in revenue, up from $112 the year before, LLEN made $40mm on their bottom line, up from $14mm the year before .....

$40mm NI on a company with a $120mm market cap

These are some HUGE growth figures on a company with no debt ....

How can a stock growing this fast trade at a PE of 3!??

The valuation here is waaay too low, even with falling coal prices ...

Conference call is set for Weds

Conference Call InformationManagement will host a conference call to discuss its 2013 fiscal year financial results at 12:00 p.m. Eastern Daylight Time(9:00 a.m. Pacific Daylight Time) on Wednesday July 31, 2013. Investors may access the call as follows:

The audio call of the meeting will be available via telephone at: 

North America Toll Free: 800-893-5360

MYOS - "The Avengers" of Biotech

At a $15mm market cap, MYOS is a bargain on human capital

Scroll to the bottom for my conclusion

Myostatin Inhibition

Role Call!

Chairman of the Advisory Board, Dr. Sol Barer

• CEO of Celgene
• MYOS has the top two players at Celgene onboard.... for those that dont know, Celgene is one of the largest, most successful public biotech stocks with a current market cap north of $50billion

Chairman of the Board, Dr. Robert Hariri

• CEO of Celgene Therapeutics
• This guy is a legend in the biotech space with an outstanding network, connected to talent, cash, you name it .... if MYOS does anything remotely exciting, you can bet every major player in biotech will know about it because of Bob. Check out his TED talks, he is a very interesting man.

Independent Director, Dr. Peter Diamandis

• Chairman/CEO of X Prize Foundation
• Talk about forward thinkers - Dr. Diamandis has a broad resume, but is best known for sending 4 private citizens to space

Independent Director, Dr. Buzz Aldrin

• Second Man on the Moon
• enough said

Independent Director, Dr. Sapna Srivastava

• Head Biotech Equity Analyst at Goldman Sachs

There are plenty of other names worth mentioning... and I dont want to belittle or discredit the other dozen or so PhD's/MDs/brilliant people involved, but the list above should give a glimpse into just how stacked MYOS is with talent

What do they do?

MYOS currently sells nutriceutical (think GNC supplements) and is pursuing clinical developement of drugs related to myostatin inhibition

Myostatin is a protein in your body that breaks down muscle - it keeps you from looking like Arnold Schwarzenegger. Why? its calorically inefficient to be overly muscular and evolution has responded with Myostatin.... back in our hunter-gatherer/monkey days, calorie conservation was much more important than in today's world of big Macs and buffets .... just in the same way its inefficient and a waste of horsepower to have a Ferrari in New York City, rarely are Arnold sized muscles useful in the natural world. Myostatin trims your Ferrari body back down to an ergonomic Prius.

You know whipets? Those little skinny greyhound dogs? This is what happens when you inhibit myostatin

Do you even lift?

Market/Products

nutriceutical

Right now MYOS sells a nutriceutical (primarily to body builders) called MYO-X 

http://www.amazon.com/Maximum-Human-Performance-Mineral-Supplements/dp/B009MA2YV2/ref=sr_1_1?ie=UTF8&qid=1374785284&sr=8-1&keywords=myox

The products sells for about $100/month and has generally favorable reviews

Company made about $900k last year on sales and is on pace to do $1.1 so far this year ...

Clinical

Here is where the story picks up again - the nutriceuticals provide some cash while the company targets clinical developement... but for what?

Notice the space guys? Astronauts run into health problem upon returning to earth because of muscular atrophy (breakdown of muscles), which removes pressure from cardiovascular systems and bones, resulting in a whole host of issues .... 

These same problems are shared by bed-ridden patients.... from surgeries, comas, broken legs, the list goes on .... not to mention, when you lose muscle mass, you lower your base metabolic rate... aka you burn fewer calories while resting... this results in fat gain and more health problems

Muscular atrophy is a fact of life for the 40+ crowd ... MYOS is big on becoming a regular supplement for all active 40+ adults

The markets here are broad as muscular atrophy ties into a whole host of medical complications.

So far, the company has only run trials demonstrating the efficacy of their MYOX supplement, proving inhibition of myostatin uptake

The talent on the board will have no problem navigating any further FDA trials - success is another matter, but logistically, they will have everything lined up

Financials

really not too much to write about  - the company has a bit over $3mm cash in the bank with no debt and maybe 250k in liabilities

They have about 1mm a year in revenue

Operational loss of about $4mm last year

They will likely have to raise $ again .... i dont see this as a problem given the people on the board

Conclusion

Too much talent for me to ignore - let the nutriceutical aspect slow the burn rate while the company pursues further brand development and clinical developement

Given the people involved, this is a great "lotto" ticket stock for me - I picked up some shares at $.08ish a few months ago and will just let it sit ... come back to it every couple months, but really taking a gamble that in 2-5 years this stock will be valued in dollars

Watch out for resistance in the mid $.20s... I believe its around $.25 where they did their last raise, meaning there is an overhang of PIPE investors at that price ....

Shouldnt be a problem scooping up shares in the low-mid teens, but if you find the story compelling, scoop a couple up now!

TWO - Up/Down or Sideways, this Divi/Options Play will Make you $$$$

The Strategy Explained

TL;DR (too long; didnt read)

• Looking at stocks with high yield (big dividends 10%+)
• Yields are large enough to pay for insurance (put premium)
• Leaves a guaranteed neutral or positive return (no downside)

Option values change rapidly and these scenarios are outdated the minute I post them ... but good news! I can always find more. If you have an interest in this strategy, feel free to
give me a ring at 206-390-0375

Conclusion First:

7/23/13
TWO:$10.12

Buying TWO shares alongside the Jan 2014 $12 put will yield a risk free* minimum $.50 (about 4% in 6 months. Eat your heart out, treasuries!) with additional upside above $12 on capital appreciation. (ex stock goes to $13, you get another $1)

Bonus points (+$.35) if you write the Jan 2014 $12 call on top of it all

*see divi assumptions on bottom

Steps:

Buy TWO for $10.12/share

Buy Jan 2014 $12.00 Put for $2.00 (ask)

• $12.00 put locks in $1.88 in cap gains (paid $10.12, can sell for $12)
• ie this put has $1.88 in intrinsic value
• Time cost = premium ($2.00)- intrinsic($1.88)
• $.12 = time cost

Collect Dividends = $.62

• Sept estimated $.31 (estimated from 3 years of consistent divi payments ranging from .$.24 to $.40 and excluding special divi of $.50 )
• Dec estimated $.31
• http://www.nasdaq.com/symbol/two/dividend-history

Scenarios:

$.62 dividend income - $.12 time cost of put = $.50 of income

Profit = $.50 + (Anything above $12)

Worst Worst Case: Company doesnt pay dividends or income pass through is less than expected (this is a REIT FYI) - if this happens, the stock will drop. Excersize your put, sell for $12 and pour one out for the $.12 (1%) you lost

Worst Case: $.50 profit .....Stock drops to $1 ... excersize put, sell for $12, collect dividends

Best Case: $.50 profit + upside above $12 .... stock at $14 = $2.50 profit

Assumptions & Considerations:

Dividends are not guaranteed... I am assuming the trend of the last two quarters will continue, which puts payouts in the middle of 3 year divi range

TWO is  REIT and must, by law, pass through 90% of income... there is a chance divi payments could be less, but will almost certainly be something north of $0 .... all we need is $.12 for a netural/neutral/upside scenario

I have ignored tax implications .... this would be short term on cap appreciation, short term on put, income tax on divis ..... speak with your accountant

Ignores commissions .... Im assuming this strategy is either for hedgies with prime brokers, retail investors with discount brokers (Round trip on all under $50) or managed accounts

Special thanks to Jessica Garcia! She was of tremendous help in building the excel models to screen these options.

Divi/Put combos on High Yield, Low Beta positions

What happens when we use the dividends from high yield stocks to pay for the cost of put protection?

 .... essentially turning an income stock into a capital appreciation play with limited or zero downside.

The Basics:

1. Buy the stock
2. Insure the position w/ put
3. Collect divis (to pay for put)
4. Optional - write covered call for additional income
5. Wait

What could happen?

• Stock Drops: Exercise put - no harm, no foul, no profit** (opportunity cost)
• Stock Stays Flat: no harm, no foul, no profit** (opportunity cost)
• Stock Goes Up: Put Expires - profit all upside through covered call strike if applicable
• Company stops paying dividends (you are now out the cost of the put)

Fishing Pool:

• Low beta stocks should have cheaper put premiums (lower volatility = lower insurance)
• High Yields (North of 10%)

Only one scenario here (stock rises) will create a profitable situation for the trader .... however, any and all other scenarios (assuming company pays dividends as anticipated) have zero downside and cost only opportunity. One could margin upon these positions into treasuries or low risk asset classes to make up for the opportunity cost.

**I spoke a little too soon - the example below shows a scenario where the anticipated dividends exceed the put premium .... this creates a guaranteed profit (unless company stops paying divis)

Part 2: Guaranteed positive return on NLY

LLEN - Monster Cash Flow in an Abandoned Industry

NASDAQ:LLEN - LL Energy Inc.

Disclosures: As of 7/22, I do not have a position in LLEN. The information below builds a framework around a 1-3 year investment. As I have just left my job, any position I would take in LLEN would likely be a shorter term (weeks) trade. If you would like to know more about what im looking for in the short term, call me! 206-390-0375 


Q: If I offered to sell you a business for $20, with no debt, which makes $10/year in profit on contracted revenue, would you buy it? Would you pay more than $20? How much more?

Ive been pulling $ out of this stock for over a year with fast trades, but I think a longer term outlook (few years) could yield a triple or more

**7/29 earnings update

LLEN is a $100mm-ish coal company that has made my clients a LOT of money over the past 18 months  - This was my favorite pattern trading stock on technicals (look at 1.80 - 2.20 oscilation last year), but a breakout last May (scored me a double +) tells me fundamentals are starting to come into play

Business in a Nutshell:
Operates coal mines as well as washing/coking facilities in China along with wholesale and distribution networks. They are domiciled in Seattle, WA




The Good

• NO DEBT
• This is highly unusual for a coal miner - this is a capital intensive business (big expensive machines) and most companies in the space employ a high degree of leverage. This create much stronger cash flow with no interest payments to make.
• Strong Growth
• Revenue in the past 5 quarters has trippled from $20 to $60mm/qtr


• 2009 Revenue: $41mm →→→→ $143 in 2012 
• Margins
• LLEN had net income of $15mm last quarter on revenue of $60mm - 25% profit margins in coal... wowsa
• Cash Flow
• Part of LL's high margins come from their debt-free balance sheet and non-existent interest payments ..... Net income and EBITDA are important figures, but cash flow trumps all .... add back in depreciation from all their fancy machines ($5mm last quarter) and operating $ just went from $15mm net income to $20mm in cash flow ... keeps looking better and better!
• Contracts/Growth Plans
• From a PR on May 15th 2013
• "THE SPARK: The Seattle company said it will supply the coal to a power plant in Guangixi. L&L said it signed a contract in October that called for it to supply 360,000 tons of coal over a 10-month period. Those shipments started in January. On Wednesday, a deal was signed to expand the supply to a million tons over a year. "
• "THE BIG PICTURE: The company said it produced 675,000 tons over the last four fiscal quarters. In November it acquired two mines that are expected to produce 750,000 tons of coal per year. The purchase of the Luozhou and Lashu mines dramatically boosted its production, revenue and profits in the fiscal third quarter, which ended in January."
• China's consolidating Coal Industry
• China is making a big push to consolidate its highly fragmented coal industry in an effort to curtail pollution and improve safety records in the thousands of older coal mines.
• Consolidation and pressure for M&A creates both opportunities for LLEN to expand through acquisition as well as possibility for a buyout of LLEN's assets
• Give a google! Interesting reads
• http://www.worldsecuritynetwork.com/no_topic/MacDonald-Scott-B/China%E2%80%99s-Coal-Consolidating-Black-Gold

The Bad

• No Bad in my opinion, but some ugly

The Ugly

• This is still a coal company - Coal is getting crushed by cheap nat gas/regulatory pressures. Fortunately, coal is still booming in china, LLENs sole market.
• CHINA. This is one of the only Chinese companies I touch - they are actually domiciled out of my hometown, Seattle, but 100% of operations exist in China. I have a hard time trusting any numbers out of China, especially after the accounting scandals with the Big 4 last year, but sometimes you gotta take a gamble. 
• I am planning to meet with management when I go home to Seattle in August. Always a positive sign when your calls are consistently answered on the first ring - LLENs sfaff has been friendly and helpful.

I hope this summarizes the basics of LLEN - can always delve deeper, but time to answer the real question

..... so What's it Worth?!

IF LLEN can show a few more quarters of comparable performance, and execute expansion plans to combat margin pressures (primarily from declining coal prices), I can justify a price target of $30/share. Until coal/china sentiment improves, $30 is off the table, but $10 and a tripple on your $$ is not .... Here is why:

Last quarter, LLEN made $.42/share .... annualized that figure to $1.68/year and then back it off to $1.00 to be conservative ...... assuming LLEN will continue on its current path, I believe LLEN can make $1.00/year in profit.

All $1.00 goes to equity as there is no debt in the company .... LLEN has consistent double digit growth and should trade at a PE multiple equal to its growth rate (50%+) .... im going with 20 ..... $1.00 in earnings X 20 PE = $20 target

Now a PE Of 20 is overly optimistic for todays coal industry(although very conservative for LLEN's growth) .... but perceptions do change alongside valuations ....

This is purely based on earnings and completely ignores book value/tangible assets and a ripe M&A/takeover environment fueled by China's consolidation demands....

I like my valuations to be conservative, so lets lop that valuation by 1/2 and say $10 .... just $10! .... ignoring book value and now assuming a meager PE of 10 ish on a company with double digit growth ....

$10 is a triple from today's price

Thats all for now!

If you have any questions at all, please feel free to call:

Cheers,

Max

206-390-0375

Free Lunch on Star Bulk Carriers Corp (SBLK)

Star Bulk Arbitrage on May Rights Offering
aka Free money from a poorly masked corporate takeover

Background
A few weeks back a client of mine brought me a problem involving an equity rights offering by a Greek shipping company called Starbulk.

Below is a writeup I put together for Starbulk shareholders explaining the recent rights offering and how to capitalize upon it.

If any of my readers come across a situation that sounds even remotely close, please email or call me at 206-390-0375 and I would be happy to dissect the problem.

~Max

Star Bulk Carriers Corp (SBLK), a Greek shipping company, recently announced an equity rights offering backstopped by Oak Tree allowing for the purchase of an additional 2.59 shares at $5.35 for every existing share. Although the offering appears egregious dilutive, it has provided a unique arbitrage opportunity for anyone who owned shares as of last Friday, May 10th.

With the shares outstanding set to nearly triple at price below the market, what caused last week’s runup from $6 to $7 ¾?  

A few facts:

• The offering is set to raise $75mm and is backstopped by Oak Tree in California
• All shareholder as of May 15th (Friday the 10th and T+3 to settle) will have the rights to purchase 2.59 shares at $5.35/share
• SBLKs IR firm has confirmed the following
• The rights offering is not effective
• Investors will have 20 trading days post-effective to exercise the rights

This is a democratized offering allowing all current shareholders to maintain ownership %.... but I call total BS on that as the one thing not democratized is the dissemination of useful information – all investors, other than Oak Tree and a few others “in the know” are completely flying blind and unlikely to exercise upon those rights…. Allowing those “in the know” to essentially buy the company below the market

With the offering price set at $5.35/share it seems a poor time to own shares at $6.50 ….

The following steps will yield a free lunch:

1. Blow out any holdings in SBLK above $5.35 – you own the rights to over 2.5 shares, which will function like a call option for 20 trading days after the rights offering becomes effective
1. Maybe you are holding on for that nice 15% dividend…. But note per the terms of their ABM Amro bank loan will issue no dividends until 12/31/2014 (see page f-16 on the 6k filed Jan 3rd 2013)
2. Short 2.5 shares for every 1 share held
3. When the offering is effective, subscribe to the offering and jump back in with your guaranteed $5.35 delivery and keep the difference

Shorting today at $6.5 will realize a risk-less profit of $1.15/share 

About the Author

Max Taylor is a 24 year old market analyst from Seattle, Washington. Max has been trading since he was 12 years old and moved to NYC/Wall St last year to chase his dreams. In his short tenure on Wall St, Max has acquired the Series 7/24/63/65/86/87 licenses. He is hungry and ready to work.