Imagine that you were shopping for a nice shirt, or watch, or bicycle and you have been tracking the prices all year (or ten) and the thing finally goes on sale. You drive to the store and while you are in transit, unknown to you, the store manager puts a half price sticker on the item. You would be overjoyed with glee! To buy something at half the price you already thought was a bargain -- that would be amazing!
The fact is that this year the stock market has provided that opportunity. This year for the first time in most of our lives, you were able to do that to a degree that we have not witnessed before and have only read about.
So far this year has turned into the best year I have ever had in the stock market. I am expecting Rod Serling of the Twilight Zone to step out from behind the curtain and tell me it was all a fantasy. As of this moment my portfolio is up 131% YTD, in a year when the S&P is up 8%.
I still keep finding what I think are huge bargains. The title of this story was part of a discussion with one of our editors who encouraged me to share these thoughts, so I will try not to get a big head.
Here is a typical example of a crazy market where fools and fear reigned supreme and where my colleague Jim Cramer encouraged people to exit the market and set aside enough capital for five years. He is so out of touch that he thinks there are people that could possibly have five years of liquidity that is so readily accessible. I know very few and I know plenty of wealthy people.
Back to the market facts. I had been following Wells Fargo (NYSE: WFC) for about 18 months through the financial turmoil and it was trading in a range between $30 to $40 for much of that time. When the stock dropped to $27 a share I bought some establishing a position in the company. I even made it one of my 2009 recommended stock picks.
Well even though I have been advocating entering the stock market since last October, as others were exiting, I did not do so with zero trepidation. As the market headed south into March I felt a little betrayed and was taking my lumps, but still investing, or nibbling, here and there. Finally on that fateful day of March 9, I posted Nostradamus was a punk! Have we reached bottom? because the absolute capitulation happened -- chants that the world is coming to an end.
Wells Fargo was way down and investors were questioning its stability. In the mean time I was buying and made my largest buy at $12.50 a share. Yesterday WFC closed at $24.87 about where it has been trading for the last month. Although I could have bought the shares cheaper still, I am up 100% on the buy and more!
How can I be up even more? That's the result of selling naked put options (selling to open) at $5.00, $7.50, $9.00 and $10 at the same time I bought the $12.50 shares. It seemed to me at the time that the banks that the government maneuvered into acquiring troubled institutions were not going to be allowed to fail and this included Wells. I got paid very high premiums for my courage during this volatile period and was rewarded. All of the puts expired leaving me with more gains than I made in the shares I own, so if I closed out my WFC position there would be somewhere over a 200% gain.
I have been using a similar approach all year. I recently bought Microsoft Corporation (NASDAQ: MSFT) at $23.40 a share. Not a steal, but a fair price for a cash flow machine with $31 billion in the bank and a whole new product cycle to be released, including the long awaited "Windows 7". At the same time I bought these shares I sold to open (naked puts) put options at $24 and $25, taking enough cash to make my average stock price lower than what I bought in for should these options be exercised. If not the cash brings down my average price even more and I have a win-win situation.
The basic theory is rather simple. If you are happy to buy a stock at a given price then why wouldn't you be willing to take cash on the spot to buy it for less later? I have done this numerous times this year, juicing the entire portfolio.
There are plenty of dumb things going on in this market. Today I was able to do naked puts on Ford Motor Company (NYSE: F) $2.50 strikes, January 2011 options, and receive 44 cents, making my break even $2.06 when Ford is currently trading over $8.00. I am getting an 18% premium over the next 16 months, for what appears to be extremely low risk? Who is taking the other side of that bet?
Not to dwell on options which many people cannot trade, here are a few of my picks for the year, which remain the foundation of this portfolio: Anglo American ADR (NYSE: AAUK) up 66%, American Eagle Outfitters (NYSE: AEO) up 60%, and Intuitive Surgical Inc (NASDAQ: ISRG) up 91%, all in a year when the S&P is up 8%. I will be updating the 2009 pick list in great detail after the third quarter closes.
I am trying to maintain some perspective in all this and recognize that the market can change direction abruptly so I have been taking some profits off the table and advised others to do the same.
The following are some stocks I am watching closely now:
- Archer-Daniels-Midland (NYSE: ADM)
- BHP Billiton Ltd ADR (NYSE: BHP)
- Chevron Corp (NYSE: CVX)
- Nucor Corp (NYSE: NUE)
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of AAUK, AEO, ISRG, MSFT, WFC, and options in BHP and NUE.