24 February, 2009

Marvel shines its profitable Iron... Man

Beating street estimates for Marvel Entertainment (MVL) has become the norm, with a 6th straight quarter of analyst trouncing results. Clearly the comic book company's foray into the film business has been successful. The numbers show the tremendous potential of a successful film franchise, and Marvel's expecting a 2nd and 3rd.

Coming in at $0.80/share profit for the quarter, a beat of 8 or 9 cents according to the various Wall Street average estimates, Marvel shined in early trade with shares up about 15%. A stock that was flying in the mid 30s after the successful run at the box office of Iron Man has been resilient but not immune to the economy of late. Marvel had held up better than most stocks over the last several months but with selling pressure mounting market-wide, Investors were fleet of foot here also. Marvel fell below $24 before today's rebound on strong results and re-affirmed guidance.

Perhaps the most telling strong sign of the Marvel story is the re-affirmation of previous guidance. Marvel guided 2009 in a range of the $1.00s to the $1.30s, which a rarity in today's economics is unchanged from previous verbiage. This kind of confidence, considering Street estimates for Marvel's 2009 average around the $1.20 mark, has spurred renewed confidence that the company can and will be a growth story in the years to come.

Revenue for the quarter came in at $224 Million (profits of $63 Million) and closing out the record year were numbers of $676 Million in Revenue with $205Million at the bottom of the Income statement. A big chunk of this was due to Marvel Studios with the Iron Man and Incredible Hulk films that opened in the summer of 2008. Iron Man DVD and Blu-Ray sales, according to Marvel were the biggest drivers of the quarterly revenue spike at the culminating quarter of last year.

Investors see 2009 as a watershed year for Marvel as average estimates of $1.20 are off significantly over the $2.61 Marvel posted for 2008. What the Street does realize however is that Marvel stock can not be a complete P/E story but has to be an Entertainment cyclical story. With no self-financed films on its plate in 2009, Marvel must rely significantly on licensing and publishing revenue. As an aside, the company has declared that it will recognize most of The Incredible Hulk DVD revenue over 2009 as opposed to Iron Man DVD revenue which provided the boost in the December quarter. Marvel will reap licensing revenue from the Wolverine film over at Fox Studios as well as from its own slate of Animated straight to DVD releases and various television projects.

The real story is growth in Marvel as a brand and a business! With earnings of $2.61/share in 2008 with 2 self-financed films, Investors see the upcoming slate of 2 films in 2010 and 2 films in 2011 and begin to get bullish behind this story. With Iron Man 2 scheduled for 2010 and the highly anticipated Avengers combination film in 2011 Marvel has tapped a Revenue stream that it can call upon for the next several years. Marvel Bulls expect both those films to be successful but if either Thor or Captain America catch on as a film franchise, the growth engine will be remarkable. Iron Man, who has captured the imagination of audiences around the Country in his first installment, is poised for bigger, better and global reaches the 2nd time around. With added anticipation for the sequel, expect Marvel to cash in from the Worldwide box office at higher rates, which will significantly add to the company bottom line.

Those in tune with the latest industry news will be quick to point out that Marvel's in the middle of more than a couple potential stumbling blocks. A lawsuit with Stan Lee Media that threatens either a large ownership change of character rights and profits or some kind of settlement, a constant barrage of bad press over acting negotiations for Iron Man 2 and subsequent films, and the seemingly rushed time-lines to get said films completed on time and on par with quality Marvel efforts. In time I think the nay-sayers will be vilified. Marvel should not and can not allow itself to be crippled now by any lawsuit, and negotiations for film roles are an ongoing process and one that should not spill over into public conversation as it has. If anything, Marvel needs to hire more PR people to keep the Entertainment Press in control and in company favour.

Marvel is a $2Billion company, with yearly profits of over $200Million in its first year of producing film. The move into the film business garnered over three quarters of a Billion dollars in Box Office receipts. With four films on the upcoming independently produced slate, plus merchandising, publishing and licensing revenue, the company has a lot of growth ahead of it. It may take until 2010 for Investors to price this in but market cap will catch earnings potential, and economic recovery will only act as an accelerator to Marvel's growth machine.

Disclosure: Author owns MVL

19 February, 2009

Anatomy of a Trade: Selling Calls in a Bear Market

Risk is without a doubt the de-facto component of any investment. There's certainly no free-lunches out here, especially in the Bearish climate traders are finding themselves in. With the majors touching November 2008 lows, the already fragile marketplace finds itself hanging by mere strings from a profound loss of confidence.

Anatomy of a Trade, as this article is titled, is thought of as the first in a series of pieces attempting to give some insight into a Traders mindset, which seems more prevalent now given the climate. A consistently volatile and bearish mood of the marketplace, can often cloud sound reason decision making by forcing a Trader to maneuver more swiftly and determinately than typical.

First, a brief introduction to the concept of selling options. Wikinvest (Link) has a brief primer on the concept of "covered calls", which in laymen speak is the process by which an Investor holding a stock position sells a call option to the marketplace giving another Investor the opportunity to buy said stock position at a pre-determined price on a pre-determined date. Several good and more detailed resources exist on the topic both online and off .

How this trade started! WC Power Tech Fund holds in its portfolio long positions in both Google (GOOG) and Goldman Sachs (GS) and as January was coming to a close, Covered Call Option positions were opened on both securities.

Jan 22: Covered Call Option position sold for Goldman Sachs with a strike price of $85 for February netting a premium of $2.23 per share.
Price for GS: $71

Jan 23: Covered Call Option position sold for Google with a strike price of $350 for February netting a premium of $5.70 per share
Price for GOOG: $324

Selling Covered Calls doesn't exactly tickle anyone's risk bone in the slightest because in the best case the options expire worthless and the seller keeps the premium received and their stock, and in the worst case the seller keeps the option premium but has to also sell the stock at the strike price despite the fact that in the market the stock is trading at a higher value. Either way there's technically no "loss" if an Investor chooses a comfortable Strike Price for their position.

How the Selling Covered Call strategy works against an Investor is the "potential lost profit" on a stock that continues to surge. And this is exactly what happened during a two-week run for both Google and Goldman Sachs stock prices as the Market experienced a Bullish bounce. The value of the sold options went increasingly higher and to buy the options back at market prices would have led to losses of 4 to 5 times the initial premium received.

Within a week the prices of the option positions were as follows:
Google Feb $350: $14.20
Goldman Sachs Feb $85: $8.35

This is where that seductive element of Risk steps through the door. The Naked, or Uncovered Call Option. Staring at unrealized losses on a short position of 400-500%, the Trader has the Option (pun intended) to sell more options. These are different from the original sales as the Investor doesn't currently have the stock to offer if the prices remain this high.

But in a Bear Market, the Anatomy of this trade had 2 main parts: Sell Uncovered options at the same strike prices to drive up the average selling price of the position. The thinking was that Bearish tones will overtake the general markets and bring prices back down prior to expiration of the options. This would present the ideal opportunity to close out this trade, by buying back the uncovered and covered options for less than a now increased average selling price! In simple terms, turn this heavily negative current position into a profitable one. That was the goal.

On paper, its a very risky trade, as the losses are potentially limitless if Markets kept proceeding higher. But by sticking with the prevailing notion that the Markets are Bearish, a small spike in prices presents an opportunity to sell into if not at the peak.

Initially the small spike, wasn't so small at all and both Google and Goldman Sachs kept being bid up and bought ever higher. By February 9th: Google's stock stood just shy of $380 (nearly $60 higher) and Goldman Sachs shares fetched $98 (nearly $30 higher). Nothing short of a complete disaster for a short-term trade.

Option prices on February 9th:
Google Feb $350: around $30
Goldman Sachs Feb $85: around $14

Some simple math based on the first covered call sells shows that the Google position had increased over 5 times! and the Goldman Sachs position had increased over 6 times!.

However with continued Uncovered Option selling mathematically the potential loss didn't look so daunting and the continued collection of premiums had built a cash position for the fund. The risks associated with the accumulation of short call positions in both Google and Goldman Sachs was that as expiration dates loomed ever closer the fund was on the hook for an increasing amount of stock, should there not be a sell-off.

So, what is the thinking at this point. The trade has gone against the Trader, and perhaps the smartest thing isn't to continue selling into the wind. When purchasing stock you're told to buy a position in pieces in an effort to average down if the stock moves the opposite way. Same thing applies to selling short, both stock and options. Whether this practice is smart for uncovered option positions in clearly debatable, it is however absolutely possible. By continuing to sell more Uncovered Call Options the average prices of each position had increased 3 and 4 fold by the infamous February 9th date.

Infamous because that day proved to be the peak for both Goldman Sachs and Google stock. The initial theory was beginning to prove correct, albeit after many days of market-watching worries and frantic paper loss calculations. By using Uncovered Calls the positions had grown but so had average selling prices.

January 23 & February 9th Position Average Selling Prices:
Google Feb $350: $5.70 on Jan 23 --> $17.10 on Feb 9
Goldman Sachs Feb $85: $2.23 on Jan 23 --> $9.10 on Feb 9

Now that initial convictions had been proven correct and the Market began making its way to November 2008 lows the current prices of both Option positions fell dramatically. As expiration approached, the Trade should look to be closed, and with that the Uncovered Call contracts bought back.

With each passing day in the third week of February the markets slipped and along with them, were the share prices of Goldman Sachs and Google, closing Thursday at $86.01 and $342.64 respectively. The WC Power Tech Fund closed all outstanding Google and Goldman Sachs option positions on Thursday. So although the bullish market spike in late Jan/early Feb as a threat proved formidable it was not, in the end, insurmountable.

February 19 Position Buy Back Prices:
Google Feb $350: position bought back for $1.54 --> net percentage gain
(kept 91% of option premiums received based on $17.10 average selling price)

Goldman Sachs Feb $85: position bought back for $2.54 --> net percentage gain
(kept 72% of option premiums received based on $9.10 average selling price)

In a market that hasn't been Investor friendly for a long time, there are Trades that can be very profitable. The Uncovered Call brings with it enormous and limitless risks, which don't translate well to the average Investor. There are easier ways to exploit Bullish Market spikes in a Bearish market, and options are one of the most cost-effective ways to do that. They are also amongst the riskiest. The WC Power Tech Fund uses and has since inception used Covered Call selling as a monthly income generator, to supplement dividends and supplement or offset capital gains and losses that positions incur.

So for all those nail-biting moments earlier in this month with these option positions, the end proved to justify the means, this time, and what was a very risk-intensive trade turned profitable in this inaugural Anatomy of a Trade.

Disclosure: Author owns GOOG, GS

13 February, 2009

Friday Market Notes

With the majors hovering around the flat line for most of the morning trade, the one thing that's easy to determine is the market's general lack of direction. Stimulus news dissemination could be the main culprit, but more than likely its the sparse rash of headlines that paint a directionless picture.

Making waves this morning are further retail struggles at Abercrombie & Fitch (ANF) with a 4th quarter year over year drop of 68% in earnings. Despite the profit fall, the company did meet tempered expectations despite Chairman Mike Jeffries comments about the industry having an end of year that could only be described as "catastrophe". Not giving guidance due to the hazy economics of the day, ANF finds itself well in the green up 11% on the results.

While the talk has been of retail disaster, Microsoft (MSFT) is taking the other approach and jumping into the retail sector. Taking a page or two from Apple's book (AAPL), the company has hired a former Wal-Mart-er to head a retail store operation. No details have yet been given in terms of specifics, but judging from Apple's incredible success with its retail chain, driving customers to purchase an ever growing arsenal of products, Microsoft will undoubtedly try to replicate the experience. A task easier said than done, but one the world's largest software company has to endeavor if only to stem the tide of mind share defectors form its Windows brand.

Well the Car business is still terrible, according to Toyota (TM). Inventory levels continue to be high as sales drop month after month, forcing Toyota to shut production at many of its facilities around the world. This includes plants in America, Canada and Mexico. The cost cutting measures, which also stem some executive pay, are the latest of efforts by a car maker to incite some sustainable increases to profitability. Increases that hopefully result in a spark to lagging share prices as the industry sits in a holding pattern waiting for consumers to reacquire credit and the desire to purchase big ticket items.

Disclosure: Author owns AAPL

10 February, 2009

Reaction to New Financial Bailout Plan and Stimulus Bill Passing bearish

Markets traded in negative waters in early morning trade, but it wasn't until details of Tim Geithner's plan for the remains of the Financial Bailout the things scampered quickly into the bear caves.  The Dow Jones finished lower by nearly 400 points (4.6%) and the S&P and Nasdaq followed with declines of 4.9% and 4.2%, respectively.

The Financial Bailout Plan, the new one of course, since the first $300Billion seems to have been vastly misplaced and mostly wasted, is one riddled with rules and regulations sure to make most on Wall Street unhappy with the prying eyes of Washington.  But maybe that's the point, because just maybe that's what is needed to restore both public and the private sector confidence.

Bank Bailout details have been written about in several news outlets today, including CNN (Link) but the overwhelming theme is better and deeper scrutiny.  In an economy where the public has little to no confidence in the health of their banking system it may be a necessary evil. Banks will undergo tests to determine how capitalized they are before, during and after they receive funds, and the Treasury will take positions in preferred shares of companies receiving these funds.

Certain conditions will have to be met by institutions receiving money, such as the provisions included to make sure Banks work with homeowners on the verge of foreclosure in an effort to keep people in homes by redrafting payment terms and a partnership with the private sector to purchase and cleanse bad assets from the books of infected financial institutions.

Luxury items are a big public sentiment play for the President and his administration.  Clearly the public doesn't want to hear headlines about executives making multi-million bonuses while banks cry for hand-me-down money.  So executive compensation and corporate luxury spending will be scrutinized and have to go through an approval process.

The whole point here it go get banks comfortable to lend again to individuals, small businesses and large corporations, with secondary objectives of keeping people in their homes if possible and restoring public outcry over excessive compensation packages.

Oh and of course the plan will likely cost far more than initially anticipated, with numbers being thrown around of near $1Trillion in provisions, but as President Barack Obama iterated in his press conference yesterday, the cost of doing nothing is that much graver.  Oh and this on the heels of the Senate approving an $830Billion Stimulus bill that will attempt to stem the rate of job losses and put men and women across America back to work on Infrastructure, Energy, Health Care and Technology projects.

The President of the United States has indeed inherited quite an economic mess and only time will tell if opening up the ever-deepening Federal Wallet will be the inflection point the country, and the world for that matter, needs to spark itself out of Recession.

The Markets have had their say today, and so far the sentiment is pessimistic.

06 February, 2009

Markets Rally on Stimulus Package Hopes

200 to the good for the Dow in mid day trading has equities on a continued Bull run as regularly rough unemployment metrics are being used by traders to cash in, in the hopes the dire data will bring the US government around to passing, and passing quickly a massive stimulus package aimed at helping America get off the economic doormat.

The United States, according to latest figures lost 598000 jobs in January, raising unemployment to 7.6%, the highest level in 16 years. Normally, this news would spur further doomsday economic chatter but with the proposed $800Billion plus stimulus bill on the table in American parliament the talk turns to anticipation that lawmakers will act swiftly on resolution.

All the majors in America (Nasdaq, Dow Jones and the S&P) were up around 2% at the time of writing.

03 February, 2009

Citigroup unveils TARP plans, public gets some transparency

Leading the pack of news stories in the category of "Things that should have been public months ago" is today's gem about Citigroup (C) and their official plans for using government funds as part of the TARP bailout. Finally the company is unveiling how it has structured the use of funds it received as part of the Federal Government's Troubled Asset Relief Program - TARP.

In a report out today, Citi outlines how it earmarked for use the $45Billion it received in aid. Taxpayers, and in turn, the press have become more adamant in recent weeks about getting more transparency from the companies receiving TARP funds. President Barack Obama has released statements and given speeches recently on the same subject matter, and has in fact made transparency, regulation and executive pay limitations cornerstones of the next step of TARP and in the ongoing legislative stimulus package that is reportedly approaching $880Billion.

It is certainly high time for this kind of disclosure, with the latest stimulus package the United States government has essentially printed close to $2Trillion in economic aid, as taxpayers have been left scratching their heads. The public has demanded these programs become more transparent and informative, and with media and political pressure now being placed on the companies that receive funds, Citigroup appears the first to play ball.

With Citi stock hovering around the $3.50 range, the company really has no other choice but to do everything in its power to regain some Investor confidence. The selling of assets that it began late last year and early this year, including the brokerage deal with Morgan Stanley (MS), is only the beginning of the end of Citi as a stand-alone banking conglomerate. There are many legitimate fears in the marketplace that Citi's common shareholders will be left holding the bag as assets are sold to cover losses and Government aid comes in the form of more control.

For Citi Investors, the question to ask is whether, for the sake of the United States and the country's new mantra of Hope and Change, can one of the big American financial institutions afford to be seen as dissolving? Citigroup stock has seen support around the $3 range and has been caught in the bullish and bearish short-term trends of the market over the last 3 months. Initial sentiment to the report was positive boosting Citi by nearly 6% at the open to $3.80, however this waned quickly leaving Citi stock down by nearly 2% in early trade.

With this TARP report, Citi hopes to instill confidence to the mass media, that money being given isn't only used to cover bad investment bets. A bank of its size and stature is one of the few institutions that can get the media writing about new loans and new business instead of plummeting housing starts and production capacity. For the sake of a fragile American economy, that should be seen as a positive. According to the plan, Citi has approved $36.5Billion for loans and other related commitments to other businesses. Citi also made a big push into the secondary mortgage market, by taking $27.5Billion of its approved use dollars and buying up mortgages and other troubles mortgage related assets.

The important part here is that Citi is making a valiant effort to boost lending in America, and if similar reports come out from other institutions the public and the press will start to get what they were clamoring for, TARP transparency.

Disclosure: Author owns C