Here is the transcript to this week’s Live Q&A Chat. Visit the Trading With Cody Chat room on the Trading With Cody iPhone App, the Trading With Cody Android App or at https://twc.scutify.com/members/. If you have any questions about our service, just email us at firstname.lastname@example.org.
Q. What do you think are the chances of a Sanders or Trump presidency and do we need to be prepared for this in some way?
A. Investors and traders might be scared of any potential for Trump, Hillary or Sanders. Feet to fire, I think Hillary is a shoe-in as the next Prez at this point. My choice for president is maybe Judge Andrew Napolitano. Or I might run myself as a write-in candidate yet again. Regardless, Trump, Hillary, Cruz, Rubio and Kasick will likely all be very friendly in their policies and subsidies for banks and giant global corporations and will essentially have very similar kick-the-can-down-the-road and inflate-asset-bubbles mentality.
Q. Would you buy a tranche of $QCOM here at $52?
Q. $QCOM raised their dividend by 10% in the last few days. It is now paying 53 cents per share on a quarterly basis. At today’s stock price of $52 that equates to a 4..08% NTM yield. This could set a floor in $QCOM‘s stock. 4% seems to be the magic number. Think $CSCO recently. Your thoughts?
A. I think you make a lot of “cents” in all of your comments. That said, I don’t think 4% dividend yield is a magical number that will support the stock without other fundamentals supporting it too.
On $QCOM, I also like the fundamentals here. Do you?
Like I wrote in yesterday’s Latest Positions Round Up: “Everywhere I look I see Qualcomm announcing that they’re going to be providing the next generation smartphone chips for Android smartphones and wearables. The smartcar chip business is also looking very good for Qualcomm over the next couple to five years.” I’ve made $QCOM my 4th largest position over the last month or so.
Q. What are your first, second and third largest positions?
A. You can see the full list of all my positions in order from largest to smallest in the Latest Positions Round Up.
- Subscriber Follow-up: Never realized that your positions were in that order!
- I’ll make sure I clarify that each time from now on when I do the Latest Positions Round Ups.
Q. Cody, I have a question on the strategy of evaluating premiums or cost of buying options. Yesterday, you purchased $6 and $7 puts while $SDRL was trading at about $5.20 or so. Of course, the nearer the money puts are cheaper. So how does one go about comparing the relative “cheapness” of which puts to buy? As a further example, about 5 months back, Lucy indicated she was looking at some $30 calls for $GG dated out to 2018 (this was just board discussion, she made it clear this was not a Cody stock). At the time, the $GG underlying price was like $11 or $12. It seemed to me at the time that buying $30 calls was outlandish, but sure enough, those calls have done extremely well for some of us who followed. But the question is, how does a pro (like you) evaluate whether an option premium is cheap or expensive, so that an amateur (like me) can also begin evaluate this stuff, rather than just following and hoping?
A. I don’t think I’ve ever purchased any call option that was 300-400% out of the money, as you did in the $GG example. When I buy call or put options, I take a look at how high of a premium I’m having to pay for the leverage that comes by using options vs. the risk that they will lose their value before they expire. There are times that certain stocks, such as with maybe $QCOM right now, that the call option premiums are quite low. Other times I might take advantage of a panicky sell-offs in the largest stock market to sneak in and use some options because the premium on call options at those points can be low as traders puke them. As always, options are very risky, so I suggest not trading them at all if you don’t feel comfortable with the potential for the losses that can and sometimes do come with trading options rather than common stock.
- Subscriber Follow-up: Back to the options subject again, and the experience with $GG calls: I’d guess the reason that the large out-of-the-money strike price worked (in that case) was (a) that the timing was so far off; (b) the bids we put in were very low and, importantly, (c) the guess/prognosis was that gold was destined to a recovery at SOME time. My question: gold has stayed over $1,200 for maybe a month or two now — something you were looking for to possibly take new interest. If one assumes, despite occasional pullbacks (like today), that gold will continue its climb (modestly or a lot between now and January 2018), IF you wanted to test the waters with call options on GDXJ, would you recommend, or not, January 2018 calls and — using your “calculating leverage” technique — would you be able to suggest a strike price for 1/18 GDXJ calls (knowing the risks)?
- $GG has billions of dollars of net debt and I’m not interested in investing in any commodities-related stock that’s heavily indebted. Specifically, I wouldn’t want to bet on the gold miners, most of whom have terrible balance sheets which makes me uncomfortable in giving you a long-term bet since I don’t believe it’s good risk/reward on the premise.
Q. Can you give a real-number example of “I take a look at how high of a premium I’m having to pay for the leverage that comes by using options vs. the risk that they will lose their value before they expire”? Perhaps use $SDRL as your example. How you evaluated/chose what to buy regarding those puts.
A. $SDRL is a bad example, because I don’t often buy puts on $5 stocks and/or heavily shorted names like $SDRL is. The reason I bought puts on $SDRL is because I couldn’t locate enough shares to borrow to short to make it worth my while. That said, I barely got filled on any puts and I only have a tiny position in the $SDRL puts now. I paid $2.60 for the July 2016 puts with the $6 strike prices. $SDRL was at about $5.25 or so at the time I started bidding for those puts and so I knew that it would have to fall below $4 per share in the next couple months for those to be profitable. I think $SDRL will be back closer to $1 per share by the time July rolls around. At even $2 per share for $SDRL, the puts would be worth at least $4 ($6 strike – the $2 price of the stock + a little bit of a time premium) and I like those risks vs potential rewards.
Q. What will happen to Twitter?
A. $TWTR will always be a terrific news and celebrity outlet. It’s not going to disappear, but I think they’ve missed their chance to become a huge consumer product. News organizations and new apps like Headlne will figure out ways to make the most of Twitter’s products. A lot can happen and most of it all depends on Jack Dorsey getting the ship righted.
Q. Hi Cody, what’s you take on $VRX? Thanks!
A. I still believe everything I wrote in this piece about $VRX from the Trade Alert I sent out to Trading With Cody subscribers when I first shorted $VRX back in October when the stock was near $170 per share: Thursday morning I was catching up with an old friend of mine who’s presently an executive at a publicly-traded biotech firm who used to run his biotech hedge fund next door to my old tech hedge fund on the 40th floor of the Texaco Building in midtown. When I mentioned my thesis about how there’s about to be a bunch more pressure on pricing from the government, especially after the positive press and poll reactions to the recent headlines like: Sens. Bernie Sanders and Elijah Cummings are investigating sudden hikes in the costs of older medicines and this morning’s headlines that Valeant Pharma (VRX) Receives Federal Subpoenas Related to Drug Pricing, the conversation got interesting. Biotech Andy talked to me about the way the biotech world thinks that the government crack down on pricing will be limited to companies and cases like Turing Pharmaceuticals (Company that hiked drug price 5000% now under antitrust probe) and others that don’t innovate many of their own drugs but roll up other drug and treatment companies, including Valeant Pharmaceuticals. I tend to think pricing for lots of drugs and treatments are about to be scrutinized but in the meantime, I started digging into into Valeant Pharmaceuticals because right now it sure is starting to look to me like it could be another great Revolution Investing short position. Here’s the company’s description from Yahoo Finance: “Valeant Pharmaceuticals International, Inc. develops, manufactures, and markets pharmaceuticals, over-the-counter products, and medical devices worldwide…” The company’s been acquiring drug and treatment products/companies and raising the prices and is now under fire for it. It seems like most of Wall Street thinks the crack down from the government on this trend will come to naught. I think we are just seeing this crack down get started. The company is a roll-up and I’ve seen a lot of roll-ups in the health care field go up 1000% or more only to end up at zero, such as Health South Rehabilitation and Med Partners Mulligan back ten, fifteen years ago. I’m not saying VRX will go to zero, but I do think that the concerns about the company’s aggressive accounting and the fact that roll-ups can use GAAP and non-GAAP are big red flags. Speaking of aggressive accounting, Valeant has long been accused of being very aggressive in their accounting from the shorts in the name, which have been massacred over the last five years as the stock has gone up more than 10-fold. Here’s an article from March 2014 as an example: “In this week’s edition of Grant’s Interest Rate Observer, the newsletter proclaims Valeant Pharmaceuticals a “financialized pharma company” that Grant’s is “confidently bearish” on. Before going into the details of why, the writer offers a hat tip to noted short-seller Jim Chanos for the idea. Chanos is famous for shorting Enron before it collapsed because of fraudulent accounting. Grant is critical of Valeant because he sees it as a serial acquirer that hunts for growth “in the stock market, not the laboratory.” He cites the 2.7% of sales Valeant spends on researching and developing new drugs. By contrast, Johnson & Johnson, Pfizer and Merck spend approximately 13.8% of sales on R&D. This criticism is by no means new. Those who have dared to short Valeant on this acquisition thesis have been badly burned – the stock is up 113% over the past year and 982% over the past 5. But the newsletter raises some interesting points. For example, before Valeant acquired Medicis in 2012 for $2.4B, the company used to recognize revenue when it was actually sold to the doctors – not when it was shipped to distributor (McKesson). Following Valeant’s acquisition, however, Medicis started recognizing revenue as soon as the products went out to McKesson.” I’ve no idea if Grant rode his short in Valeant as the stock doubled from its levels when that article came out and I don’t care really. I do think that estimates for this company could start to come down and that would make the stock look rather expensive with its current $60 billion market cap. $60 billion! Valeant has about a 15 billion dollars in debt vs just a few hundred million dollars in cash on the balance sheet. The stock is trading at 10x this year’s revenue estimates and 11x next year’s earnings estimates of $15, which would be up 40% from this year’s numbers. There’s a lot of expectation for continued price increases and very few analysts if any are modeling in lower prices and margins ahead. I make a lot of mistakes and I’m not going to bet my ranch that biotech and Valeant in particular have topped. But I do think we’ve got a good opportunity to help hedge our broader long growth portfolio with some shorts and puts as the sector could very well be headed for trouble in coming months and years. I’ll continue to dig more on Valeant and its financials and prospects, but I want to go ahead and get started on a new short position in this name here around $167 per share and plan on adding to this short in coming days and weeks.
Q. $VRX is $67.09 right now. Did you short it by buying options or just short it?
A. I wouldn’t rush into $VRX at all right now actually. I might look to short it if it got back above $100 or something, but I have covered more than 90% of the shares I’d shorted and am just leaving a toe hold in there.