Another Real Estate/Housing/Construction Stock... Really?!

Between Sears and St. Joe you might've thought I had plenty of exposure to real estate/housing/construction and I'd be looking elsewhere for opportunities.  If so, you're probably right about the "plenty of exposure" but you're wrong about the "looking elsewhere," as today I bought 125 Jan 2013 $12.50 call options on Masco (MAS) for $0.45 per contract.  In plain English these LEAPS give me the right to buy 12,500 shares of MAS on or before January 19, 2013 for $12.50 a share. 

So what does Masco do?  Well they've got five segments which I'll list below (it's OK if you cringe a little, I did too):

1. Decorative/architectural products (including Behr paint)
2. Plumbing (including Delta faucets)
3. Cabinets & related products
4. Installation and other services
5. Specialty products

As you may have guessed Masco's operating performance has been horrendous over the last several years.  Revenue has fallen about 40% from the peak, and FCF has fallen from $1.1 B to $225 MM.  So why did I buy today?  Well, it's my belief that these horrible results, dire outlook, etc. are more than priced into the stock.  Further, the company's management has done a great job of cutting costs and right-sizing the business - the fact that they're still FCF positive is actually pretty good. 

My hope is the economy manages to stay out of a deflationary spiral and we see housing rebound in a year or two.  If this is case, Mr. Market's manic depressive mood around Masco should change as well, and the stock could easily climb to the mid-teens.  Looking at my investment checklist (http://mevsemt.blogspot.com/2010/08/investing-checklist.html) this stock meets most of the criteria - insider buying, 52-week low, guru buying, discount to Morningstar & my fair value, high degree of leverage on the options, and asymmetric payoff all fit here (althoug insider and guru buying is a bit light). 

To give you an idea of the upside I'll take a haircut to Morningstar's fair value of $22 and assume the stock gets to either $15 or $17.50 at expiration.  The cost of these LEAPS was $5,656 and if MAS hits $15 they'll be worth $31.3K.  If MAS hits $17.50 they'll be worth $62.5K.  Can you say asymmetric?!

Lastly, on a cautionary note I should stress that this is a very speculative bet.  In the past some of these have really paid off (SD and NRG) and others completely flopped (EXC and so far SHLD).  I have no idea how this one will turn out, but I personally feel the risk-reward is worth it.  Wish me luck!

As always I'm available for questions and appreciate comments.  Email mevsemt@gmail.com.

Out of the Frying Pan?

This week has been absolutely insane!  Typically I'm not a "trader", but the volatility we've had this week has created some interesting opportunities...

Regular readers know Bank of America has been a huge thorn in my side - first I took a loss on the common stock, then I traded it in for TARP warrants only to have things go from bad to worse!  But there's a silver lining; over the last three days BAC-WTA has rebounded about 50% off its lows.  Now this isn't a function of a great earnings release or anything like that, rather it's simply a bi-product of the volatility that's been dominating the market.  

Anyway, as a result I decided to sell my stake in BAC-WTA for two reasons.  First, I'm still underwater on this position so I wanted to lock in a tax loss.  Second, I wanted to use the proceeds to buy AIG TARP warrants (AIG-WT), which are still right around their all-time lows and IMO represent a better value at this time.  Specifically, I sold the 4,000 shares of BAC-WTA for $3.40 (netting me $13,595) and used the proceeds to buy 2,000 shares of AIG-WT at $6.94 (costing $13,885).

For anyone interested in AIG there's a great analysis here: http://longtermvalue.wordpress.com/2011/05/13/american-international-group-aig/.  Bruce Berkowitz has also commented extensively on the company, so you can check that out as well.  And lastly, just because I sold BAC doesn't mean I've given up on the company (or banks in general).  In fact, Citigroup is another company high on my watch list.

Questions?  Comments?  Email mevsemt@gmail.com

Cash and Cojones, Part II

Back in May I wrote a post titled "Cash and Cojones," (http://mevsemt.blogspot.com/2011/05/cash-and-cojones.html) in which I said the following:

Recently I've read a handful of articles that basically say the same thing in different ways: proceed with caution.  Or, to put it more colorfully, in early 2009 you only needed two things to make a killing: cash and the cojones to commit it.  Ironically, if you had those two things in 2005-2007 you probably got killed.  So what does the market feel like today?  Well, while we may not be quite at the excesses of 2005-07, we're definitely nowhere near the palpable fear of early 2009.

So the real question is what’s an investor to do?  Obviously I have no idea what the right answer is (remember, I'm just some guy with a blog), but I’ve been focused more and more on mitigating risk and less and less on reaching for returns. 

So, out of a general sense of concern and nervousness I managed to keep a large % of my portfolio in cash.  In fact, at the end of Q2 my cash position was 37% (http://mevsemt.blogspot.com/2011/06/q2-2011-returns.html).  However, over the recent days/weeks the fear in the market has grown steadily and, while it might not be 2009 all over again, I'm wondering if maybe now is the time to start using some of that dry powder... 

With that in mind I decided to dip my toe in the water by adding to my SHLD LEAPS.  Specifically, I bought Jan 2013 $95 call options (10 contracts at $3.00) for a total outlay of $3,010.76. 

On a side note there are a ton of stocks I've added to my watch list, some of them are new (MS, JEF, AMD) and some are old friends (SD, USG, NRG).  As always, if I buy or sell anything I'll do a quick write up that day.  Good luck everyone, and for those of you worried about the market decline just remember - this too shall pass.

Questions?  Comments?  Email mevsemt@gmail.com.