Your Core Portfolio: Swing Trades and Options

by Lawrence Meyers | October 7, 2013 11:17 am

Thus far, our core portfolio[1] has been filled with investments across the spectrum, from stocks to bonds and growth to income. Unlike most money managers or mutual funds, however, my special addition is taking 10% of the portfolio and using it to make swing trades or to trade options. The idea is that we each have our own expertise in various stocks or sectors, and that we can put that to use not only to buy for the long-term, but to take advantage of market inefficiencies to turbocharge returns.

Asset Allocation Asset Allocation
Large-Cap Growth[2] 15% Options 5%
Large-Cap Value[3] 15% Midcap Growth[4] 4%
International/Emerging Market[5] 15% Midcap Value[6] 4%
Income-Driven[7] 14% Small-Cap Growth[8] 4%
Special Situations[9] 10% Small-Cap Value[10] 4%
Swing Trades 10%

Your own situation will dictate how and when you use your capital. The caution I would make is not to force yourself into trades. Be observant and patient and execute trades when they make sense.

Here are a few trades I’ve made recently to give you an idea about what I mean:

Campus Crest Communities

Last Thursday, Campus Crest Communities (CCG[11]) announced the sale of more of its 8% Series A cumulative redeemable preferred stock (CCG-A[12]), as well as the sale of $85 million in 4.75% exchangeable notes. The market didn’t seem to like that the company was raising more debt, and investors drove CCG down almost 4% and its Series A preferred down the same.

I can see why the market would shudder at this move for the common stock, but knocking the preferred down to below par makes no sense. Remember that preferred stock pays out dividends before the common does, and that preferred has more rights in any liquidation than the common does. So for the Series A to trade below par meant the market was valuing the security at 1% below its redeemable value.

Campus Crest is not going bankrupt, so I added to my position, with the intent to flip those shares if the stock picks up another 50 to 75 cents.

Outerwall

The still oddly named Outerwall (OUTR[13]), formerly known as Coinstar, got hammered in late September when it announced sales at its Redbox kiosks would fall short of expectations. The company reduced estimates on the top and bottom lines, and the stock fell 13% in one day to $46.

This is a perfect swing trade example.

Outerwall is generating plenty of cash with Redbox and its Coinstar coin machines. Redbox is starting to falter as far as growth is concerned, but I knew that would happen ages ago. My thoughts on the company’s kiosk model is that it still will drive the company for a long time. Against, I certainly didn’t believe OUTR was going bankrupt, so I bought shares at about $47. I exited that trade today at $52, preferring to pocket the cash from that trade rather than roll the dice further.

You must have discipline and not get greedy on swing trades.

First Cash Financial Services

The option play I executed on Sept. 11 was typical of the ones I engage in. I happen to know a lot about payday loan and pawnshop stocks, and have followed First Cash Financial Services (FCFS[14]) for a long time. It was trading near $55 on Sept. 11, so I sold some naked Nov 55 puts for $2.40. This is a very nice return for a stock and company I have total long-term confidence in.

If I get the shares put to me, that’s fine — I’m happy to have the shares in my portfolio. If not, I make the premium and pocket the cash.

As of this writing, Lawrence Meyers had sold naked Nov 55 puts against FCFS and holds the Series A Preferred stock of Campus Crest Communities. He is president of PDL Broker, Inc.[15], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[16] and blogs about public policy, journalistic integrity, popular culture, and world affairs[17]. Contact him at pdlcapital66@gmail.com[18] and follow his tweets @ichabodscranium.

Endnotes:
  1. core portfolio: http://investorplace.com/2013/09/your-core-portfolio-more-special-situations-shorts/
  2. Large-Cap Growth: http://investorplace.com/2013/06/your-core-portfolio-large-cap-growth-stocks/
  3. Large-Cap Value: http://investorplace.com/2013/06/your-core-portfolio-large-cap-value-stocks/
  4. Midcap Growth: http://investorplace.com/2013/07/your-core-portfolio-mid-cap-growth-stocks/
  5. International/Emerging Market: http://investorplace.com/2013/09/your-core-portfolio-special-situations/investorplace.com/2013/09/your-core-portfolio-international-emerging-markets/
  6. Midcap Value: http://investorplace.com/2013/08/your-core-portfolio-midcap-value-stocks/
  7. Income-Driven: http://investorplace.com/2013/08/your-core-portfolio-income/
  8. Small-Cap Growth: http://investorplace.com/2013/08/your-core-portfolio-small-cap-growth-stocks/
  9. Special Situations: http://investorplace.com/2013/09/your-core-portfolio-special-situations/
  10. Small-Cap Value: http://investorplace.com/2013/08/your-core-portfolio-small-cap-value-stocks/
  11. CCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCG
  12. CCG-A: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCG-A
  13. OUTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=OUTR
  14. FCFS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCFS
  15. PDL Broker, Inc.: http://www.pdlcapital.com/
  16. written two books: http://www.investorplace.com/author/lawrence-meyers/
  17. blogs about public policy, journalistic integrity, popular culture, and world affairs: http://www.ichabodscranium.com/
  18. pdlcapital66@gmail.com: mailto:pdlcapital66@gmail.com

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