I’m mostly a value stock investor. Value stocks offer greater returns over the long haul than growth stocks, and there is a greater margin of error should you choose poorly. One of the great things about value stocks and naked puts is that the latter allows you to potentially scale into a value stock position even if you aren’t certain the stock has yet hit its bottom. If it has, naked puts are still of use.
Naked puts that generate income like this are a cornerstone strategy of my forthcoming stock advisory newsletter, The Liberty Portfolio.
By selling naked puts on a value stock, should the stock get put to you, you get it at an even better value than just buying shares outright. If you also nibble a little at the value stock, you are covered two ways in terms of getting into the stock.
If you aren’t sure, naked puts allow you to hedge by collecting some premium income.
Naked Puts on Value Stocks: Teva (TEVA)
Teva Pharmaceutical Industries Limited Ltd (ADR) (NYSE:TEVA) is just such a potential play for naked puts and value stocks. TEVA is the largest generics company in the world, but it also develops and markets its own biologics, as well as biosimilars.
The company has been hit with a wave of bad PR lately amid being sued in a price fixing case. What’s more, Teva’s also seen one of its top drugs go off-patent, is being investigated for bribery in Russia and its CEO has stepped down. But with shares at their lowest point in ten years, I think the selling is overdone.
TEVA closed Wednesday at $32.80. My suggestion is to sell the 19 May $32.50 naked puts for $1.75. Sell three of them to collect $525. That’s an incredible return of 5.3%, which you never see for a 67-day holding period, which also equates to about a 29% annualized return.
Naked Puts on Value Stocks: BP (BP)
BP plc (ADR) (NYSE:BP) is another company that has an even worse, and ongoing, PR problem. Deepwater Horizon remains on in the zeitgeist, thanks also to the recent movie. While BP has been slammed with more than $62 billion in payments from this disaster, it’s actual core operating business is doing better.
Upstream production is now profitable after quite some time of losing money. It’s making money now from the partnership with Rosneft (OTCMKTS:OJSCY). But more to the point, it’s a value play. BP’s EV-Ebitda ratio sits at 8.6 right now. By comparison, Exxon Mobil Corporation (NYSE:XOM) is at 16.1, Chevron Corporation (NYSE:CVX) is at 18.5, Royal Dutch Shell plc (NYSE:RDS.A) is at 10.7 and ConocoPhillips (NYSE:COP) is at 16.5.
BP closed Wednesday at $33.35. You might consider selling the 19 May $33 naked puts for $1.20. If you sell three of them for $360, you have a total of $885 collected so far. You also have a 1% buffer before having the stock put to you.
Naked Puts on Value Stocks: Alphabet (GOOGL)
Finally, it may come as a surprise but I consider Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) to be a value stock. Well, actually I consider it a GARP stock — growth at a reasonable price.
To me, a GARP stock is a growth stock that trades at a value price. That’s because, when you back out its net cash position, it trades at a very reasonable multiple compared to its growth rate. Add in a great free cash flow situation and a big brand name, and you have a great stock.
As it is, GOOGL trades at $858.27. There are some very aggressive naked puts you can do here that may earn you a cool grand on one trade alone. But since we are just rounding out $1,000 worth of naked puts, and we only need $115, just sell the 19 May $705 naked puts for $130. If you get GOOGL put to you at that price, you’ll be thrilled!
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
