Long-Range Puts for Dying Industries

by Lawrence Meyers | June 27, 2012 9:58 am

Many companies are facing their demise — some sooner than others.

I have several companies in mind that I believe will be extinct or least struggling mightily in next few years. Rather than short these stocks outright, however, which exposes an investor to unlimited risk, I suggest buying long-range puts.

First, newspapers are dying[1], regardless of what Warren Buffet thinks[2].

New York Times Co. (NYSE:NYT[3]), Washington Post Co. (NYSE:WPO[4]), Gannett Co. (NYSE:GCI[5]), and Media General (NYSE:MEG[6]) are all in trouble, with NYT and MEG the worst off. I’d buy in-the-money puts on both of these for as far out as you can go (presently it’s next January). Keep an eye out for Gannett’s next few quarters. It has strong cash flow and is making lots of money, but earnings are falling.

Computer-hardware manufacturers face increasing problems as well.

Hewlett Packard (NYSE:HPQ[7]) is facing all kinds of problems, and Meg Whitman won’t be able to solve them all. Although it has over $8 billion in cash, HPQ carries an ever-increasing debt load, now at almost $26 billion, up from $19 billion in just one year. I would buy the January 2014 $20 puts because I think things are going to get a lot worse there before they get better.

You may not think buying puts on Nokia (NYSE:NOK[8]) is worth it, but I do — Nokia is toast. The company went from having free cash flow in the $4-billion-to-$5-billion range in 2009 and 2010 to under $700 million last year. Buy the January 2014 $2.50 puts.

Lastly, everybody’s favorite punching bag, Netflix (NASDAQ:NFLX[9]) is also headed for the scrap heap[10]. DVDs are giving way to streaming, and Netflix doesn’t have the cash[11] to stay competitive with Amazon (NASDAQ:AMZN[12]) and Apple (NASDAQ:AAPL[13]). This one is tricky because both the news and the stock are volatile. I’d buy the January 2014 $70 puts for $20 because I think Netflix will easily fall below $50 by then.

Lawrence Meyers does not presently own any positions in any security mentioned.

  1. newspapers are dying: https://investorplace.com/2011/11/sell-newspaper-stocks-wpo-nyt-gci-mni/
  2. what Warren Buffet thinks: https://investorplace.com/2012/05/warren-buffetts-bad-bet-on-newspapers/
  3. NYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=NYT
  4. WPO: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPO
  5. GCI: http://studio-5.financialcontent.com/investplace/quote?Symbol=GCI
  6. MEG: http://studio-5.financialcontent.com/investplace/quote?Symbol=MEG
  7. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  8. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  9. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  10. headed for the scrap heap: http://seekingalpha.com/article/284231-is-it-time-to-short-netflix
  11. Netflix doesn’t have the cash: http://seekingalpha.com/article/289956-netflix-will-have-to-overcome-rising-content-costs
  12. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  13. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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