Risk: Reference all statements regarding risk.
Sector: Global Retail / Warehouse Club Operations – International
Periodicity Consideration: 60 Days / 3 Years to Indefinite (Some Trade Thoughts, though Primary Consideration – LT)
Fundamentals: Business Operations: Core Merchandise for the United States makes up nearly half of it’s business, while the remainder of their business can be split between Core Merchandise International, Ancillary Businesses (Food Courts, Pharmacies, One Hour Photo, Hearing Aid Centers, E-Commerce, Print shop and Car Washes) and Membership Fees; the later which may make up only about 10% of their value.
Financial Ratios: Growing EPS (3 Yrs): Yes / $9.02 to $13.14
Profit Margins: 2.58%
Dividend Payout Ratio: 26.45%
Long Term Debt to Capital: 28.38%
Insolvency Ratio (Debt to Equity): 40.00%
FASTgraphs Context: Taking a look at COST FASTgraphs …
The thing that jumps out to me, beyond the fact that everyone should know that this company grows year after year, is that the market is aware of such value, and has grown somewhat … exhuberant about said value. That’s a polite way to phrase it. An normal P/E for COST at is usually far above it’s earnings for years on end at 31 to 36, the 2020 CoVid-19 event merely caused COST to drop that THAT level. Much less below it’s expanded P/E to being at value.
Putting aside the warnings of the Lucas Critique for one moment, it should be noted that 2020 demonstrated an event in which earnings had the ability to grow due to the nature of the event. Viewing 2008 as a opportunity to evaluate the company during an earnings contraction, can demonstrate that the level of downside that is possible during such collapses ….
This actually provides some opportunities which we can specify when we delineate our thoughts …
ESG Score: 24 or the 41st percentile. Will specify in the future how we use this data.
Strategy Thesis: ST Trades, Valuation, Equity Income (Dividend)
Our Thoughts: The above is simply a ‘quicksheet’ The Duke uses for various companies with which he invests, or is considering; to give you a ‘look over our shoulder’ of our thoughts at a snapshot in time. It’s typical of the factors considered looking over any Equity instrument or Option. Reference all statements regarding risk.
For any short-term (ST) trades and accounts, there is the idea of selling put premium. 1 Put per $50,000.00 in available cash; to cover the downside by an earnings contraction, or vol event. Usually, there’s no problem leveraging up a bit on selling put premium, but given the valuation environment at the moment (which can affect ST trading thoughts), in this particular case premium sold would keep 1:1 on a cash basis. The gain for the total account will not be much for such an approach, and other trades in other assets would be necessary to provide an adequate return for the portfolio as a whole. At the moment COST has an approaching a Earnings Release, which helps pump up the option premium a bit. So with that caveat in mind, at the time of this writing, there is the possibility a -0.08 Δ to -0.10 Δ puts from between 1.46 to 2.00. For the next two months, possibly continually selling 30 DTE Puts puts (to the aforementioned leverage) for the next two months or so at the -0.10 Δ to -0.14 Δ range. One would have to assess the risk to premium after the vol event of the earnings release to see if the risk is worth it. If assigned the actual underlying, one could simply sell calls against any assigned stock. Previously sold premium would obviously lower cost basis, and calls sold on any assigned stock could continue to do so. For accounts smaller than those mentioned above? Honestly, given the cost of the stock, the only ST trades seen are 50/50 probability probability directional bets, via call or put spreads that limit the total risk of loss.
For any valuation mandates? I’d pretty much follow the same thoughts as above. Although at the moment, personal valuation mandates has exposure extremely light for macro-economic considerations, so leverage could be reduced to 0.8:1, so 1 put sold per $63,000.00 in free cash. This would reduce the size of the exposure in case of assignment; as the periodicity of COST being held would naturally be longer in a valuation mandate. For smaller accounts that do not have that sort of free cash? 25% of a normal ‘full size’ position could used to initiate or avergae into a position ( i.e. if a normal sized position is $15,000.00 in a valuation account, a $3,750.00 position could be initiated with the possibility of adding to the position at a moment later in time, and scaling in more at much better values ). Or, if the yield on cost permits it, to find some point in the future to scale given metrics individual to each portfolio.
For Equity Income (Dividend) accounts? For smaller accounts, a position could be initiated at these levels, as long as there is future capital to average the position at a lower cost basis in the future. For larger accounts? Given valuations, the above ST and Valuation option strategies could be used to raise premium until assigned, and an actual position is both initiated fulfilling a equity dividend mandate.
The yield is low, so this needs to be taken into consideration. Such a position added to account would do so to add stability to other yield assets and elements, and the portfolio as a whole.
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