Everyone in the investing world likes to cite Warren Buffett, the legenday Sage of Omaha. But what makes Buffet so extraordinary? He has consistently demonstrated the ability to see value where others do not. Over time, his vision has been proven right.
My stock pick today,
Delphi Financial Group
is the kind of company Buffett would consider quality. Delphi knows that an employee with a good dental plan is happier than one without, and the company specializes in the employee benefits market, primarily for small to midsized businesses.
Through Reliance Standard Life and Safety National Casualty, it sells such insurance products as life, disability, excess workers' compensation and personal accident insurance. Its Matrix Absence Management subsidiary, serving large employers, administers employee benefits. The company also offers asset-accumulation products, mainly annuities to individuals and groups that are sold through independent brokers and agents.
Delphi doesn't get a lot of attention, but don't let that fool you -- it is a very solid, consistent company that's been a consistent winner. It also has great management, let by Chairman and CEO Robert Rosenkranz, who controls a majority of the company.
And check out these numbers: The stock has a forward
price-to-earnings ratio of 14.09 and quarterly revenue growth of 22% year over year, and most importantly, it's a very profitable company with free cash flow of about $518 million.
We are going to buy 10 deep-in-the-money calls going all the way out to January, using the $35 strike price (DFGAG). Using a limit order, I will pay $6.90 or better. The stock recently traded at $41.02.
Now, as we do every Friday, let's take a look at your emails.
Hey Lenny,I loved you as a Met, but I love you more as a columnist. I love it. In the current article I didn't see a strike price for the Jan 25, 2008, DITM's in Amgen (AMGN) - Get Report. If I missed it, my apologies.Keep up the good work.
My thanks to you and to those who sent the numerous "heads-up" emails I received yesterday regarding the strike price of the January $45 (AMQAI) call.
Lenny;I had copied down your Stat Book scorecard last week, and it showed Archer Daniels Midland (ADM) - Get Report December $30s that you paid 6.00 sell at 7.00.This week it shows you have open ADM December $30s that you paid 5.45 and sell at 6.50. The only thing I can figure out is that maybe you only had 1,000 shares to beginwith and then you bought another 1,000 at a lower price? Did you publish that you did that?
Each week as part of the
Stat Book, we publish the next buy levels for each open position. When the price of the underlying asset, the stock, falls to the next level of support, this is a signal to add to our positions. The next buy levels are adjusted weekly to account for the current stock price, option price and time remaining until expiration.
So to answer your question: On June 25, the stock price of Archer Daniels Midland dropped to $32.92, and our next buy level was published at $33.29 for the week, which alerted readers to add to their positions and lower the cost basis of their position in the trade. Then, because our cost basis is averaged between the two purchases, we adjust our good-till-canceled sell order to reflect a new sales target at a point higher than our average cost.
Readers who followed the strategy with ADM were rewarded when the option closed for a $2,000 win on July 9.
Don't you think it would be useful for the readers to show the current plus orminus position of all of the calls in the current "in play" calls? It is misleading to only show your winners while doubling down on the losers and building up a bigger and bigger risk pool. By my calculations, your in-play calls are currently underwater by $22,600, and you currently have $283,320 at risk. This has a very high likelihood of leading to a disaster when (or if) we have asignificant market correction. Your readers deserve to know the whole picture.The column headings for such a scorecard could look like this: symbol, contracts, average purchase price, invested amount, current contract price, current worth, current under or over.
As a firm believer of accountability, I believe my Stat Books allows readers of the column to quickly see the results that can be realized by following my DITM calls strategy. The options that are "in play" are not losers or winners until we close the position. Period. Purchasing DITM calls is not contributing to a risk pool, unless you consider all investment portfolios as such, because every type of investment carries some degree of risk.
Please understand, a great deal of time is spent researching the companies I invest in, and only those that meet the criteria for a successful trade are recommended. You can be sure that each investment is carefully considered, as I am purchasing each and every selection along with those who choose to follow my DITM calls; it is not a responsibility I take lightly. I do not play to lose.
Additionally, every portfolio has disaster potential, especially those that buy on margin. In the event of a major market correction, our DITM calls strategy won't be accompanied with a "margin call," and we will have time for the market to rebound because we are buying four to six months out. And as the market corrects itself, there will always be "quality" companies that present the opportunity for successful DITM trades.
Lastly, I have stressed the need for my readers to conduct their own research and their own due diligence before making any investment decision. That would include following any trades they make and knowing the current worth of their positions at all times. I am confident they are accomplishing this without my assistance.
The current format of the Stat Book is a reader favorite, but thank you for your suggestions.
Hey, Lenny, I don't have the money to buy the DITM calls, so I go for thecompanies you recommend at a higher strike price and the cheaper calls. Itdoes not always work out. What are your thoughts?Bill
Bill, I think you answered your own question -- it doesn't always work out.
Rememember, my strategy of using deep in-the-money calls is a "stock replacement strategy," meaning I want to buy the stock without using all of my cash. The second reason is this: My DITM calls strategy can be used as an actual defense mechanism against margin. Margin is the devil, just waiting for you to cross the line.
Do not use margin, period.
Also, you may consider following the DITM call recommendations but scale the number of contracts you purchase to match your buying power. The percentage yield potential is the same if you buy 10 contracts, five contracts or even just one contract. This way your win percentage will improve, and if you reinvest your wins, you will be trading more contracts in no time.
At the time of publication, Dykstra had no positions .
Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for TheStreet.com, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."