As the unofficial end to the summer approaches, the stock market's roller-coaster ride continues.
Clearly, significant amounts of money have left the markets over the past few weeks. It remains to be seen whether that money will return to equities, so we need to keep our focus on strategic investments in very specific and strong sectors of the economy.
, recently announced an expanded share-repurchase program. Forest focuses on developing and producing branded and generic forms of pharmaceutical products.
At its close Friday of $37.91, it is trading just above its 52-week low. However, the share-buyback program makes this an opportune time for using deep in-the-money options with Forest Laboratories.
Share-buyback programs indicate management's confidence in the company, providing a ready buyer of the company's shares should demand dry up. Furthermore, buybacks protect against a further devalued share price. When a company's management buys more shares, it indicates a high level of confidence in the direction of the share price.
Management buys more shares when it believes the stock's price is too cheap. Considering the position of management to assess the corporation's strengths, buyback programs should always indicate an opportunity for investors.
Forest's management is buying an additional 35 million of the company's shares, because at its present value, Forest is a great investment.
Forest's key asset is its sales force. As a marketing-focused company, Forest solicits research-oriented firms for opportunities to in-license potential best-in-class new products within Forest's therapeutic focus areas, such as the central nervous system and cardiovascular categories.
Each new product increases the productivity of Forest's existing sales force. The company has historically in-licensed late-stage products, but it is migrating to more early-stage opportunities.
In July, Forest posted a 34% quarterly increase in profits, but the performance failed to satisfy more optimistic expectations. Its leading product, Lexapro, fell short of analyst expectations, and since that time the company's stock price has taken a beating. Falling back on a common theme of mine, it's clear that the beating in this case was too severe.
Management reiterated its fiscal-year projections, indicating future strength. Furthermore, the company possesses nearly $1 billion in free cash flow to go along with zero debt. In the pharmaceutical business, a healthy balance sheet generally leads to a healthy and promising future.
Research and development, along with the ability to invest in new products, allow pharmaceutical companies to succeed.
With that in mind, I will place a limit order to buy 10 contracts of the January $30 DITM calls (FRXAF) for $8.90 or better.
Now, let's take a look at what the readers had to say in our regular Friday feature.
First, thank you forteaching me so much about this kind ofinvestment strategy. Ofcourse I also do my own homework andinvestigating, but your picks are theinitial triggers that get me interestedin a particular stock. I've also madeseveral of my own selections using thesame criteria I've learned from readingyour articles. Second, I was very interested in your column on Morgan Stanley (MS) - Get Morgan Stanley (MS) Report, but when I wentto check on the pricing, I found thatMSAK opened at $11.00 and neverdropped below that price. Your articlesays you planned to purchase 10 optionsat $10.30 so I'm curious to know howyou buy so much below the market. Am Imissing something, or am I just confusedabout the date or price? -- Stephen
Thank you for your very kind email; it is very rewarding to know that my DITM calls strategy columns have been a useful learning tool for you.
The question you ask is a common reader misconception -- I am not able to purchase DITM calls below market costs. I must wait for the option order to fill, just like everyone else.
You mention Morgan Stanley: On Aug. 24, I placed my order for 10 contracts of the January $55s with a limit order of $10.30 or better. This order was not filled until Aug. 28. Waiting for orders to open is a lot like waiting for the right pitch, or "working the count." If you play smart and remain patient, you can get on base, on your own terms, and put yourself in scoring position.
Hi Lenny:I have followed youcolumn since you started writing overa year ago. Ihave not tried any of your strategiesyet though, because I am still getting behindthe idea. Mostly I read your column tolearn about new companies out there; Iam trying to learn as many as possiblefor my investing. You really don'tgive the readers much of a reason tobuy; basically you find blue chips, andthrow out that they have no debt andhuge revenue. Also, most other reporters and analysts on TheStreet.comhave at least a chart to back up theirresearch, so the readers can see themoving averages, since basically youare a technician. Do you have any ideaabout the math behind options? It isvery complex. I have never read youtalk about any Greek terms that are involved in the pricing of theseoptions. Also, your Stat Book showsyou have made money, but you havethrown a huge amount of capital atyour strategy to make this happen. Very fewreaders have this kind of capital. Thenagain, I could go half of what you sayand get half the profit, but by thetime I double down, I have no capitalleft, and am leftundiversified. Italso seems your strategy doesn't work,because you basically double andtriple down on every stock. So your 9k cost about doubles for one trade. On another note, all ofyour emails on Fridays always give youpraise -- why not include some bad emails? Most other writers dothis, especially on sports Web site-related mailbags. I'm also curious how much knowledge you have? How much of the work is by your broker? My last request is,please stop talking about the PlayersClub; you put it in at the end ofabout every column. Youdon't give updates of what is going onwith the Players Club, who is amember, how much money is in it, howit is investing -- some more detailswould be nice. This email seems kindof harsh, but I think of it as myconstructive criticism. I am a fan and readevery column you put out and usuallyenjoy them. I think yourcolumn could be better, and isn't thatthe goal in life, to get better? -- Lucas
All my reader responses are important to me, the good, the bad and the ugly. Emails for the column are selected each week solely on the basis of whether they can be used as a tool to teach my readers more about my DITM calls strategy. On to the points raised in your email.
1.) My DITM calls strategy gives readers many solid reasons to buy; it should be enough that the success rate to date on my column picks is irrefutable and unprecedented. What more do you require?
2.) I have found a simple strategy within the complex market of options trading. I fully understand the Greek terms. However, teaching math and confusing the average investor is unnecessary, as the strategy is simple enough to understand without them -- and it works beautifully.
3.) As a technical trader, I do rely on charts and moving averages when making a selection. However, I also believe in due diligence and encourage my readers to do their own homework before making a trade. There are so many online sites where readers can look up a chart. I feel it is in their best interest to expend a little effort and confirm my selections with outside sources. It protects them against inadvertent errors and omissions on my part, as I am only human.
4.) Investing in a trading strategy requires capital. You have to spend money to make money. A tremendous amount of research and time is spent each and every day in order maintain the level of success my DITM picks have yielded to date. Investors who cannot afford 10 contracts at a time can still produce the same exact return by proportionally scaling back their purchases to match their personal resources.
5.) It has been several years since I was taught the ins and outs of the stock market and the benefits of trading DITM calls, and I am proud to say I am still learning. In order stay at the top of my game, I will continue to learn and expand my knowledge base.
6.) The broker I use is like a base coach. He doesn't bat for me, but he contributes to my success, and I am thankful for his coaching skills.
7.) I have no plans to stop talking about the Players Club. As a former Major League Baseball player, it is very important to me that professional athletes have access to educational tools and resources needed to protect their wealth. It's the one thing that doesn't automatically come with the uniform, and it is my goal to change it. Everyone should have the opportunity to be set for life.
If you can't get behind my strategy, I encourage you to find one that works for you.
P/>Lenny, What does this statement at the end ofyour column mean:"At the time of publication, Dykstrahad no positions in stocks mentioned."-- George
Every investment columnist is required to disclose the positions they hold at the time of publication. When
posts the message that I have no positions in the stocks mentioned, it means that my column is published "before" I place my trade.
However, new rules now make me wait 24 hours before I can buy or sell all recommendations in case my mention moves the stock in question. Please understand, I write these columns to help my readers "get in the game" and make some money. I have no problem with the rules; in fact, the rules are the single most important thing.
At the time of publication, Dykstra had no positions in stocks mentioned.
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."