Growth At a Reasonable Price
I can think of no better example of this type of stock than Wal-Mart ( WMT). A decade ago WMT was a glamour issue and priced at 30x-40x earnings with a scrawny yield of about 0.4%. The share price actually peaked at $70.30 in late 1999 on FY earnings of $1.28 per share and a 55 multiple.
Since 1999 EPS have more than tripled to an estimated $4.05 for the FY ending this month. Its annual dividend rate has surged from $0.19 to $1.21. Revenues, cash flow and book value have shown similar gains.
While WMT may never again command its old high P/Es, Value Line assumes a 15 multiple in calculating its three to five-year expected price range. Standard & Poor's rates WMT with its highest five-star ranking and carries a 12-month goal of $63.00. Morningstar sees present day 'fair value' as $60.00. What's not to like here? Even if these shares simply rebound to $60.00 over the next year, you'll pocket an 11.66% rise on top of the 2.25% yield for a 13.9% total return.
This is OptionsProfits so let's make things even better... If WMT closes at $60.00, or higher, on January 19, 2013:
¿ The call will be exercised and the put will expire worthless
¿ You will likely have collected at least $242 in dividends
¿ You'll be left with no shares and $6,242 in cash
Any move up of 11.7% or more over the next 24 months will translate to a net profit of $2,179/$4,063 = 53.6% cash-on-cash, or about 26% annualized. Considering the very-low risk, this looks like a great trade to lock in nice returns for a substantial period of time.
Breakeven on the whole trade is $50.32 per share (excluding dividends), or 6.3% below our trade inception price.
Trades: Buy 100 WMT for $53.73 per share, sell to open 1 WMT January 2013 60 call at $2.90 and sell to open 1 WMT January 2013 60 put at $10.20.
At the time of publication, Paul Price was short WMT puts.
Dr. Price joined Merrill Lynch in 1987 and over the next 13 years worked with A.G. Edwards, Wheat First and Ferris, Baker Watts. Dr. Price enjoyed enough success to retire in October 2000, but he continues to write and give investment seminars.
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