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Kevin Kersten's Analyst Insights

InvestorsObserver
Options Analyst Writer
Kevin Kersten
Author Bio


September 04, 2012 - Use LinkedIn to Make Connections and Profits

The Facebook IPO was much anticipated. It almost seemed like it was the 1990's again. There was a lot of excitement about an Internet company -- When is the IPO coming? What price? Can I get a piece of the action? -- and then it finally came out. It actually fell. Whoops! The underwriters didn't want that to happen. Then the company reported earnings and, as you are probably well aware, the market was not impressed. The stock has been punished and it fell to less than half the offering price!

There is risk both ways with stocks, and people get so excited at times that they forget the downside to a stock. Sure, you have an exciting, sexy stock in your portfolio, but is making money more important? To some it is not; they just want the bragging rights to say, "Hey, I have that in my portfolio!" But to others, the actual returns are important as well.

Facebook is a great tool and very useful. As long as it does not mess things up, like MySpace did, there is enormous potential for profits. As investors have realized, some stocks are trading on potential and others are trading on profits and good hard numbers. But there is some hope in the social networking space. Yes, there is Facebook (FB); but we could also connect on LinkedIn (LNKD), play games on Zynga (ZNGA), and get a really great deal at Groupon (GRPN). You could also search for returns on Google (GOOG), read about them on Amazon (AMZN), or make a bid on eBay (EBAY). There are a whole host of other Internet companies that have established business models, beyond Facebook. 

LinkedIn caught our eye, though. The company is new like Facebook, but the demographics are much different. LinkedIn is the Facebook of the corporate world. People can use their networking skills and connect to others to help them get business done and make deals happen. Doing business on LinkedIn, you are a little more connected to the clients and customers and can use mutual business connections to eliminate some of the risk. Beyond that, the simple fact is the users of LinkedIn typically have more money than those of Facebook. When it comes time to pay the bills, the social networking sites rely on advertising and if you are advertising to richer eyeballs, it is more likely you can get money out of them. If your user is 15 years old and has no job, it is unlikely that any advertising campaign is going to get them to spend money they don't have.

LinkedIn's numbers have been improving dramatically over the last few years. Revenues have been rising about 15% each quarter for the last two years. In 2010, the company had revenues of 243 million; but in 2011 they had revenues of 522 million. In just the first two quarters of 2012, they have already booked 416 million in revenue so the pace of growth every quarter does not appear to be slowing down. Profits have been a little slower; the company lost money in 2008 and 2009, but reversed that trend in 2010 and showed 11 cents per share in profits in 2011.  For a hundred dollar stock that is not much in earnings; but the company is still trading on growth, hope and the potential of over 100+ million members in 200 countries.

Many investors may be holding onto the stock waiting for the company to fully develop and pull in the big revenues. Some of those investors might be getting a little antsy as the stock is still hanging out in the midway between 70 and 120 that it has been at for most of the last year. Covered calls are usually a very conservative strategy done with boring stocks that are unlikely to move. Most of the time new stocks do not even have options available of them for some time. However, due to investor demands, some stocks get them before others so covered calls and other option plays are available. If you think the stock is going to be staying in this range for a while, one can pull in some extra premium by selling a covered call. There is going to be a little more risk and a little more return. While the stock could always fall, as an investor you could feel left out if the stock shoots higher and you see the stock called away. If the stock stays in the same general range, you can make a nice premium by selling a call on the stock.

If one knew exactly what the stock was going to do, it would be so much easier to suggest the perfect trade. A fair trade-off on the risk and the reward might be a covered call on LinkedIn at the November 105 option for a net debit of 95.80. This covered call has a 9% return which, over the three months holding period, comes out to an annualized return rate of 45% (for comparison purposes only). The position has 8% of downside protection. This covered call is being sold at the money and by the time you read this the stock could have drifted a little either way.

When you are using LinkedIn, it is all about using your connections to help you out. You might connect to a better supplier, find a new customer or get a better introduction to a client, understanding his needs and meeting them to your mutual benefit. While stock investing can be good, connecting a covered call to your stock investment can add returns and new dynamics to the trade. One can structure trades in different ways to control risk, take on more risk, get higher returns or even watch them for news about what is happening in the market. A covered call is primarily about getting a little more return when you don't think a stock is going to be rising a lot and, given the atmosphere around the Facebook IPO and earnings, it may be a while before LinkedIn shoots up. Taking that time, an investor who sells a covered call can pull in some additional cash, but it may well be too much risk for some traders. While there is risk, all investing has risks and newer Internet stocks have greater risk than normal. 

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