October 8, 2012 - Can You Ship Home Profits in this Market?
With persistent high unemployment, lack of job growth and governments trying to spend their way into prosperity, how is an investor going to make money? When will our economic troubles end?
There has been such a stream of bad news about the economy that many investors may have actually disconnected from reality. The stock market has recovered to pre-crisis levels and the S&P 500 has been up for the last three years. It seems someone forgot to tell many investors, though, as one recent investor survey showed that about half of respondents believed the market has been down in each of the past three years.
Sure, there have been some bumps in the road; the dot com bubble in 2000 and the subprime real estate crisis make serious dips in the 60-year chart of the S&P 500. But did you look for that crash we had in the 1980s or the recession in the early 1990s? Those events are not so noticeable today, and it is not because they were not so bad; it is because the market went up afterwards and made the dips look really small. There is a very real long-term trend to the market. It rises!
Investors who have been turned off from the market face a very real risk of being left on the sidelines if they do not get back in the market. Yes, there is risk to entering the market; but there is also risk of being left behind. This is not to say the market cannot crash again; it has done so many times in the past and it is a pretty safe bet that it will do so many times in the future. It is sort of like getting on a bicycle or driving a car; bad things happen and you might end up in the ditch. But success is just getting up once more than you have fallen down.
With the stock market rebounding, there are lots of companies that have been making profits. Investors in index funds or a broadly-balanced portfolio have been doing alright. Investors in cash and waiting have been left behind a bit. Is it too late to get in now? No.
Sure there are risks; there is the presidential election, oil prices, higher-than-normal volatility and a debt crisis in Europe. But there are also reasonable valuations, a slowly-growing economy and businesses that have adjusted to the economic conditions in order to continue pulling in profits.
If you are one of those still not fully in the market, now may be the time to thoughtfully deploy some more capital. One should look for well-run companies with solid balance sheets making money. One might also look at catching up by pulling in some extra income through the selling of a covered call. Take a look at UPS for example.
United Parcel Service (UPS) is the top parcel-delivery company in the world. Competing with Federal Express (FDX) and the post office, it transports books from Amazon (AMZN), the auction goods you won on eBay and other goods going back and forth through the supply chain all over the world. Every day it handles about 15 million packages with 60% of its revenue coming from domestic packages and the other 40% coming from international shipments. Last year the company had $53 billion in revenue and 400,000 employees with $3.84 of earnings on each share of $72 stock. The company pays a 3.1% dividend yield and has a P/E ratio of 18 with a 4 STARS S&P buy rating.
Take a look at doing a trade on UPS. The April 2012 72.50 covered call entered at a 68.85 net debit caught our attention with a 5% assigned return, 4% of downside protection and 2.8% dividend. The trade is only held for about 7 months, so the annualized return (for comparison purposes only) is 10%. The dividend is also juiced up due to the reduced holding costs of the covered call from 2.8% to 2.9%. This means the trade will pull in about 13% (10%+2.9%) a year. As a well-run broadly based business the company should continue to pull in cash and buy back shares supporting the stock price. If you are sitting in cash waiting, now may be the time for UPS to ship some returns to you.