EMR and NMX for Monday

I like Emerson Electric (EMR) going into Tuesday morning's report. Like last Friday, I wanted to find a company with a history of earnings success, and Emerson fit this mold. The company has beaten the estimates each of the last six quarters and averaged a next day gain of almost three percent. The company's P/E of 20.46 is only slightly above the industry's standard, giving the stock some downside support should the company miss estimates. Also, Earnings Whispers projects that the company will beat the street by three cents.

It's important to note two dangers of the stock. The first is that the stock is trading a little bit below its 52 week high. I argue that many stocks have hovered around their 52 week highs going into earnings, and these stocks were able to explode past these technical barriers. My second concern is the sell-off going into earnings. Many stocks do sell-off going into earnings and I feel that investors are simply being risk-adverse and are not willing to take on the risk that comes with an earnings announcement.

As I mentioned in an earlier post, I also like NMX today.

Good luck!

BEAV For Friday

I like BE Aerospace (BEAV) going into earnings today. BEAV provides interior services to an array of different types of airplanes. The stock is marginally up after a series of airline stock downgrades, leading me to believe that many are confident this airline services provider will beat the street. I am confident in BEAV because of the run-up in airline producers and the high demand from these companies. Stocks like Boeing (BA) have shown significant capital gains and high dividend payments throughout the last year.

Another attractive aspect of the stock is the recent success in earnings. The company has beat the analyst expectations five out of the last six quarters and shares have advanced the next day after each of those reports. I am a strong believer in prior success translating into excellent future results. The only risk in playing this stock is a relatively high P/E and six month run-up, leaving the stock susceptible to a sharp downturn.

Personally, I am willing to take on the risk given the history of success. Good luck.

The NYMEX

I like the Nymex (NMX) going into the company's first quarter results. Over the last couple of weeks I noticed that significant buying pre-release is usually a great indicator of a potential estimate beat. The intuition beyond this strategy is that risk-adverse investors usually sell the stock before the earnings in case the stock does miss. If there is strong drive up in the price of the stock, supported by high volume, there may be a large number of investor groups that are speculating that the stock is going to report good numbers. Given that many investors are risk-adverse, NMX chart suggests that these investors feel the stock is a sure winner.


Along with a strong chart, NMX should be posed to show great numbers because of the fluctuation and bullish drive in commodity prices. The volume on the exchange was significant last quarter, and with this increased fluctuation it would be safe to say that these volume numbers should have continued this quarter.

I bought in this yesterday, but I still recommend the stock today. Good luck!

Evaluating Investment Performance: Part 1 of 2

As many of my readers know, I love comparing individual stocks. I think it is important to evaluate stocks against one another. While all great investors do this, I do not like comparing portfolios against one another. It seems that comparing portfolios just gets too personal sometimes. While returns do give you some insight into your talent as an investor, often times they do not tell the whole story. My next series of non-stock-picking posts will be examining how to properly evaluate your performance of an investor.

Two of the most common measures of performance are the Sharp ratio and Treynor ratio. The core fundamentals behind these two measures are tracking the expected return of a portfolio over the risk the portfolio. The only difference in the calculations of these two portfolios is the value that risk takes on. The Sharp ratio is found by taking the return on your portfolio, less the risk free rate (rate of a T-Bill for example) all divided by variance in your portfolio's holdings. The Treynor ratio is found by taking that same return on your portfolio, less that same risk free rate, divided by the average beta in your portfolio (Beta can be found on Yahoo! Finance).

A talented investor is an investor that has the ability to achieve returns in excess of the average return given his/her portfolio's risk level. Let's say Investor A has achieved returns of 20% while maintaining a portfolio beta of 2 and let's say Investor B has achieved returns of 8% while maintaining a portfolio beta of .5. Who is the better investor?

Let's look at Treynor ratios. Assuming a risk free rate of 3%:
A has a ratio = (20%-3)/2 = 8.5
B has a ratio = (8%-3)/.5 = 10
Investor B is actually has a better reward-to-risk ratio and is essentially more talented as an investor.

So next time when you compare returns, you may want to look into which investor has the higher reward-to-risk ratio as well.

How I Made 16% On A Stock That Went Down 9% Without A Margin Account: Part 3 of 3

Now that everyone comprehends the basics of options, what some simple strategies are, and how they leverage gains and losses, I can start explaining some more complicated strategies.

Butterfly Spread
If the investor is confident that a particular stock is going to be the same price today, sometime in the future, the investor could: long the stock and make no money, short the stock and have the ability to make money elsewhere, or use options to make money on the non-movement itself. To do this an investor would take long position at strike prices where the investor feels the stock will not pass given the time interval (if you think the stock will not go past $27 and $29, you would buy calls at strike prices of $26 and $30). The investor would also take a "double" short position at the strike price the investor feels the stock will hover around (if you think to stock will hover around $28 you would sell two calls at a strike price of $28). The investor would make the most money if the future stock price stays at the strike price of the shorted call position. The investor will lose money is if the future price breaches the outer long call strike positions. These losses are caped, however, because each move up in the stock price means the long positions' value will go up, but the short position will go down and vise-versa on the lower extremity. The payoffs look like this:

Straddle
If an investor wants to take the opposite strategy, they would likely create a straddle. A straddle involves longing (purchasing) a call and a put at the strike price you feel the future stock price will be farthest from (usually the strike price closest to the current stock price). In order for the investor to make money on this strategy, he/she needs the future price to be greater than or less the strike price in excess of the sum of the call premium and put premium. Let's say the call and put each cost $3 at a strike price of $65. The investor would need the future stock price to go up to $71 (65+3+3) or down to $59 (65-3-3) to be in the money. The strategy is shown below.
I replicated the straddle strategy last week when I started this trilogy of blog posts. I managed to make more than 9% fluctuation in the stock because of the leverage that options create. Since then, I managed to make money on only one of my next three plays. Luckily, I am only down $30 on options. In short, I recommend that you only do options if you are truly willing to accept the risks you take on to achieve such high returns.