The Market for Perpetual Options -- Page 2
Current market conditions have stocks displaying their option characteristics.
Investing Specialists
There are a few characteristics that can be used to identify stocks with a great deal of optionality. Low multiples of price/sales, price/trailing earnings, and price/book are key signs. A number of high-optionality companies are listed below.
American Reprographics Company
Moat Rating: Narrow | Fair Value Uncertainty Rating: Medium | Morningstar Rating: 5 Stars
From the Analyst Report: " American Reprographics Company (ARP) has carved itself a niche by providing document-management services to the nonresidential construction industry. The firm manages production and delivery of large-format blueprints, which, in the construction business, is a common language for numerous constituencies, from architects to subcontractors. We like ARC's experienced management team and its ability to generate healthy cash flows even during an economic downturn."
Alumina, Ltd.
Moat Rating: none | Fair Value Uncertainty Rating: Medium | Morningstar Rating: 5 Stars
From the Analyst Report: " Alumina, Ltd. (AWC) has a 40% interest in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns the other 60%. AWAC is predominantly exposed to the first two stages in the aluminum production chain: bauxite mining and alumina refining."
Capital One Financial Corporation
Moat Rating: Narrow| Fair Value Uncertainty Rating: Very High | Morningstar Rating: 5 Stars
From the Analyst Report: "Just a few years ago, Capital One (COF) was a monoline business offering credit cards to individuals throughout the United States. The main sources of revenue were interchange fees, interest charges, and securitization income. The company collected an interchange fee each time a cardholder used a Capital One card to make a purchase. If the cardholder kept a balance on the card, Capital One charged interest on the balance. Eventually, the firm securitized and sold most of the outstanding card balances to investors while retaining some interest in such securities. Today, this business is only one facet of the new Capital One."
Hughes Communications, Inc.
Moat Rating: None | Fair Value Uncertainty Rating: Very High | Morningstar Rating: 5 Stars
From the Analyst Report: " Hughes Communications' profitability should improve substantially, with cash flow growing nicely, over the next couple years as it deploys new services using a satellite it launched in late 2007. We don't believe, however, that the firm operates with significant long-term competitive advantages as it goes up against rival technologies and other satellite providers."
Nissan Motor
Moat Rating: None | Fair Value Uncertainty Rating: High | Morningstar Rating: 5 Stars
From the Analyst Report: " Nissan Motor (NSANY) has come a long way since its problems in the late 1990s, which caused it to form a partnership with Renault. Although the firm is finally on stable ground, falling demand for autos and the weak dollar will create difficulties for management as it implements the company's next strategic plan."
Regions Financial Corporation
Moat Rating: Narrow | Fair Value Uncertainty Rating: High | Morningstar Rating: 5 Stars
From the Analyst Report: "In normal times, Regions Financial (RF) would be a large but mediocre regional bank with acquisitions that have resulted in unimpressive returns on equity. More recently, a new management team took the helm, providing some optimism for future profitability. In this current credit environment, however, Regions' former strengths are its greatest weaknesses and a poor outlook required the company to write off half of its goodwill--a sign that it paid too much for past acquisitions."
Ruth's Hospitality Group, Inc.
Moat Rating: None | Fair Value Uncertainty Rating: Very High | Morningstar Rating: 5 Stars
From the Analyst Report: "Led by the respected and well-known Ruth's Chris brand, Ruth's Hospitality Group is a leader in the upscale steakhouse segment of the restaurant industry, but the company took on considerable financial leverage to finance the acquisition of Mitchell's Fish Market in February of 2008. This poorly timed acquisition made the business much more vulnerable to the current economic downturn, increasing the chance of bankruptcy. However, we still believe the company is likely to survive."
Sprint Nextel Corporation
Moat Rating: Narrow | Fair Value Uncertainty Rating: High | Morningstar Rating: 5 Stars
From the Analyst Report: " Sprint Nextel has stumbled badly over the past couple of years. Its best customers have defected in droves, dragging sales lower and punishing margins. Verizon Wireless and AT&T Mobility, Sprint's two larger rivals, have pulled well ahead while the far smaller T-Mobile USA has gained ground. More bad news is probably in store over the next several quarters."
Stoneridge, Inc.
Moat Rating: None | Fair Value Uncertainty Rating: Very High | Morningstar Rating: 5 Stars
From the Analyst Report: " Stoneridge (SRI) is trying to restructure its fixed-cost structure, but we don't believe these efforts will fully offset weakening auto sales and powerful end-market customers. Stoneridge produces custom electrical components used in vehicle platforms by original equipment manufacturers (OEMs)."
TRW Automotive Holdings Corporation
Moat Rating: None | Fair Value Uncertainty Rating: High | Morningstar Rating: 5 Stars
From the Analyst Report: " TRW Automotive continues to show stability in the volatile automotive supplier universe. As a top supplier in the attractive niche of safety products, TRW can continue to strengthen its balance sheet without significant margin contraction."
Woodbridge Holdings Corporation
Moat Rating: None | Fair Value Uncertainty Rating: Very High | Morningstar Rating: 5 Stars
From the Analyst Report: "The past couple of years haven't been good for Woodbridge , which is now made up of a land-development company, investments in time-share operator Bluegreen and Office Depot (ODP), and a pile of cash. Its homebuilding operation, Levitt and Sons, declared bankruptcy in November 2007, and the value of land held by its land-development company has plummeted. We think Woodbridge still holds very high risk because of the difficulty of valuing its remaining assets and the uncertain allocation of its large cash hoard."
As an added kicker, any equity options listed on a high-optionality stock are "options on options," which can provide tremendous payoffs when a company rebounds, an area of investing we pursue at Morningstar's OptionInvestor newsletter. However, be careful--the sirens of triple-digit returns may call, but unwary sailors who answer could drown in worthless options.
If you are interested in further exploring options as an investment vehicle, and Morningstar's unique approach to using fundamental research to invest in options, I encourage you to download the Morningstar Guide To Option Investing.
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