The #coronavirus has entered Europe and in particular Italy and it seems to be spreading relatively fast. This is no fun and therefore fear has really entered the market today 😱
This led the Dow Jones Index to briefly drop with 1000 points today. 1000 points a decade ago would probably have resulted in an entry in Wall Street’s history books, but nowadays it’s “just” an equivalent of 3%.
Therefore I am not worried at all about the drop in share prices, because as per the below picture, the Dow Jones Index is still much closer to its recent all-time high than its 52-week low.
On the other side, I am a bit worried about the virus though, but rather about the harm that it can do to our health and in particular to the ones in my surroundings.
I know that statistically it’s probably still more likely to get hit by a car tomorrow than being affected by the virus, but I guess that this is how fear typically works by sneaking into our brains.
How to play this market on such a day?
Well, buy some undervalued stocks off course! 💪
Therefore I just wanted to let you know that I took the opportunity to add few shares and to sell few put-options today at for me attractive prices.
Purchase: 3M
3M ($MMM) is one of my tier 1 stocks as per my allocation strategy. From all the stocks listed there, 3M is probably one of the most interesting ones from a valuation point of view.
Most of the basic metrics look pretty good for 3M. It currently yields 3,84%, a ~75% payout ratio and a Price-to-Earnings of 19 and a bit.
I will not go into a full stock analysis now (fair value estimate: $156), but the main 2 metrics that I would typically like to see a bit lower are the payout ratio (60% or less) and the debt/equity ratio which is rather on the high side with ~200%.
Nevertheless, I’m having full confidence in the ability of the company to grow its dividend in a sustainable manner and therefore I decided to purchase few additional shares today at a price of 153 USD. It is a small addition, but every little bit helps.
Remember, I buy for income (aka cash flow), therefore dividend safety is of the utmost importance for me. 3M has a Dividend Safety Score of 95
Option: 3M
At the same time I decided that I would like to purchase a pretty decent amount of 3M if it would be 10% undervalued. In such cases I typically decide to sell put-options as they give me a nice premium while waiting. This is something that I did in the past and has done me pretty well.
Therefore I sold today as well a put-option for 3M with a strike price of $140 and an expiration date of 19 June. The income from that option was $380 in total. This equals an 8.12% annual return. Not bad for an old and “boring” stock 💤.
Option: UPS
UPS is another stock listed in my allocation strategy, but in this case as a Tier 4 stock. This means for me that I would like to keep the position size rather small.
Many articles have been written about UPS and in particular on SeekingAlpha. I noticed that there are typically two camps to the story of the stock:
Amazon is going to crush the stock 🔨
VS
UPS is the best of bread as an eCommerce play 📦
Personally I am rather towards the eCommerce play camp, because I believe that there is more than enough market for several players and at the same time this is a very capital intensive market, in other words “high-barriers to entry”.
What’s keeping me from going big into this stock is their debt position and in particular their pension liabilities, which covers 18.3% of their balance sheet (page 57). Not many Wall-Street analysts mention this, but UPS themselves have mentioned this in their risk factors:
Employee health and retiree health and pension benefit costs represent a significant expense to us; further cost increases could materially and adversely affect us
page 15, 10-K form, FY 2019 results
Another reason for us as amateur investors to always do our own homework!
Having said that, I still find it an interesting stock as an eCommerce play in my portfolio and therefore I used the pullback today to sell a put-option with a strike price of $80 and an expiration date of 15 Jan 2021. The income from that option was $335 in total.
The strike price is approximately 20% lower than today’s share price, hence I don’t think this price will quickly be realized. However, I do get to collect the option premium which equals a 4.6% annual return.
Option: Exxon Mobil
Last but not least, I also sold a put-option for Exxon Mobil. The strike price is $50 with an expiration date of 19 June 2020. The income from selling that option was $103.
Exxon Mobil is a Tier 3 stock for me and the ability to purchase stocks at $50 would allow me to complete my position. In the meanwhile I get paid while waiting with a 6.2% premium. At that price the dividend would yield ~7%, probably the highest yield in the last few decades for $XOM.
Summary
Todays transactions went quick and the volume of transactions today was probably already more than I usually execute in a whole month.
I just didn’t want to lose the opportunity to add some additional income from put-options, because put-options are getting more expensive with high volatility.
I didn’t think that my goal of starting to earn some additional income (which I described in Yesterday’s post) from selling options would be straight away the first day in the new week 😎
This was it from me for today and I just wanted to give you a brief update in the heat of the moment.
I am always looking forward for a day like today, because it allows me to benefit from a decline in stocks that I already had on my watchlist.
In this case I added also some significant income from option premiums which is something that I didn’t really discuss yet on this blog.
I hope that you enjoyed this brief update. Feel free to use the comment section in case you have any questions.
Yours Truly,
— European Dividend Growth Investor
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