The retails and financial sectors: buy on fear and sell on greed!
To make serious money, you must have the tenacity to go into sectors that everyone is abandoning. Retail and financial stocks have taken a beating in the past 4 months and continue to make investors very nervous. That said, several stock pick strategies offer good long-term return:
A. WM: I have been monitoring the shares since they began their steep decline from 36. I understand that the New York Attorney General’s probe into WM’s practices is concerning, but he has not named the financial powerhouse a defendent nor does he plan to file a suit against them. He is only interested in examining the allegations made by several title companies on whether WM deliberately inflated home appraisals. The selling at 18-20 is overdone.  If you desire to “buy and hold”, the Dec and January slightly “out of the money” calls are very attractive. I wouldn’t buy the calls, but would rather write them. In writing calls against shares, the time decay on the calls works with you and not against you. In other words, when youre purchasing calls in hope that the shares appreciate before expiration, you risk the time decay value on the calls if the shares stay stagnant. However, if you had written the calls, the decay on the time value will only add dollar value to your account.Â
Anyhow, I recommend the current shares coupled with the Dec strike 22.50 calls which are paying nearly 1.20/contract. At 20.00/share, you nearly have 1.20 in downside protection from an already beaten share level. Should the stock descend lower than 18.80 (break-even- point), the shares are still worth holding for the long term. At that time, you can “buy to cover” the Dec calls and roll them into the January calls, either strike 22.50 or 20.00.
 Moreover, in the event your core holding trends lower to the point where your shares are significantly lower than your original “call strike”, you can either dollar- cost -average by adding additional shares or simply scalp the shares on an intraday basis to help offset the losses on your core holding.Â
Last but not least, it’s always encouraging to know that an insider has expressed interest in the shares at these levels. According to an SEC Form 4 filing from last Tuesday, William Reed, WM Director, bought 10,000 shares for 20.21.
B. WB is another attractive strategic play. At 39.20/share, the Dec strike 40 presents a good downside risk/reward ratio of 1.70/contract. You can write the calls against shares, knowing that you have a downside protection to 37.50/share. Thereafter, the calls for Jan, Feb offer very juicy premiums to further earn money while your underlying shares mature.
The integration of World Savings bank into WB is going to be very positive on WB’s balance sheet in the upcoming year. This indigestion will only add dollar revenue for WB. Furthermore, an insider from WB bought last thursday. According to an SEC Form 4 filing, Lanty Smith bought 37,000 shares of common stocks for 40.51 to 40.75/share.Â
C. M and JCP are my favorite in the retail sectors.  It is comforting to know that M entirely owns 56% of their stores’ land. This percentage is far greater than any retail chain brand thsat I know. Besides, the May department stores it bought in 2005 will be of great value in 2008.  Also, if KKR liked  M as a take-over for 51/share, don’t you think theyre salavating to buy them at 28?
The calls on M offer the most in premium value. Consider Dec or Jan strike 30s. While, I don’t own any of M or JCP, i will very soon establish core positions in both. Meanwhile, I have been scalping both on an intraday basis and have done quite well.Â
 JCP is superbly attractive at 43/share. It’s PEG suggests that the shares are worth 91. That is a discount value of 50%!Â
 I will keep you posted as I buy any of the above mentioned shares. Over the years, I learned to go into securities that everyone is avoiding. To that end, becoming a contrarian has done me the justice I deserve!
I have to say that of all of these WM worries me the most. I don’t want to touch that stock because you just don’t know how badly they might be hurt by the mortgage mess. WB doesn’t have as much exposure I don’t believe. JCP and M, as well as KSS look like good long term retail plays.
I’d have to agree with Aaron, WM is under a fair bit of uncertainty right now. My instinct would be to wait on that one.
With financial stocks and the US dollar taking a beating right now it may be worthwhile taking a look at Canadian banks. They are increasingly active in the US and will likely be able to take advantage of the growing dollar disparity. Try RBC, TD, or CIBC on the Toronto Stock Exchange. Yes, they too have been somewhat hit recently, but longer term I fully expect them to rebound better and faster.
Blain – I love that you’ve highlighted some great contrarian plays here. At the very least people should be thinking abou these kind of stocks. Keep up the good work!
Hi All,
This is good stuff, and I especially like the contrarian angle on JCP. It seems like you don’t see many forward PEGs at 0.63 anymore (Graham and Dodd might even jump on this one were they still around).
I ran through my basic DCF model using 4% annual Free Cash Flow growth and 3% perpetuity growth and came up with a value of 81.72 per share (roughly 50% undervalued). You can see how I built this model at:
http://www.evaluatingstocks.com/2007/11/18/build-a-simple-excel-model-for-valuing-stocks/