I have followed BBBY (29.11, $7.6 billion) for years, never attracted to its “low PEG ratio” as I had believed that it was unlikely to be a 20% growth company any longer. Still, I always had tremendous respect for its operating metrics, its strong balance sheet and the consistency of its results. Well, the pendulum has seemingly swung the other way. Will BBBY never grow again? The company has no debt, $2.5 billion in tangible equity, and $377mm cash as of the seasonally-low Q3. Pre-tax margins have declined from 16% to 13% over the past two years and conservatively should be a minimum of 12% on a normalized basis. So, when they report their fiscal year in April, I wouldn’t be surprised to see estimates come down again given the macroeconomic environment and the slightly high inventory situation, but we are at least getting close to a good normalized earnings power with a very low PE to boot. As you can see in the chart below, the stock has essentially been in a holding pattern for the past 7 years, as the PE has shrunk from the 30s to the low teens. The P/S ratio has declined from 4 to 1, and the EV/EBITDA ratio is 6.8.

While i have not yet bought BBY, I recommend the following strategy: Assuming the shares open tomorrow at 29.11, I would buy at market.  Simulataneously, I would write either strike 30 or strike 27.50.  April strike 30 is offering a nice 1.20/contract.  on a 100 share investment, this premium represents a heft return of 29% in nearly 1 month.  If you cannot stomach further downside from 29.11, consider hedging your shares with strike 27.50 calls.  Theyre paying a premium of 2.55/contract.  That is nearly a .95/contract in intrinsic value.  Both are winners.  Personally, I like the 27.50 striuke because I like having the shares get called away by option expiration.

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On 2/19/08, I posted the following:

“Bought 20 blocks at 20.52.  Today’s downside, which is attributed to the removal of INTC from the conviction “buy” list, does not mean anything negative concerning the fundamentals of the company.  INTC’s fundamentals are no different today than they were 3 months ago.  Therefore, Goldman’s removal of INTC from their “buy” list recommendation is at best silly.  I also wrote 1000 March strike 20 calls at 1.25/contract, and 1000 March strike 21 calls at .72/contract.  This is a good mixture of “deep” and “at the money” covered call strategy”.

 On  3/28/08, the shares closed above both strikes, 20 and 21.  Therefore, my shares got called away and I pocketed .73/contract times 100,000 shares and 1.20/contract times 100,000 shares.  This transaction was the funds largest gainer for the month of March.

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On 2/22/08, I posted the following:

“Apple’s challenges regarding its inability to generate the promised sales and revenue from iphones is not warranted.  because the iPhone likely generates gross margins of 55% to 60% — compared with 30% to 33% gross margins for the rest of Apple’s product line — the device could be responsible for as much as 80% of Apple’s earnings. 
That said, bought 5 blocks at 116.45 and wrote 500 March strike 115 at 6.60/contract.  I feel that I not only have a hedge of approximately 5.00/share but also a good pivotal entry”.

On 3/28/08, the shares closed above 134.  Since they closed above the strike of 115, the shares got called away and I pocketed 5.75 per contract times 50,000 shares.

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In June of 2007, credit rating agency Moody’s opined that the market was safe from systemic risk in part because the $45 billion in profits reported by a group of financial firms including Citi and Merrill Lynch were “considerable and significantly larger than in 1998,” when those same firms reported profits of $12 billion. As the events surrounding Bear Stearns show all too clearly, the market isn’t safe from systemic risk. Was Moody’s wrong partly because that $45 billion isn’t sustainable?  From 1947 to 1997, financial profits were stable at around 0.75% of GDP. But over the last ten years, the share of GDP represented by financial profits began to shoot higher. In the last few years - before the Street began to report massive writeoffs - financial profits represented roughly 2.25% of GDP. Inker says that it is too simplistic to say that the right number should be 0.75%. But when you think about what financial profits consisted of at the height of the boom, 2.25% seems unsustainable too. 

Thus far, Citigroup has taken $32 billion in writedowns related to the subprime crisis. Merrill Lynch’s writedowns have totaled $22 billion. So were Citi’s 2006 profits really the reported $21.2 billion, and were Merrill’s the reported $7.5 billion? Or was some percentage of that an illusion? If Bear can be sold for $2 or $10 a share, then how solid was Bear Stearns’ $84 per share in reported book value?

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On March 6th 2008, NYX said that trading volumes in February were very strong.  The Euro Cash market volumes rose 43% year-over-year, and US Equities volume also rose by a 20% growth rate.  Derivative volumes also rose on both sides of the Atlantic – European derivative volume rose by a 37% metric, and US derivative volume on the NYSE rose by over 70%!  Morevoer,  Euronext’s plans to expand into areas beyond just equities trading is paying off, particularly in the derivatives industry. NYX is also actively closing on its deal to acquire the AMEX.

 The company is expected to achieve $3.29 in earnings per share this year (ending Dec 2008), putting the current P/E ratio for the Company at roughly 14x its expected calendar year forward earnings.  Earnings  for 2009 are forecast in a range from $4.56 per share in EPS on the high end, all the way down to $3.87 on the low end. I foresee an annual rate that is in line with that $4.00 per share estimate, possibly slightly higher, accounted for by additional tax savings, and by a probable acquisition of an options exchange (or additional other exchanges, for that matter). 

There has been a radical drop of about 20% in the shares within the latest month, leading to a trailing 52 week performance of these shares of -28%.  We could see stabilization at current levels, and then hope to see additional improvement in the RSI and MACD lines, which measure relative strength and divergence from the  moving averages, respectively.  Previous highs were in the $105 - $110 range, so today’s $60 price is a solid discount to those highs.

 On any shares purchased at or below $60, consider writing June 2008  covered calls at the $70.00 strike price or higher against this long position. Currently those calls are (Friday 3/7/08) bid at $2.65 per share.  Also, one ,might do ”put option strategy, calling for investors to sell, or “write” the June and September 2008 expiration put options on NYX at the $60.00 and $55 strike price.  Current premium levels reflect that investors implementing these positions will enjoy either a nearly 10% return on their committed capital (assuming no stock is assigned and the option premiums are all kept), or they will be able to purchase NYX stock at an adjusted net price level of roughly $52.50 per share (accounting for option premiums), a significant discount to the present market price.  The final price an investor will pay is dependent upon how many of the options are assigned over the life of the position and the transactions costs.

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