Yesterday, billionaire hedge fund manager Barry Rosenstein, of the activist hedge fund Jana Partners, said that Hertz ($HTZ), the largest rental car company in the U.S. should triple in price. Rosenstein is taking a page from Icahn on two fronts: 1) Using the media to promote his message, and 2) calling for a stock buyback.
Rosenstein’s fund owns more than 8% of Hertz. And Carl Icahn owns 10% as well. Altogether, hedge funds own more than 50% of the Hertz, even as the stock has dropped nearly 25% over the past six months. Rosenstein said Hertz will be able to buy back as much as 25% of their stock, which should juice earnings and cause the stock to triple in price over the next year.
With two of the best billionaire activists in the world controlling almost 20% of Hertz, this stock is a must own stock for investors in 2015. You can see in the chart below, the stock has based just above $20. Icahn owns most of his stake above $28.
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Following the highest conviction trades of the world’s best hedge funds works especially well in the biotech sector. It gives you direct access to the smartest investment minds with a niche concentration in science and medicine. They work for you, for free. This is critical, because there is no more complicated sector than biotech. You virtually need an MD or PhD from Harvard or Johns Hopkins to understand these companies.
With that said, the following four stocks are all owned by some of the best biotech hedge funds in the world. Moreover, they all have an average analyst price target that is at least 200% higher than its current share price.
1) AcelRX Pharmaceuticals (ACRX) has a current share price of $7. The consensus analyst price target is $15. That gives us a “street projected return” of 114%. Perceptive Advisors owns more than 15% of ACRX. Perspective is one of the top performing biotech hedge funds in the world, managing more than a billion dollars and returning an incredible 42% annualized since 1999. If you would have invested $10,000 in Perceptive in 1999, you would now have $1.3 million.
2) Ocera Therapeutics (OCRX) has a current share of $6.97. The consensus analyst price target is $17. That gives us a “street projected return of 143%. Ocera is owned by RA Capital Management, another top biotech focused hedge fund. RA Capital has returned 40% annualized since 2002, without one losing year, and is run by Peter Kolchinsky, a Harvard PhD in Virology.
3) Ariad Pharmaceuticals (ARIA) has a current share price of $6.50. The consensus analyst price target is $14. That gives us a “street projected return of 115%. Ariad is owned by one of the best emerging biotech hedge funds, Sarissa Capital Management. Sarissa is run by Alex Denner, a Yale PhD and the former head of healthcare investments for Carl Icahn. Sarissa owns almost 7% of Ariad.
4) Infinity Pharmaceuticals (INFI) has a current share price of $15. The consensus analyst price target is $39. That gives us a “street projected return of 160%. INFY is owned by one of the best and longest running biotech focused hedge funds, Orbimed Advisors. Orbimed runs over $10 billion dollars. The fund is run by the Princeton educated Samuel Isaly, and has returned 27% annualized since 1993. Orbimed owns almost 10% of Infinity Pharmaceuticals.
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This past Friday on CNBC, billionaire energy mogul T. Boone Pickens predicted that oil prices would be near $80 by the fourth quarter of this year. His oil prediction is based on the thesis that U.S. energy companies will drastically cut back on production. That would decrease the supply of oil produced, eventually driving prices higher again.
Pickens said the number of rigs drilling for oil in the U.S. declined at the second biggest weekly rate in more than 24 years.
If he’s right, and oil bounces back to levels last seen just two months ago, many small and mid-cap energy stocks are in position to double or triple, by returning to levels traded when oil was last $80. Of course, first oil needs to bottom. For those looking for reasons to believe a bottom is here for oil, at the close today, crude traded into rising 16-year trendline support.
This trend started in December of 1998 and touched in late 2001, and again in late 2008 — each time bouncing aggressively. From those dates, within twelve months oil was 160% higher, 100% higher and 146% higher, respectively.
Through our analysis at BillionairesPortfolio.com, we’ve identified the following five stocks that could double or triple if oil prices go back to $80.
1) Oasis Petroleum (OAS)- Billionaire hedge fund manager John Paulson owns nearly 10% of this stock. The activist hedge fund SPO Advisory owns 8% and has been buying the stock on almost every dip. When oil was last $80, OAS was trading $30.74 or 130% higher than current levels.
2) SandRidge Energy (SD)- Billionaire hedge fund managers, Leon Cooperman and Prem Watsa own almost 20% of SandRidge. This stock traded above $4 last November, when oil was $80. That’s 185% higher than its current share price today.
3) Gran Tierra Energy (GTE)- This might be the cheapest energy stock on the planet. The company has zero debt, and $1.30 in cash per share, more than half of its current share price of $2.26. With this much cash, you are getting the company’s oil and natural gas assets for a song. When oil was last $80, GTE was trading at $4.64 or 110% higher than current levels.
4) Energy XXI LTD. (EXXI) – If oil goes back to $80 a barrel, EXXI should be worth almost $8 a share. That’s nearly a triple from its current price of $2.80. Energy XXI sold for as much as $24 a share just 7 months ago.
5) Breitburn Energy Partners (BBEP) – Breitburn should be a near triple if oil goes back to $80. The stock already popped today by 22%. BBEP currently sold for $17.56 last November, when oil prices were at $80 a barrel. Breitburn pays an incredible $1 per share dividend, giving the stock a current dividend yield of 15%.
To find out more stocks positioned to double and triple, join our premium service. Just click here.
Billionaire investor Bill Ackman has one of the best investing track records in the world. When you add back fees, Ackman has returned 1,199% since starting his fund in 2004. That compares to 119% in the S&P 500 for the same period.
Of course, if you invested in his fund back in 2004, you had to pony up a huge initial amount, likely $5 million or more. You had to agree to remain invested in the fund for a specific period of time, likely three years at minimum. And you had to pay Mr. Ackman a big cut of that handsome cumulative return. With that, after Ackman has taken his cut throughout the past decade, investors who have been in his fund since day one sit with a cumulative return of 627%. They put all the money up, but they share in just a little more than half of the total profits generated on their cash during the past 10 years. Still, no one would argue with a seven-fold return over a decade. It’s outstanding.
In his recent letter to investors, Ackman explained that there is no need to pay him fees. He admits that following his portfolio is easy. He says “free riders” can follow him “with none of the costs or the illiquidity, and with all of the upside.” In plain English, this means you can piggyback his investments without paying him fees, without putting up a multi-million dollar minimum investment in his fund and without having your money locked up for three years.
How is this possible, you might ask? When Ackman’s fund, Pershing Square Capital Management, takes a stake of 5% or more in a company, he is required to notify the SEC within 10 days, through a public disclosure filing called a Schedule 13D. And then, on a quarterly basis, Ackman is required to file form 13F with the SEC. This filing discloses all his fund’s positions. Ackman says, looking back, in 87% of the activist campaigns they’ve launched, the public could have bought the stocks at a “bargain price” even the day after he made his public filing.
While Ackman is one of the best-performing investors on the planet, his portfolio might be one of the easiest to replicate. His fund holds just seven core positions.
Here’s a look at the holdings of Ackman’s $13 billion Pershing Square fund as of its last filing:
Allergan (AGN) – AGN represents 38% of his portfolio. He has a $5 billion stake in the company.
Canadian Pacific Rail (CP) – CP represents 22% of his portfolio. He has a $2.8 billion stake.
Air Products & Chemicals (APD) – APD represents 20% of his portfolio. He has a $2.6 billion stake.
Burger King Worldwide (BKW) – BKW represents 8.5% of his portfolio. He has a stake worth $1.1 billion.
Platform Specialty Products Corp (PAH) – PAH represents 6.2% of his portfolio. He has a stake worth $800 million.
The Howard Hughes Corporation (HHC) – HHC represents 4% of his portfolio. He has a stake of $535 million.
Zoetis Inc (ZTS) – ZTS is a new addition to his portfolio. It represents 1.5% for a value of $200 million.
Ackman’s Pershing Square fund also holds small stakes in Fannie and Freddie Mac. And has a famous short position on Herbalife.
But Ackman has 80% of his fund’s money in just three stocks!
That shows extraordinary conviction, and it also means he can’t afford to lose. That conviction and confidence is present only because he has the ability to gain control of, and influence on, the companies he invests in.
Right now, you can follow the best performing billionaire activist hedge fund manager in the world, Bill Ackman, into an option trade that could make 1,000% or more. Just sign up for our Billionaire’s Portfolio and we’ll send you all of the details on this option immediately. Click here to join.
This morning the Swiss National Bank (SNB) surprised the world by abandoning its managed Swiss franc floor against the euro. The SNB said as recently as Monday that they remained committed to the 1.20 minimum EUR/CHF rate, a floor they have maintained for three years. They also announced a further reduction to an already negative deposit rate. Swiss bank account holders will now be paying 0.75% for the privilege of having funds on deposit in the Swiss banking system.
The move by the SNB created a violent 28% collapse in EUR/CHF.
And, as you can see in the chart below, there was an equally violent collapse in USD/CHF.
After the initial massive gap in CHF pairs, the CHF is now trading well off of its strongest levels of the day. SNB chief Jordan said in his postpartum press conference that the Swiss franc dramatically overshot and that he expected it to ultimately reflect the fundamentals of a soft Swiss economy with negative deposit rates. This statement acknowledges the huge dislocation in USD/CHF that has resulted from the SNB’s actions.
The Fed and the SNB remain on divergent monetary policy paths. The Fed is exiting emergency policies, while the SNB is going further down the path of aggressive, extraordinary easing policies. This fundamentally drives capital out of Switzerland and into U.S. assets. The Swiss can now buy 10% more U.S. treasuries and U.S. stocks than they could yesterday at this time.
Why did the SNB do it?
Why did they reverse course on a policy they’ve held steadfastly for three years, and to which they have promised to remain committed? It’s likely because they are expecting big and bold actions from the ECB next week. The ECB has been explicitly devaluing the euro through their policies and policy guidance. Meanwhile, the Swiss National Bank has been persistently gobbling up euros in defense of their EUR/CHF exchange rate floor. That euro stockpile has been persistently losing value, and all evidence points to much larger losses ahead. With that, it appears most likely that the SNB decided to step out of the way of the downhill freight train, the euro.
For global markets, attention continues to be squarely on Europe. And today’s events highlight that point. Stocks, interest rates and currencies have been swinging around, driven primarily by fears that the deflationary problems in Europe are a deeper signal of weak global demand. But weak global demand isn’t a new problem. It has been a clear problem from the outset of the 7+ year global financial and economic crisis. That dynamic has been improving, not worsening. Europe, however, is facing deflationary pressures and no growth due to other factors, most importantly, while they should have been rolling out policies to promote growth in 2010, they further strangled growth by tightening the fiscal belt.
We will hear from the ECB on January 22. European officials have been on a media assault in recent days in an attempt to manage expectations on the ECB decision. With today’s SNB actions, an announcement of outright purchases of sovereign debt by the ECB are expected, and likely more to go along with it (like a further cut in the deposit rate).
On January 25th we get results on the Greek elections, which will determine whether or not a new administration takes the reins. The anti-euro, anti-bailout, Syriza party is favored to take control. This poses a risk to the Eurozone and the euro. This party is expected to, at best, demand softer conditions on their bailout and reform program. At worst, they are a threat to take Greece out of the European Monetary Union altogether.
But if we look at yields in the weak countries in the EMU (including Greece), those markets tell us that Greece isn’t a threat to euro zone stability.
Instead of yields in the troubled euro zone countries trading at unsustainable/default levels, yields in Italy and Spain are now trading below that of U.S. 10 year yields (well below 2%). Greek 10 year yields were trading over 40% at the peak of the European sovereign debt crisis. Now, Greek yields are well below 10%. So again, for those looking for smoke before fire, the European sovereign debt markets are giving you no signals.
For now, it’s about how big and how bold Draghi and company will be. Big action should be very good for the global economy and very good for global markets.
The theme of the year has been divergent policies, with the Fed positioned to exit emergency policies this year, while the ECB and BOJ are positioned to do more aggressive QE. When you step back from the day to day noise, that theme continues to play out, and it is good for global stocks, good for the dollar and good for global growth.
The S&P 500 is now more than 200% higher than at its crisis-induced 2009 lows. But despite the powerful recovery in stocks, the rally has had few believers. All along the way, skeptics have pointed to threats in Europe, domestic debt issues, political stalemates, perceived asset bubbles — you name it. As it relates to stocks, they’ve all been dead wrong.
The truth is, global central banks are in control; they have been since coordinating in 2009 to save the worldwide economy from an apocalyptic spiral. And because the crisis was global, and the structural problems remain highly intertwined globally, the only hope toward achieving a return to sustainable growth is through continued coordination. The Federal Reserve has led the way on this front and continues to do so, now through forward guidance rather than outright quantitative easing.
How does this relate directly to the stock market? Simple: The Fed needs stocks to be higher. The Fed needs housing to be higher. Fed officials get their desired wealth effect through higher stocks. And from pinning mortgage rates at historical lows, they get wealth gains from rising housing prices.
The Fed can’t manufacture a sustainable recovery through monetary policy, but it can influence confidence. Members can assure the public that they stand ready to suppress any “shock risk” that might derail stock prices. And they, along with other major central banks, have proven they can do it. So with the elimination of a negative event that could tumble the stock market, why wouldn’t you own stocks? The Fed wants you to, and they are giving you no better alternative, with a 2.4% 10-year Treasury yield.
Still, there are plenty of naysayers that like to throw around words like bubble. They like to say the stock market is just a house of cards and that it’s completely manipulated by the Fed.
The truth is, the Fed does manipulate interest rates. That’s what they do. They set rates as a tool in an attempt to achieve their mandate of price stability and full employment. Stocks tend to be a byproduct of interest rate policy.
If core inflation runs hot, the Fed raises interest rates to curb it. When that happens, in normal times, stocks tend to soften. But these aren’t normal times. Core inflation is still under the Fed’s target of 2%. In the latest Fed minutes released Wednesday, officials noted inflation could stay low “for quite some time.”
Europe is fighting deflationary pressures, and so is Japan. So the Fed has no reason to raise rates. And even when they finally do, they are moving off of ZERO. When they move rates higher from such emergency, record-shattering low levels, it will not have the same effect as a normal rate-hiking cycle typically intended to cool down a hot economy. When they raise rates this time, it will be a celebration, as it will mean the economy and credit demand are both strong enough to deal with an increase in interest rates.
With this in mind, the economy, for the first time in a long time, will likely grow by about 3% into the end of this year and for next year. That means we have the underpinning for healthy earnings growth for stocks for the first time in a long time. And earnings growth drives stock prices.
For those who argue the economy is fragile, the bond market disagrees with you. The yield curve may be the best predictor of recessions historically. Yield curve inversions (where short rates move above longer-term rates) have preceded each of the last seven recessions. Based on this analysis, the below chart from the Cleveland Fed shows the current recession risk at 3.42% — virtually nil.
Given that central banks remain in control, rates are still exceptionally low and recession risk is nearly nil, any recent dip has been a huge buy opportunity. Still, several years into an economic recovery, fear continues to creep in for investors when there is any downtick in stocks. Perhaps it’s a form of post-traumatic stress disorder or simply a lack of perspective, but people seemingly have been conditioned to think another big crash is coming, despite the lack of evidence. The reality is, the U.S. economy is in a very different place than it was in 2008, and so is the global economy. Even if trouble were brewing, much of what might be an unknown in normal times is well-known now. We know how the central banks and governments will respond.
We’ve had seven declines of close to 5% or more in the S&P 500 since late 2012. In each case, the decline was fully recovered in less than two months. In most cases, the decline was recovered inside of one month. This is an amazing fact, yet many people have been focused on trying to pick a top rather than preparing to buy the dip.
You may have noticed I referenced the period from late 2012, in which stocks have been particularly resilient. This is not arbitrary. It coincides with the date Japan first telegraphed the massive policy effort to defeat deflation. The BOJ has since more than doubled its balance sheet, devalued the yen by nearly a third (vs. the U.S. dollar) and pushed up Japanese stocks by more than 100%. The massive BOJ experiment is a recipe for higher U.S. stocks. It pumps new money into the global economy and creates capital flows out of Japan and into U.S. stocks.
The above evidence supports the case for a continued rise in stocks. How high can they go?
If we applied the long-run annualized return for stocks (8%) to the pre-crisis highs of 1,576 on the S&P 500, we get 2,917 by the end of next year, when the Fed is expected to start a slow process toward normalizing rates. That’s 45% higher than current levels. Below you can see the table of the S&P 500, projecting this “normal” growth rate to stocks.
In addition to the above, consider this: The P/E on next year’s S&P 500 earnings estimate is just 16.8, in line with the long-term average (16). But we are not just in a low-interest-rate environment, we are in the mother of all low-interest-rate environments (ZERO). With that, when the 10-year yield runs on the low side, historically, the P/E on the S&P 500 runs closer to 20, if not north of it. A P/E at 20 on next year’s earnings consensus estimate from Wall Street would put the S&P 500 at 2,600.
You have the best track record of any living investor: 27.5% annualized returns over the past 52 years.
You even made money in an extremely difficult period for stocks; between 2000 and 2014, you averaged a 22% annualized return, versus a 3.8% return in the S&P 500. That’s nearly 20 percentage points of outperformance, annualized, during a period that included one the worst stock markets in our lifetime. This is outstanding.
That said, while you’ve had great recent success with high-profile stocks, other areas of your portfolio, particularly in the energy sector, have been very poor performers. Today we are writing to respectfully challenge you to execute your game plan and create value in the uncharacteristically weak spots in your portfolio.
Carl, you’ve stated often that you are an advocate for the little guy. You’ve even gone so far to say small investors should follow your lead into the stocks you buy. You’ve laid out specific analysis to support the case, demonstrating how easy and powerful following your lead can be. According to your study, over the past five years, if any investor had bought an Icahn-owned stock the day that you (or your team) joined the board of the company, then sold it the day the board seat was exited, that investor would have made a 27% annualized return.
That means your “board seat effect” could have turned $30,000 into just over $100,000 for the average guy. Moreover, within your analysis, these stocks were winners nearly eight out of every 10 times, when this condition of a board seat was met.
We agree completely with your premise. As you’ve said, “The little guy should be allowed to follow good investors without having to pay a fortune.”
We founded our research business, BillionairesPortfolio.com, on the same fundamental beliefs. And today, Carl, we have co-invested with you, following your lead into four stocks – each of which either you or your team have a board seat: Navistar (NAV), Nuance (NUAN), Transocean (RIG) and Talisman (TLM).
Carl, you paid $49 for your 6% position in Transocean; it now trades at $27.11. You paid $11.60 for your 6% position in Talisman; it now trades at $5.71. We estimate your price on Navistar is just over $32; you’ve built a 15% stake and held it for three years. It now trades at just $36.46. We estimate your average cost on Nuance at just over $18, for a nearly 20% stake. It now trades at $15.01.
As shareholders, we support you in your effort to create change in these companies, to unlock value. To be frank, given your mission to fight for shareholder rights and your record of executing against that mission, we expect success. Just as you hold the companies that you invest in accountable for maximizing the value of your shares, we hold you accountable to work on behalf of all shareholders to do the same.
We are frustrated that you have not spoken publicly about these energy investments and have made little progress toward your goals. You have over $2 billion of your fund invested in energy stocks, including Talisman and Transocean. We believe that it is time for you to get to work and start creating value in these stocks.
Energy stocks are selling at the most undervalued levels since the great recession. Transocean is near a 10-year low, selling well below its Great Recession price of $37. Talisman is at a 10-year low, selling below its Great Recession price of $6. And, as you know, oil prices are almost 100% higher than they were during the Great Recession — even following the recent oil price sell-off.
This underperformance isn’t just in the stocks we’re discussing (RIG, TLM), but is sector wide. The ratio of oil prices to oil stocks is below 1. The last time the ratio was below 1 was March of 2009 — at the depths of the global financial and economic crisis. There is no fundamental reason why these stocks should be selling for less than they were during the Great Recession.
We are calling on you, and your team, to take action.
We’ve heard your public voice on Apple (AAPL) and Netflix (NFLX). But we haven’t heard or seen the same type of effort and passion in the deeply undervalued stocks we are discussing.
We know you have billions of dollars of inspiration to turn the ship around on these stocks. Let’s look at some numbers on what it will take to right the ship.
You purchased Transocean back in January of 2013, and you got a board seat in April of 2013. You usually hold a stock for two to three years. You bought Transocean at $49. Based on the board seat analysis you’ve presented, Transocean should return 27% annualized. Within your typical holding period, we should expect to see Transocean up 61% from the date you won a board seat. That would put the share price at $72.50. Transocean is currently less than $28 dollars a share. That projects a 150% return in Transocean over the next six to seven months. Let’s get to work!
Next, your team received a board seat on Talisman Energy in December of 2013, when Talisman was $10.50. Using the same math from your board seat analysis, applying a 27% annualized return for every year you, or your team, has a board seat on a company, Talisman should be selling at $16.90 by next month. The stock currently trades for $5.00 and change. Carl, you have a lot of work to do in a very short time. This projects a nearly 200% return on Talisman by next month.
Obviously that target is highly unlikely. But over the next few months, we want to see progress toward the changes we know you can force, to begin the revaluing process of this stock. By December of 2015, your influence, based on history, should give shareholders a 340% return on Talisman, or $21.50 a share.
Carl, we think there is a simple formula for these stocks: You! We challenge you to get back to your activist ways. You and your team have seats on the boards of all four of these underperforming companies. Start creating value for us today. Force the CEO out. Force Nuance to sell itself to the highest bidder. Force Talisman to sell off its assets, piece by piece, to the highest bidder. Force Transocean to do the same.
You are the best investor on the planet because you have a simple playbook of buying stocks at deeply depressed prices, reforming troubled companies and selling for a huge profit. You don’t have a board seat on Apple. You didn’t have a board seat at Netflix. While those investments were successful, they represent a clear drift from your style.
By any standards, you have lost a significant amount of money on these stocks we’ve discussed. So get angry and fight. Fight for the little guy, just like you said you would do this summer. Shareholders are counting on you. And we know you are one of the few investors in the world that can do it.
Respectfully,
William Meade and Bryan Rich
Billionairesportfolio.com
The annual Invest For Kids Hedge Fund Conference was in Chicago this past week and featured many of the best hedge fund managers in the world. Below are some of the managers who spoke, and their favorite stocks:
1) Billionaire Larry Robbins of Glenview Capital likes Ebay (EBAY), Tenet Healthcare (THC), Teradyne (TER) and Cadence Design Systems (CDNS).
2) Steve Kuhn of Pine River Capital Management likes Japan (NKY), especially the 400 Japanese stocks that the nation’s Government Pension Investment Fund can trade. For more on Japan and the best stocks to buy, please click here.
3) Billionaire Bill Ackman of Pershing Square Capital Management, who is up an incredible 42% year-to-date, likes Valeant Pharmaceuticals (VRX) and Canadian Pacific Railway (CP).
First, let me say this: Most people lose money trading options.
It’s a very difficult game. But if you can find an edge, the returns can be huge. One of the best option-trading hedge funds in the business, Cornwall Capital, has averaged 51% annualized over the past 10 years. That turns a mere $20,000 investment into $1.2 million, in less than 10 years.
Two of the best option strategists that have ever worked on Wall Street are Keith Miller, formerly of Citigroup, and John Marshall, of Goldman Sachs. Both Miller and Marshall happen to be Blue Jays (i.e., Johns Hopkins University grads), like me. If you can ever find any of their research studies, print them out and examine them closely. They are excellent — and will give you an edge.
Below are the rules the best hedge funds use when trading options:
Rule #1
Options are like a coin toss; you’ll be lucky if half your option trades are profitable. That is why you have to make sure you get paid for the risk you take.
Only trade an option if your projected return is a triple or better. To do this you will have to buy an out-of-the-money option. And you should go out at least two months, preferably longer. Now, here’s the math:
Let’s say you make 40 option trades a year. Odds are at best you will only make money on 50% or half of these trades. Therefore, if you had 40 options trades and 20 of those trades expired as worthless, and the other 20 option trades averaged a triple or more, you would still make 50% a year. For example, on a $40,000 account taking 40 trades a year, if 20 option trades lose everything and the other 20 trades give you an average return of 200%, your account would be worth $60,000, giving you a 50% return.
So $20,000 would go to zero on the option trades that expired worthless. The other $20,000 would go to $60,000 on a 200% return.
Rule #2
Price predicts a stock’s earnings and fundamentals 90% of the time. According to Keith Miller of Citigroup, a stock will start to move one to two months ahead of its earnings date, in the direction of the earnings report. This means if a stock starts trending higher or breaks out higher before the company reports earnings, the earnings report will be positive 90% of the time.
Rule #3
When you are buying options on a stock, make sure the stock is owned by an influential investor or activist. These investors, such Carl Icahn, Barry Rosenstein of Jana Partners and the rest, are always working behind the scenes to push the companies to unlock value; this can come in the form of incremental positive change or big one-time catalysts. This positive announcement or catalyst usually emerges after the stock has moved up in price. So when you see an activist-owned stock breaking out, or trending higher, there is usually a good chance change is coming. Thus, you’ll want to buy calls on this stock immediately.
Rule #4
Only trade an option if there is an event or catalyst that will reprice the stock. This could be an earnings announcement, a company’s Investor Day or an annual meeting.
Rule #5
Only buy options when both implied volatility and historical volatility are cheap. Be a value buyer of options. Watch volatility. Buy volatility only when it’s cheap.
A perfect example of an option trade that fits all of the above criteria is Walgreens ($WAG).
> Jana Partners, run by billionaire Barry Rosenstein — one of the top 5 activist hedge funds on the planet — owns more than $1 billion of Walgreen’s stock. That’s more than 10% of the fund’s overall assets invested in Walgreen’s (Jana has $10 billion under management). Even better, they just added to their position last week, buying $77 million more during the market correction.
> Walgreen (WAG) just broke out of a consolidation pattern, and it looks like it is ready to make a big run (see chart below).
> Walgreen reports earnings on December 22nd. So whichever way the stock moves over the next month or two will predict whether the company’s earnings are positive or negative. Based on the stock’s current price momentum, the report will be positive.
> The Walgreen $65 calls are cheap, especially since they expire only two days before the company reports earnings. You can buy the Walgreen December $65 calls for just $1.10. That means, at $66.10 or higher, you will make money on this option. My price target for Walgreen, based on its recent breakout, is $69. That also happens to be where Walgreen gapped previously.
> If Walgreen stock trades just 10% higher to $69 by December 20th, you will more than triple your money on this option in less than two months. This is the risk-reward profile you want when trading options. Your goal should be to make 50% a year.
Momentum investing, or buying stocks with the largest six-month and one-year price gains, works well when volatility is low, with the VIX below 25. But when the VIX closes above 25, all bets are off. This is when mean reversion kicks in, and the sectors and asset classes that have performed the worst tend to turn into the market leaders.
What would that shift mean today? It would mean: Go long energy, long small caps, and short momentum-driven tech stocks (YELP, TSLA, FB, NFLX, TWTR), while trimming healthcare and scaling into retail.
The simplest play would be to buy energy stocks and small-cap stocks (or the Russell ETF), and short momentum tech stocks or the QQQ’s.
