Russell’s Redux – Revisiting Tech Stock Recommendations from Barron’s

I apologize for not getting this up yesterday, but the civic duty of jury service inCookCountywas required. My number was never called so I did not see a case, but in return for a day of sitting around I received a payment of $17.20 and I’m hoping for annual pension of just under $100,000 a year (inside IL joke for those of you scratching your head).

This past weekend, the cover story in Barron’s highlighted their top Technology picks over the next few months to three years. When I see something that touts longer term positions like this one word jumps in my mind – LEAPS (is that really a word?).

The Barron’s article discusses 10 technology stocks that have bright prospects complete with target prices. I thought LEAPS again when I saw technology stocks because the majority of these stocks do not pay dividends. Holding a LEAPS call option give the holder the ability to benefit from an increase in the price of the underlying security. The holder of the LEAPS does not receive any dividends paid by the underlying company. Also, to satisfy full LEAPS disclosure, a holder of a LEAPS will not get to vote proxies like holders of the stock.

The table below takes Monday’s closing prices for each stock along with the target price, timing of the target and expected return based on purchasing shares. All these stocks were higher yesterday so the returns are not quite the returns that show up in the Barron’s article.

 

Stock

Ticker

Close

Target Price

Months To Target

Return

Fusion-io

FIO

30.32

52.00

12

71.50%

Oracle

ORCL

32.87

40.00

12

21.69%

Tibco Software

TIBX

28.01

35.00

12

24.96%

Electronic Arts

ERTS

24.94

40.00

24

60.38%

Nuance Communications

NUAN

26.15

30.00

12

14.72%

Ancestry.com

ACOM

25.30

44.00

18

73.91%

Hewlett-Packard

HPQ

26.02

30.00

6

15.30%

eBay

EBAY

32.37

40.00

12

23.57%

Fortinet

FTNT

19.12

25.65

36

34.15%

Apple

AAPL

405.77

495.00

12

21.99%

 

The target times ranged from six months (HPQ) to thirty six months (FTNT). Of these ten stocks six appear (100% my judgment here) to have LEAPS that are liquid enough to substitute for holding the stock. Those stocks are highlighted in bold in the table.

What I decided to do (again 100% my judgment not a recommendation) was to compare a long position in the LEAPS that have at least a delta of 50 and a delta of 70 to a long position in the stock. The table below summarizes this for the six stocks that made the liquidity cut. All the contracts are Jan 2013 LEAPS with the exception of the HPQ contract which is the May expiration (the HPQ target is a six month target). Also, the target price and timing in the article for ERTS was 24 months, but the 2014 LEAPS have not been listed on that stock yet. The 2014’s for ERTS should be available on November 14th.

 

Ticker

Close

Stock Return

50 Delta Strike

Premium

% Profit

at Target

70 Delta Strike

Premium

% Profit

at Target

ORCL

32.87

21.69%

35

3.85

29.87%

25

9.80

53.06%

ERTS

24.94

60.38%

25

4.50

233.33%

20

7.25

175.86%

NUAN

26.15

14.72%

26

2.45

63.27%

22

6.90

15.94%

HPQ

26.02

15.30%

27

3.00

0.00%

22

5.80

37.93%

EBAY

32.37

23.57%

35

4.70

6.38%

25

10.30

45.63%

AAPL

405.77

21.99%

440

49.62

10.84%

360

88.50

52.54%

Of course there are more factors and more potential outcomes that just hitting the target at option expiration. Use of leverage is a double edge sword and if the recommendation in the article turns out to be a dud, the loss of the whole capital commitment is more likely than if the stock were purchased.  However, this analysis shows that whenever there’s a stock recommendation and you are considering pulling the trigger, a quick check of the LEAPS that are trading on that stock may be worthwhile.