Friday, October 30, 2009

Why Buy RIMM, and How?

7 Reasons Why I am Interested in RIMM:

1. Has the company performed well consistently?

How RIMM Scores:

RIMM's return on equity has been consistently above the Diversified Commun Svcs industry's average ROE over the last five years.

What This Means:

This meets The Warren Buffett Way guideline for a company that is performing well annually.

2. Has the company avoided excess debt?

How RIMM Scores:

RIMM's long-term debt/shareholder's equity ratio has stayed below the Diversified Commun Svcs industry's average over the last five years.

What This Means:
This signals that RIMM's management is not relying on debt to boost returns on equity

3. Can managers convert sales to profits?

How RIMM Scores:

RIMM's net profit margins have been consistently above the Diversified Commun Svcs industry's average over the last five years.

What This Means:

High profit margins reflect not only a strong business but management's tenacious spirit of controlling costs.

4. Are managers handling shareholders' money rationally?

How RIMM Scores:

The number of RIMM's common shares outstanding has decreased over the last five years.

What This Means:

This is a sign of rational management. When executives actively buy back a company's shares in the market, they are demonstrating that they have the best interests of their owners at hand rather than a careless need to expand the corporate structure.

5. Has management actually increased shareholder value?

How RIMM Scores:

Over the last 10 years, investors have created $3.03 in market value for every dollar in retained earnings.

What This Means:

This signals a company that has been recognized by the market for earning above-average returns on retained capital.

6. Has the company consistently increased owner earnings?

How RIMM Scores:

RIMM's owner earnings have an average annual compound growth rate of 46.97% over the last five years.

What To Look For:

This is especially notable if RIMM has experienced different competitive forces or economic cycles during the same time frame.

7. Is the stock currently selling at a 25% discount to intrinsic value?

How RIMM Scores:

RIMM has an intrinsic value per share of $102.12. Assumptions: projected earnings growth rate for years 1-10 is 22.78% and 5.00% for each year after that. The discount rate used is 10.00%.

RIMM currently sells at $61.36 per share, which is a 60.09% discount to intrinsic value.

What This Means:

This margin of safety helps create a cushion that will protect Buffett-and you-from companies where future cash flows are changing. You can adjust earnings estimates and the discount rate yourself to see how intrinsic value calculations can change.

Interested in RIMM but Fearful of the near future.

I love the use of options in my trading my question when looking to buy a stock is can I buy it cheaper than the current price and how?

One way is the use of a Short Put...what is a short put?

The best way I can explain what a short put is is this...
A short put is the act of selling the right to sell a stock at fixed price for a set period of time. By doing this the seller of the put now has the obligation to buy the stock any time the stock price should trade below the "fixed" price otherwise known as the strike price (This would mean the option is In The Money or ITM.)
The sell of the put will receive cash or a credit for doing so. That money is the sellers to keep however as long as the option is open the credit is unusable capitol. Since the options was sold when opened it would need to be bought in order to be closed out.

I Sell 5 contracts of a Put for RIMM, which closed at $58.73,
Using the 60 strike price for the November expiration month I would receive about a $3.25 credit. It would look a bit like this:
STO 5 NOV 60 SP = ($3.25 x 500) $1,625

Until the Saturday following the 3rd Friday of November I would now hold the obligation to buy 500 shares of RIMM at $60 a share (this would cost $30k) MINUS my credit of $1,625 total cost also known as total Risk would be $28,375. Only if I am assigned my option, my broker however would more than likely require half if not all of the risk available in order to open a position like this, commonly known as a Naked Put.
If I have the capitol and was looking to buy the stock anyway why not use a naked put?
I could go out and just buy RIMM at its current trading price of 58.73 per share which would cost about again using 500 shares... $29,365.

Using the naked put would save me about $1,000 bucks.

The Fear of Trending Lower???
The best way to calm this fear is to buy a put at the same strike price put use a different expiration month (usually about 3 - 6 months of time value.) Also known as a Put Calendar.
By adding this Long Put this now gives me the right to sell the stock at 60 the protection is this; If i am assigned the short put and the stock price continues to drop my Long Put will gain value so when new support is found I could then sell the long put and book the profit in essence reducing my cost basis by what ever the difference comes out to be.

STO 5 Nov 60 SP = (3.25)
BTO 5 Mar 60 LP = 7.70
Net Debit or Cost of the Trade = 4.45 ($2,225 = RISK)

For more Information or to set up a time for some One on One meetings about how to use puts in this market... Please contact me, Coach Nuge, at:

Make It a Great Weekend!!!

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