Thursday, January 7th, 2010
Top 3 Plays to LEAP Ahead Your Portfolio
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Petroleo Brasileiro SA (NYSE:PBR), Goldcorp Inc. (NYSE:GG), and Amedisys, Inc. (NASDAQ:AMED) are three LEAPS (long-term equity anticipation securities) plays for long-term investors looking to lever up in 2010.
A Brief LEAPS Primer
LEAPS are publicly traded options contracts with expiration dates that are longer than one year. Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to prolonged price changes without needing to use a combination of shorter-term option contracts.
The premiums for LEAPs are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit. However, the high premiums also necessitate that investors carefully screen for reasonable plays and calculate risk/reward.
Petrobras: A Strong Bet on a Recovery in Oil
Petroleo Brasileiro SA, known as Petrobras for short, is a large and growing oil company located in Brazil. The company’s offshore discovery near Rio de Janiero, Tupi in the Santos Basin, has attracted worldwide interest after experts determined that it could contain between 5 and 8 billion barrels of valuable light crude oil.
Unfortunately, the oil is located thousands of feet below the ocean where it must be drilled out in a process that costs around $25 per barrel. This was a problem back when oil prices hovered in the $30s, but the recent increase to more than $80, combined with optimism in a long-term rebound, has led to confidence that prices could reach triple digits once again.
Currently, investors can purchase January 2012 LEAPS with a strike price of $50 for just $9.25 per contract. Essentially, this is a bet that PBR’s stock price will rise above $59.25 by January of 2012. Moreover, investors will only have to invest $925 for the rights to 100 shares instead of purchasing the 100 shares outright for nearly $5,000.
Goldcorp: An Inflation and Volatility Hedge
Goldcorp Inc., which is engaged in the acquisition, exploration, development and operation of precious metal properties around the world, may not be the most attractive stock right now with the price of gold retreating substantially over the past few weeks, but the yellow metal does provide a valuable inflation hedge in a post-stimulus economy.
Gold is also a commodity hedge that is capable of rising in a deflationary environment, since it tends to rise as a function of the level of risk in other markets and asset classes. As a result, many investors see gold prices rising after a period of consolidation, particularly as new threats in commercial real estate and continued unemployment keep uncertainty high.
Currently, investors can purchase January 2012 LEAPS with a strike price of $60 for just $5.45 per contract. Essentially, this is a bet that GG’s stock price will rise above $65.45 by January of 2012. Moreover, investors will only have to invest $545 for the rights to 100 shares instead of purchasing the 100 shares outright for nearly $4,200.
Amedisys: A Government-Sponsored Healthcare Play
Amedisys Inc., which provides home health services to chronic, co-morbid, and aging Americans, could see some strong upside from an increased in the number of covered citizens from a potential government plan. Meanwhile, device makers have historically shown higher-than-average performance and profitability ratios.
Healthcare spending grew at its slowest rate in about 50 years at just 4.4% in 2008, according to a recent government report. The drop was attributed to the fact that private health insurance dropped to 195.4 million people in 2008 from 196.4 million in 2007 in part because of job losses in the manufacturing and financial sectors amid the recession.
Currently, investors can purchase January 2012 LEAPS with a strike price of $50 for just $13.50 per contract. Essentially, this is a bet that GG’s stock price will rise above $63.50 by January of 2012. Moreover, investors will only have to invest $1,350 for the rights to 100 shares instead of purchasing the 100 shares outright for around $4,951.
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-- Written by Rick Telfur
