In my Investing Strategy, I like to sniff around stocks which I have featured, when the S&P has experienced a period of selling. At current valuations, the S&P is at a point where I prefer to be lightening the load, or looking at setting up some covered calls to generate some funds. I had suggested some covered call opportunities on Feb. 1 around Tesoro Corporation (NYSE:TSO), Krispy Kreme Doughnuts (NYSE:KKD) and Tenet Healthcare Corp. (NYSE:THC). A couple of names performing strongly and worthy of consideration this time are Medidata Solutions Inc. (NASDAQ:MDSO) and American Railcar Industries, Inc. (NASDAQ:ARII)
Tesoro Corporation (NYSE:TSO)
Since Feb. 1, Tesoro went on a surge. The suggested May $50 option will likely be exercised given the stock currently trades in the mid- to upper-$50s , although the offered return was a respectable 9.7%. The Energy sector has managed to buck the trend in oil prices by pushing beyond the February price peak. Despite the strong price action, Tesoro Corporation has maintained a competitive forward P/E valuation of 9.3. Next earnings release isn’t due until May, so current price action is mirroring the broader market and whatever news items are floating around. The price of renewable fuel credits (required to conform to the government’s renewable fuels standard) has jumped from $0.01 to $1.00 per gallon in the space of a few months. This significant leap will likely attract attention in the company’s next earnings report, and will be a contributing negative on margins.
Given the relative position of the S&P, a larger pullback is likely on the cards sooner rather than later. Tesoro Corporation (NYSE:TSO)’s May $55 call around $4.70 might prove attractive for those expecting Tesoro to ease back in the months ahead.
Krispy Kreme Doughnuts (NYSE:KKD)
Hot off the press was Krispy Kreme Doughnuts (NYSE:KKD) disappointing earnings release. The May $13 strike is still holding its value around $1.20. The remodeling (and closure) of stores in Kansas and Missouri is likely to slice $9 million off the revenue stream, assuming the work doesn’t take longer than a year to complete. Concerns on meeting year-on-year growth targets are more compelling. In the current earnings report, same store sales grew 5.5% on a 6.2% rise in customer traffic. Domestic franchise was also strong, with a 6.8% growth in same store sales. International same-store sales declined on an exchange-adjusted basis. These will be tough figures to repeat on a regular basis.
The company opened its 500th international store in Mexico during the fourth quarter. It expects to have 900 international locations by fiscal end 2013; a very aggressive growth strategy which will lead to continued cannibalization in its international operations (i.e. lower international revenue until the expansion program stabilizes). The company also expects to have 400 domestic shops by 2017, over the 240 currently in operation.
Overall, it’s an aggressive plan, which is a long way from its earlier troubles. It will probably take a couple of years to bed in its international growth, which may see some missed earnings as it becomes a larger percentage of the overall revenue pie. A forward P/E of 19.9 is on par with Dunkin’ Brands Group’s 20.5 and discounted against Starbucks Corporation’s 22.0. So while the current earnings hangover selling will probably take a few weeks to play out, any decline will only make its valuation more attractive.
Tenet Healthcare Corp. (NYSE:THC)
The stock is on course to double in value since the November low. The suggested March $40 call will have exercised, leaving you with the earlier premium. Existing holders can look to May $45 call around $2.15 as a new covered call opportunity. As mentioned just a couple of weeks ago, this is a stock which is trading at about one fifth the value of its 2002 high.
The Affordable Health Care Act will provide the long term earnings engine, with very few negatives. The chief benefit is a reduction in the loss from the provision of non-insured health care. How the Health Care Providers position themselves to take advantage will be key. Aggressive pricing for inclusion in exchange-based plans will look to offset revenue against higher participation rates. Participating hospitals will be in a smaller network of providers, but will get more patients because there will be fewer choices available to the consumer. Tenet Healthcare has already penned three contracts for exchange plans in “tiered” networks. In these scenarios, participants will have to pay more for services outside of the tier structure. Tenet Healthcare Corp. (NYSE:THC) is in discussions to sign further exchange plan deals. Projections for Exchange Plans is for $50 to $60 billion in revenue from up to 13 million participants in 2014
Despite this, the stock’s price will not be immune to the trials and tribulations in the market, but any 10% trim off highs will probably be reason enough to start nibbling.
