Chat Transcript for Feb 22, 2012: Options, takeovers, oil and much more

Here’s the transcript of today’s chat. See you next week at 2pm EST at http://tradingwithcody.com/chat for more Q&A where you can ask me anything.

Q. How often are you planning to change the rating system? daily? weekly? on an event by event basis? (I am thinking of Thai flood again and how would you change the rating for STX)
A. I’ll do the rating system itself completely fresh the every time I send out the list of positions. But I’ll also sell a 9-rated stock in a flash if something changes intraday or overnight to one of them that would prompt such a change. The ratings system is a way of communicating to you guys, along with the relative size of each position in my portfolio, what my take on each individual position at the time I list the positions. Great question, thank you.

Q. I have registered for the Aapl conference and live a few blocks away in a loft in a Downtown LA historic building… Would love to have some members and Cody over for wine and cheese one evening of the conference or any other time that might work. If interested please email me dbensou@gmail.com
A. — that is REALLY nice of you and I look forward to it. I love the idea of having a TradingWithCody group session. We’ll start trying to do that every time we go to a conference. Next time at a bar, maybe. Anyway, it’s very generous of you to open up your home. Let’s plan on doing something Thursday evening. Maybe say, 6pm PST Thursday? Everybody interested email: dbensou@gmail.com for details. Rock on.

Q. Cody: YHOO and ETFC are both considered by some to be take over plays. Which of the two do you think is a better buy for the next 6 months to a year?
A. There’s a lesson that I’ve learned over the years, best communicated by my old mentor James Cramer back when we used to sit down on a regular basis to go through the positions and strategies in my hedge fund. Almost every time I mention something I learned from Jim Cramer, I get a bunch of angry comments from readers. And let me be clear — Cramer’s writings and seeming often daily flip-flopping on his stock picks and market calls and what not drive me crazy too. And Cramer and I don’t talk anymore because he got mad when I went to Fox Business and became a TV guy myself. Anyway, I learned a ton of stuff from Cramer and I’m not shy about using lessons I’ve learned no matter where I learned them or from whom I learned them. And Cramer always says taught me that a company being an acquisition target is never enough in its own right to own a stock. It’s great to own a stock that is cheap and growing and has other catalysts that is in addition to that, an acquisition target. But even as I do expect Yahoo and EFTC to both get taken out sometime in the next handful of years, I have no idea when or who will buy them and or at what price it will happen at if it does. As for the two individual stocks you just asked about — Yahoo’s just such a crappy company with no growth and no technology path forward for continuing to compete against Google and Microsoft not to mention Apple. I have no interest in trying to game a Yahoo takeover in that context. And ETFC — it’s not cheap and it’s not got a clean balance sheet and other than being a takeover target, I don’t have any interest in that one either.

Q. if nuan is not in siri as much as u like who is it???
A. If Nuance isn’t powering Siri, I think Apple’s probably just got it figured out with their own software already. Not sure and Apple ain’t saying and it’s hard as hell to source a software supplier. You can always tear an iPhone apart to see who makes the components and hardware in it. But the software? Unless they tell you “Powered by…” there’s no way to know. I just don’t think Nuance’s growth numbers in smartphones is reflective of the growth that they should be getting were it powering the iPhone 4S and the 40 million plus units it has sold in the last few months. Nuance growth is still nice enough to keep me invested in it for the long-term even as I’m worried about it in the near-term should it be confirmed that it’s not powering Siri.

Q. Cody, what do you think of the run in oil, do you think it still has legs?
A. Oil’s all about the Middle East for now. If Iran and Israel continue to warmonger, I, along with everybody else, would expect oil will continue higher in the near-term. If war actually breaks out with Iran involved, it’s like to pop big. I’d probably look to short oil above $130 or so no matter what the geopolitical climate and war status of the Middle East is, but it’s not there yet and I don’t like the risk/reward as either an oil short or as an oil long as the current set up.

Q. Cody a couple weeks ago you explained you would let go of some shorts because the markets were heading higher in the short term. Can you explain why you’re bullish after the markets rallied so much since the middle of December?
A. No easy answer to “why I’m still bullish even after this big rally”. The short answer would include: *Still so many confident bears and shorts who are sure the market can’t break out. *The Fed’s still doing everything it can to create as many asset bubbles as it can, and I still think that can and likely will at some point drive a serious echo-techo bubble in tech stocks, which might very well kick off sooner rather than later. *Profit margins, despite being at all-time highs continue to surprise to the upside and the government’s doing everything it can to prop up every major corporation it can through any tax break, cut, subsidy, welfare payment it can which can further drive upside margins. *Do you know ANYBODY out there who’s actually saying, “Buy stocks, man, we are headed up 20% in the markets this year”. I bet you know lots of people saying “Sell stocks, we are headed for a sell off of 10-20% this year.” I bet they were saying the same thing 10% lower. I bet they’ll stop saying that 10% higher from here. *Smartpphone/tablet revolution and huge secular growth of both continue unabated and that’s mostly what we own.
All that said, I’m worried about that repeated underperformance of the Nasdaq and tech of late. And anybody who’s giving a market opinion…can be dead wrong!

Q. is ntap a buy here??
A. That NTAP 3 month chart sure is a buy. But NTAP ain’t cheap anymore and I’ve got no position in it.

Q. What can you tell me about Orbotech (Orbk). It is small, trades thin, has cash and a good product and good management but?
A. I have bad news for you. Looking that ORBK over made my skin crawl. Revenues will be DOWN 12% this year and are supposed to bounce back 15% next year. The stock ain’t expensive but I can’t imagine a scenario where I’d invest in this non-US company. It’s hard enough investing in the country I live in, much less trying to game a small cap stock based in Israel whose sales are falling.

Q. General Trading Question for Cody – when looking to make a trade, how much attention (if any) do you pay to 1) Recent sales and purchases by insiders and 2) Closing share imbalances?
A. Alistair, I might, maybe 1 out of 100 times worry about insider sales. I’ve known insiders at LVLT, MSFT, CSCO and many other places who have unloaded their shares and have regretted it big time as their stocks ran 1000%s afterward. Then again, I’ve also seen insiders bail just before a horrible quarter portending a huge market problem for their employer on occassion, so you it’s not something to entirely dismiss. Never looked or cared about a share imbalance when making a trading decision in my life. How would you game what the share imbalance means for the stock the next day, week or month anyway?

Q. Hi Cody, do you own calls in Apple and FIO? Both are rated high on your list. What is your opinion for June $35 calls in FIO and Oct $550 calls in Apple. Thank you
A. (Great user name, btw!) I own just common in Apple from much lower prices and I both common and calls in FIO. The June $35 Fios are going to be wildly risky, as this is a wildly volatile stock that I think might swing between $20 and $50 for months, and who knows where it will be in June of this year. Lower priced or longer-dated are safer ways to buy the FIO calls, but they will be more expensive than higher-priced and shorter-dated calls. And anytime you use options you can lose all of your capital in just a few months, so be careful. Apple October $550s probably are safer, but again, I’d rather just own the common for now. Next time Apple gets crashed for some reason, I might look at adding Apple calls.

Q. What’s your take on ENTR. I think it should do well with Apple TV…
A. Why would you presume that Apple TV needs anything from this tiny little “Systems Maker”, ENTR? It’s not a bad company and it’s in a growth market (home networking, like you said), but I have no idea if Apple TV will use anything ENTR makes and frankly, I highly doubt that it will.

Q. cody, greetings you thoughts on MT pls
A. Greetings back to you. As for MT: “ArcelorMittal operates as an integrated steel and mining company. The company serves global carbon steel markets, including automotive, construction, household appliances, and packaging. It offers commodity steel, long, flat, carbon steel, and alloy products. The company also produces iron ore and metallurgical coal worldwide with key mining activities in Algeria, Australia, Bosnia, Brazil, Canada, Kazakhstan, Liberia, Mexico, Russia, South Africa, Ukraine, and the United States. It owns a portfolio of approximately 20 mines in operation and development. The company, formerly known as Mittal Steel Company N.V., was founded in 1989 and is headquartered in Luxembourg.” Did you see what I wrote earlier about how hard it is to invest in the US much less trying to game a Luxembourg company with operations in developed and war-torn countries around the world? Moreover, I spend 80 hours a week staying ahead of the trends in tech and finance and political forces here in the US to give us an edge in the stocks I trade. I have no edge in gaming the global mining operations of a pure commodity. I wrote an article for the FT back in 2006 about why I’d rather own AAPL than copper-producer Phelps Dodge. Same holds true in 2012 in regards to MT — I’d rather own AAPL.

Q. if you want to buys calls in a stock say 6 months out, does it make a difference if you buy calls that are closer to the asking price but more expensive or further away from asking price but less expensive????I don’t have alot of money to play with so I usually do the later and am wondering if I am screwing myself???
A. Great question. Yes, it does matter and here’s how. You get more upside leverage when you buy the cheaper calls with the higher strike prices, but there’s a lot more risk because the stock would need to rally higher to get past those strikes so that you are in the money. And the longer out the expiration dates, the more “time slippage” you have as you are paying a premium for having a longer time before the options expire, which is obviously valuable because stocks can make a huge move in the extra month or six months or whatever time you’re paying up for. Buying a long-dated call with a higher strike price is risky and expensive, so you don’t want to risk more money than you can afford to lose of course. On the other hand, if the stock blows past your strike price and you were able to buy a bunch more call options than you would have if you’d bought lower strikes, you’d have much more profits than if you’d just bought fewer of the lower priced call options. Risk and reward are reflected in the costs. So be careful no matter what you do when you use any options ever.

Okay folks, that’s a wrap. Thanks for subscribing, thanks for the great questions and I’ll see you guys back here next Wednesday for more.