The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday September 14, 2004
Email – #197
** Joining Forces With an “Old Pro”
Sometimes you have to pay attention to who the real players are on Wall Street and on Main Street. One of the most successful entrepreneurs of our time is Barry Diller. He is the CEO of Interactive Corp. (NYSE: IACI), a powerhouse in many of the most promising sectors of the market.
Diller was the former CEO and Chairman of Vivendi Universal Entertainment, a major player at studios such as ABC, Paramount and Fox. Successful beyond measure at all of these companies, he ventured out to become one of the few people to make money from commerce over the Internet and TV. IACI owns Home Shopping Network, Expedia, Lending Tree, Ticketmaster, Hotwire, Hotels.com, Match.com, publications like CitySearch and a host of other businesses that millions of individuals use daily. These are brands that have not only made a mark in most of our bookmarks, but also make money.
I look at IACI like a mutual fund of successful Internet commerce sites under an umbrella of a more successful media and publishing company. For a while the shares were red hot, trading at $40 a share within the last year or so. Then the boom fell’… kind of. The boom that fell was a reduction in earnings guidance for the year ahead. And as momentum stocks are bought for extraordinary growth, they also fall when that growth disappoints.
Interactive’s lowered projections were the result of more competition and a stronger economy that slowed the growth in the travel division. Still, the company managed to project full-year operating income of over a billion dollars. The paradox in the internet travel business is that it actually does better during hard times. When the economy is going well, hotels and airlines don’t discount and higher occupancy rates lead to less inventory available for resellers. The opposite is also true.
In the case of Interactive, we are buying several things. First, we are buying a very successful, growing company at a slight premium over its book value. We are buying a stable of well-known brands with intangible value that could be realized in spin-offs or sales. We are buying the best and most seasoned manager in the “communications and e-commerce business”, and we are buying a low-debt company with more than $5 per share in cash (more than $3 billion in the bank).
Diller knows how to succeed – he has done it over and over. And with IACI he has created a company that is set up for continued brand expansion, or a takeout from a larger player like GE or Microsoft. Whether that happens or not, IACI is a strong company as a standalone. Currently trading at about 20 times 2005 earnings, the company has one more important thing going for it. In the past month and a half, the company’s CFO has bought 10,000 shares in several transactions at prices slightly higher than the current $22. This is the first insider buying at IACI in months. It is more significant since these purchases were made by an officer, the CFO no less, and not just an outside director. IACI will be volatile for some time to come. The shares are heavily traded and watched, so spikes in price can occur both to the upside and downside. Our bet is that the company will perform better or get acquired in the next two years at a price significantly higher than the current $22 per share. I would not be surprised if the company began to buy back shares with its massive cash horde, either.
Buy the IACI January 2007 (yes, 2007) $25 call options. The symbol is VSW AE. Since this option has MORE than 2 years and 4 months left on it, the spread is quite large between the bid and ask. The current offer is $3.70 and there is a lot of liquidity in this option. You may be able to get filled at a lower price in the coming days, but for now use $3.80 as your limit price. Set an initial MENTAL sell-stop at $1.90.
Regards,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol: Interactive Corp. (NYSE: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: New
Current Price: $3.70
Comment: Buy at $3.80 or better. Sell stop is $1.90.
Company / Symbol: Toll Brothers (NYSE: TOL)
Option / Symbol: Jan. 06 $35 put (YKW-MG)
Date Purchased: 8/12/04
Current Price: $2.50
Comment: Hold. TS is $2.10.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Jan. 06 $40 call (YRH-AH)
Date Purchased: 7/23/04
Current Price: $1.90
Comment: Hold. No TS.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Sold Jan. 06 $45 call (YRH-AI)
Date Purchased: 7/23/04
Current Price: $1.05
Comment: Hold. Sold call against Jan. 06 $40 position.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan. 07 $5 call (VCB-AA)
Date Purchased: 6/22/04
Current Price: $0.40
Comment: Hold. No TS.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan. 05 $5 call (EUQ-AA)
Date Purchased: 7/23/04
Current Price: $0.10
Comment: Hold. Sold call against Jan. 07 $5 position.
Company / Symbol: Lucent (NYSE: LU)
Option / Symbol: Jan. 06 $5 call (YXL-AA)
Date Purchased: 5/25/04
Current Price: $0.45
Comment: Hold. No TS.
Company / Symbol: Dynegy (NYSE: DYN)
Option / Symbol: Jan. 06 $5 call (YNY-AA)
Date Purchased: 5/25/04
Current Price: $0.80
Comment: Hold. No TS.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan. 06 $25 call (YDI-AE)
Date Purchased: 4/1/04
Current Price: $0.90
Comment: Hold. Sold call against Jan. 06 $20 position.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Jan. 06 $20 call (YDI-AD)
Date Purchased: 1/23/04
Current Price: $1.95
Comment: Hold. No TS.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan. 06 $30 call (WIK-AF)
Date Purchased: 2/9/04
Current Price: $0.10
Comment: Hold. Sold call against Jan. 06 $30 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.25
Comment: Hold. No TS.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (WZY-AC)
Date Purchased: 11/6/03
Current Price: $2.45
Comment: Hold. Sold call against Jan. 06 $12.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 06 $12.50 call (WZY-AV)
Date Purchased: 7/28/03
Current Price: $3.80
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.31
Comment: Buy under $10. No TS.
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Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club.
The editor of The Smart Options E-Report, The Income Trader – A Covered
Call Strategy and The LEAPS Option Trader, Karim is also a regular
contributor to The Oxford Club Communiqué. His highly successful trading
systems use covered calls and LEAPS to boost returns on blue chip stocks,
and during the bear markets of 2000 and 2001, his picks outperformed the
major market averages. Educated in England, Canada and the U.S. and fluent
in several languages, Karim travels the world to find the best investment
opportunities for our members.
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