The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, December 13, 2004
Email – #218
** Running With the Big Dogs
When a sector begins to move, the big dogs – the stocks that are best known – move first. They almost always lead the pack and experience the greatest initial pop. Let me give you an example:
When gold began its move, it was not Barrick, Placer Dome or AngloGold that moved first and farthest; it was Newmont Mining. Newmont is the biggest dog and consequently, when the institutional money is trying to find a home, it gravitates to the biggest and highest quality names.
There is one sector that is extremely beaten down today. It is pharmaceuticals. Thanks to all the talk coming out of the Capitol and thanks to the recent Merck fiasco, the pharmaceutical sector has been bashed mercilessly. What has not changed is the facts: People are getting older. They are spending more on drugs, and that trend is continuing.
As for getting foreign drugs at cheaper prices? There is only so much to go around. Canada has 35 million people. It is smaller than California – how much of a surplus do you think they have? The big pharmas burn through hundreds of millions in cash for research and development. A drug like Lipitor or Viagra can take five to 10 years to develop, and that costs money.
Right now, the market environment for big pharma is not that much different than 1992-3 when the Clinton administration tried to launch an attack on the industry with plans for a socialized system. It did not work, and that opportunity was among the best in history to buy pharmaceutical shares.
Today we have many issues in the sector. Each has a way of turning attention from the long-term potential of the industry and focusing back on the immediate problems of one or two companies. The truth remains that when the sector comes back into favor, and it will, the shares of pharmas will rise.
I look back to Wyeth as a good example. It was tagged in the huge Fen-Phen scandal about the side effects of its drugs. It was sued, tarred and feathered to the tune of many billions of dollars. To boot, the company had a mediocre financial profile. Yet it survived and recently hit new highs.
Perception and reality are not the same thing. We have to allow for perception to fade or change and reality to emerge. That is when big pharma will rally. And when it does, the biggest dog will move first.
That big dog is Pfizer (NYSE: PFE).
Pfizer has a fantastic profile; it is highly profitable and has good growth prospects. It almost does not matter though because when the big money goes back into drugs, they will be looking for liquidity and size. And Pfizer has both.
But, Pfizer, as all pharmas do, has a downside risk, as well. It has a Cox drug in its stable. This drug is based on similar technology as Merck’s Vioxx. But no one in the public knows whether it has the same side effects. That is the risk and that is also one of the opportunities.
Right now, Pfizer’s shares are down more than 30% for the year. That is a big dip. If the shares moved up 10% from the current $27 level, we could double our money. How? By taking a two-year trading position. You could buy Pfizer shares today for $27 or you could buy a two-year LEAP on Pfizer for 10% of that – or $2.70.
So if you wish to participate in the pharmaceutical sector using a low dollar cost/risk strategy, then pick up some control in the biggest dog in the sector.
**Action to Take***
Buy the two-year January 2007 $30 calls (VPE AF) on Pfizer (NYSE: PFE) – currently $9 below its 52-week high. It is currently at $2.65 on the offer. Do not pay more than $2.75. Our short-term target is $4 and our longer-term target is $6. We will use $1.35 as our initial MENTAL STOP LOSS.
AN URGENT NOTE: Also, here’s how you can join a select group of serious investors to learn how to multiply your money many times over. At Phoenix, AZ’s Pointe Hilton Squaw Peak Resort on February 21-22, 2005, Agora Financial will host Profits at the Peak Traders Conference. Eight top experts will reveal their techniques for beating the markets soundly, year in, year out. Presenters will include MST’s James Boric, Commodity Trend Alert’s Eric Roseman, Microcap Moonshot’s Brian Hunt, the 10 Minute Trader’s D.R. Barton, and The Oxford Club’s Louis Basenese and Karim Rahemtulla, to name a few. To reserve your spot now, visit http://www.agora-inc.com/reports/300Sconf/F300EB21/home.cfm or please call Jayle Watje 888.799.0463 or 410.454.0413, or e-mail her at jwatje@agorafinancial.com.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Pfizer (NYSE: PFE)
Option / Symbol: Jan. 07 $30 call (VPE AF)
Date Purchased: NEW
Current Price: $2.70
Comment: BUY.
Company / Symbol: Nortel Networks (NYSE: NT)
Option / Symbol: Jan. 06 $5 call (WNT-AA)
Date Purchased: 11/15/04
Current Price: $0.55
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (WNL-AE)
Date Purchased: 11/2/04
Current Price: $1.90
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Jan. 06 $22.50 call (WNL-AX)
Date Purchased: 10/19/04
Current Price: $2.90
Comment: Hold
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $5.70
Comment: Hold. No TS.
Company / Symbol: Lucent (NYSE: LU)
Option / Symbol: Jan. 06 $5 call (YXL-AA)
Date Purchased: 5/25/04
Current Price: $0.35
Comment: Hold. No TS.
Company / Symbol: Dynegy (NYSE: DYN)
Option / Symbol: Jan. 06 $5 call (YNY-AA)
Date Purchased: 5/25/04
Current Price: $0.70
Comment: Hold. TS is $1.25.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan. 06 $30 call (WIK-AF)
Date Purchased: 2/9/04
Current Price: $0.05
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: $0.30
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: $2.95
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: $4.60
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.61
Comment: Buy under $10. No TS.
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.
Copyright – 2004 Mount Vernon Publishing. Mount Vernon Publishing does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mount Vernon Publishing expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mount Vernon Publishing provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mount Vernon Publishing has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mount Vernon Publishing, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
