The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, February 16, 2005
Email – #232
** Invest Like Warren, At An 88% Discount
Warren Buffett disclosed yesterday that his holding company Berkshire Hathaway bought 10 million shares of Comcast Cable (Nasdaq: CMCSA). A lot of investors picked up the phone and called their respective brokers or went online and bought Comcast shares for $32.50 apiece.
If you know about Buffett’s investing style, he is a value investor who buys for the long-term. Yet, the past few trades he has made, including a super win with TXU Corp., have been relatively short-term investments, held for two years or less. For a day trader, holding shares overnight is considered long term. For Buffett, a two-year trade is akin to a trigger-happy day trader.
No, Comcast is an excellent company in its own right, throwing off hundreds of millions of dollars in profits and expanding revenues at a healthy clip. It is the only pure play cable company left in the U.S. that is not heavily indebted or burdened with government investigations into impropriety.
It is now one of the largest providers of high-speed access, HDTV channels and Video on Demand. Voice over IP telephony was put on the menu for customers recently. Comcast has shown strong management prowess at managing finances and taking market share from both telecoms and satellite companies. Cable, as it turns out, is one of the best money-making oligopolies in business today. No wonder Buffett has taken a sizeable position.
Comcast is in a unique position. It is cash rich, churning out more than $7.5 billion in operating cash flow, of which over $2 billion is free cash flow. It is also buying back stock to the tune of nearly $1.3 billion in the past few quarters. For 2005 Comcast is predicting very strong growth across the board, with double-digit revenue growth and almost 40% higher free-cash flow. This company is firing on all cylinders.
I am inclined to believe that the market will shift toward high quality shares in coming quarters as the U.S. economy begins to slow. Companies like Comcast, and GE (which we already own), provide strong and predictable growth. They may not be on the verge of finding a cure for cancer, but they have the potential to grow share price as investors shift their focus to predictability in times of economic uncertainty or slowdown. If the economy does not slow, then Comcast will do even better. Cable is no longer a luxury but a necessity. And Americans are not shy about spending money on cable and high speed, regardless of price.
I am not guessing what Warren knows about Comcast, but I would rather be in his playground when it comes to buying quality companies. His track record is second to none when trying to uncover value. And, he has been a very reluctant investor over the past five years, adding very few positions to his portfolio. So far, he has been on the money with his recent picks, garnering many huge profits in the past two years. I liken an investment by Buffett to a major insider buying shares. He has the influence and the respect to get on the inside of any deal he puts his name to.
Action To Take:
Instead of buying Comcast shares for $32.80 today, I am recommending the Comcast January 2007 $35 LEAP calls (VPK AG.) These options are currently trading for $3.80 on the offer. Do not pay more than $3.90.
Right now we will start with an initial MENTAL sell stop of $1.95. I will be more liberal with this sell stop unless I see filings that indicate that Berkshire is unloading shares.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Comcast (Nasdaq: CMCSA)
Option / Symbol: Jan. 07 $35 call (VPK-AG)
Date Purchased: New
Current Price: $3.80
Comment: Buy. Don’t pay more than $3.90. Mental sell stop is $1.95.
Company / Symbol: UT Starcom (Nasdaq: UTSI)
Option / Symbol: Jan. 06 $20 call (WQZ-AD)
Date Purchased: 1/26/05
Current Price: $1.25
Comment: Hold. Sell stop is $1 (on the offer, not on the bid).
Company / Symbol: AngloGold/Ashanti (NYSE: AU)
Option / Symbol: Jan. 07 $40 call (VKE-AH)
Date Purchased: 1/5/04
Current Price: $4.60
Comment: Hold.
Company / Symbol: General Electric (NYSE: GE)
Option / Symbol: Jan. 07 $40 call (VGE-AH)
Date Purchased: 1/4/04
Current Price: $1.90
Comment: Hold.
Company / Symbol: Daimler Chrysler (NYSE: DCX)
Option / Symbol: Jan. 07 $40 put (VLN-MH)
Date Purchased: 11/30/04
Current Price: $2.90
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (WNL-AE)
Date Purchased: 11/2/04
Current Price: $2.10
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: $3.50
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Purchased: 12/10/04
Current Price: $1.50
Comment: Hold. Sold call against Jan 07 $25 position.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $4.20
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: $0.05
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.15
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: $4.90
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: $7.00
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.71
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.
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