The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, November 8, 2005
#288
** Healthy Technology
These days, the only sectors that are doing well are technology and precious metals. We have options in each sector. Our Microsoft calls are doing well, as is our Placer Dome bull spread.
The reason, in my opinion, for strength in technology-based companies is their ability to generate growth consistently, by being innovators and cost cutters. This makes them appealing for companies looking for ways to make their operations more efficient by reducing labor costs and increasing their reliance on technology.
One of the fastest growing fields in technology is in the healthcare field. No surprise here, as healthcare is a multi-hundred billion dollar business with a lot of room for efficiency.
One company that is conquering this field is called Emdeon (Nasdaq: HLTH) The company is growing both its top and bottom line in very healthy fashion. The company provides healthcare information services and technology solutions. It provides the technology to allow healthcare providers to automate key business healthcare functions, like electronic transactions, document management, data warehousing and consulting services. The company also provides physicians and the general public with an online source for information through public and private portals.
This company, which used to be known as WebMD, recently spun off its subsidiary, WebMD Health, hence the reason to change its name to Emdeon. The company has almost $3 per share in cash and marketable securities on its books, thanks to strong profitability and the success of the WebMD IPO.
The company has been growing revenues at a double-digit rate year over year for the past three years, and this pace looks to continue as the company penetrates more of this massive industry and continues to build its credibility. Emdeon has put in place a model that takes advantage of its position as a one-stop shop for all aspects of medical information and processing services. It has grown revenues consistently over the past four years, and in the past eight quarters, revenues have increased quarter over quarter with the company achieving consistent profitability more than two years ago.
What has held the shares back over the past few years is expectations of huge profitability quickly. This misconception occurred mainly due to investors seeing strong revenues from an online company, but not seeing strong profits accompanying those revenues. The reason for this is the massive amounts invested by HLTH in building out its information infrastructure over the years.
Now, the company is entering into its sweet spot and should begin to see accelerated growth in the years ahead, as the bulk of its spending on build-out is behind it.
A few days ago, the company announced an increase in its share repurchase program to $200 million. Over the past couple of days, insiders, including officers, have been buying substantial amounts of shares in the open market. This falls on the heels of the CEO publicly stating that 2006 should see accelerated growth.
In my opinion, the shares, which are trading closer to their 52-week lows than their highs, offers strong upside potential over the next couple of years. In addition, I think the company could make a nice candidate for a take-out. Currently trading at two times revenues, about two times book value (considering the recently released cash/marketable securities of $832 million), it is at the lower end of tech valuations. It’s strong information-based infrastructure – and profitable and growing operations – could make a good addition to one of the major online players. Especially to those looking to expand into the medical information and processing field and to buying a company that would be immediately accretive to earnings.
Here’s what to do:
Buy the Emdeon January 2008 $10 call LEAP (WGQ AB). These are currently trading at $1.55 on the offer – do not pay more than $1.65.
If the shares approach their 52-week highs of $11.70 over the next 12 months, we could easily realize more than 50% profits from this position.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Emdeon (Nasdaq: HLTH)
Option / Symbol: Jan. 08 $10 call (WGQ-AB)
Date Purchased: New
Current Price: $1.55
Comment: Buy. Do not pay more than $1.65
Company / Symbol: Target (NYSE: TGT)
Option / Symbol: Jan. 08 $50 put (WDH-MJ)
Date Purchased: 10/20/05
Current Price: $4.20
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF-AF)
Date Purchased: 8/8/05
Current Price: $2.30
Comment: Hold.
Company / Symbol: Sun Microsystems (Nasdaq: SUNW)
Option / Symbol: Jan. 08 $5 call (WSU-AA)
Date Purchased: 7/27/05
Current Price: $0.75
Comment: Hold.
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $0.50
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.98
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Buy Jan. 08 $17.50 call (YDI-AW)
Date Purchased: 9/19/05
Current Price: $4.50
Comment: Hold
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan. 08 $25 call (YDI-AE)
Date Purchased: 9/19/05
Current Price: $1.50
Comment: Sold call against Jan. 08 $17.50 position.
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Buy Jan. 08 $30 call (WGG-AF)
Date Purchased: 9/6/05
Current Price: $3.50
Comment: Hold
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Sell Jan. 08 $40 call (WGG-AH)
Date Purchased: 9/6/05
Current Price: $1.15
Comment: Sold call against Jan. 08 $30 position.
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $7.50 call (VRF-AU)
Date Purchased: 10/7/05
Current Price: $2.80
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $12.50 call (VRF-AV)
Date Sold: 10/7/05
Current Price: $1.15
Comment: Hold. Sold call against Jan. 07 $7.50 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ-MM)
Date Purchased: 3/1/05
Current Price: $1.15
Comment: Hold.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ-MK)
Date Sold: 3/30/05
Current Price: $1.70
Comment: Hold. Sold put against Jan. 07 $39 position.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $4.90
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Sold: 12/10/04
Current Price: $2.35
Comment: Hold. Sold call against Jan 07 $25 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (NAY-AX)
Date Purchased: 8/29/03
Current Price: $0.05
Comment: Hold.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan. 06 $30 call (NAY-AF)
Date Sold: 2/9/04
Current Price: $0.05
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 06 $12.50 call (CHK-AV)
Date Purchased: 7/28/03
Current Price: $16.50
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (CHK-AC)
Date Sold: 11/6/03
Current Price: $13.50
Comment: Hold. Sold call against Jan. 06 $12.50 position.
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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