The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, January 9, 2007
Email – #352
** Start Your Engines
Something is up at Pep Boys (NYSE: PBY). The company looks like it is being set up for a buyout or a leveraged buyout in the coming months.
Management shuffles in late 2006 was the first clue. Strong insider buying by certain directors and officers is the second clue. Finally, you have a spate of MASSIVE insider buying by several hedge funds and activist funds.
Here are the numbers: In the past six months, insiders and funds have accumulated more than 3 million shares of the company’s shares. The latest of these trades occurred as recently at mid-December. One fund, Barrington, represents over 10% of the company’s shares and has been pushing for the company to “seek strategic alternatives” – Wall Street speak for a sale or a privatization.
Pep Boys has been dogged by poor operating performance for a couple of years. Poor management, shabby stores, and poor strategic direction resulted in a plunge in share prices from near $30 in 2004 to a 52-week low of $9.33 on August 14, 2006.
In 2006, Barrington forced the company to make serious changes to its management team and its board of directors. The structure of the board changed from being run by former relatives of the founders to professional managers. One of the new appointees, Nick White, was the former Executive Vice President and General Manager of Wal-Mart’s super-center division for a decade before founding his own consulting company.
These changes, from new management to store remodeling and a focus on operation, are still in their infancy.
Recent quarterly results are starting to show a turnaround from operating losses to profits. This should continue going forward as stronger management controls and better focus from a more experienced and motivated board begin to take effect. The company is currently trading a few dollars above its book value of almost $11, and at less than one half times its annual revenues.
The most recent purchase of shares by the funds/insiders occurred at $14.02. The current share price is $14.40.
If Pep Boys is successful in its turnaround, there is a lot of upside potential for the shares. Back in 2004 when the shares reached their highs, the company was coming off a year when it earned almost $1 per share.
The next few quarters will show whether Pep Boys is on the right track. There is a lot of very smart money betting that the company is heading in the right direction or it is going to get bought out, and we are going to join them.
This recommendation is for an in-the-money LEAP call option. This means that we are buying an option with a strike price BELOW the current share price.
The reason for this is to reduce the amount of premium we are paying for the privilege of controlling the shares.
The $10 options are currently selling for $5.30 with a delta of 90. The delta of 90 means the we should participate in 90% of the move in the share price. For example, if the share moves up $1, our option should move up $0.90. The reason we are going deep in the money is to avoid paying too much premium. At the $5.30 level, with the share price at $14.40, our premium is less than $0.90.
Here’s what you need to d
Buy the Pep Boys (NYSE: PBY) January 2008 $10 LEAP call options (KSY-AB) at current prices of $5.30. This option is not as liquid as options for some larger companies, so be sure to take your time and use limit orders. Use $5.40 as your upper limit of what to pay. And, set a MENTAL SELL STOP at $2.50.
Good trading,
Karim
Current Portfoli
Company / Symbol: Pep Boys (NYSE: PBY)
Option / Symbol: Jan. 08 $10 call (KSY AB)
Date Purchased: New
Current Price: $5.30
Comment: Buy. Use $5.40 as your upper limit.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $40 put (WD MN)
Date Purchased: 11/27/06
Current Price: $1.55
Comment: Hold.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $48 call (YWZ AV)
Date Purchased: 11/27/06
Current Price: $2.50
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $2.95
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $12.57
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $1.50
Comment: Hold.
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $1.90
Comment: Hold.
Bull & Bear Spreads:
Company / Symbol: Allstate (NYSE: ALL)
Option / Symbol: Jan. 08 $60 put (WLZ ML)
Date Purchased: 12/8/06
Current Price: $1.85
Comment: Hold
Company / Symbol: Allstate (NYSE: ALL)
Option / Symbol: Jan. 08 $55 put (WLZ MK)
Date Purchased: 12/8/06
Current Price: $0.85
Comment: Hold. Sold put against Jan. 08 $60 position.
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15.00 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $0.86
Comment: Hold
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $0.70
Comment: Hold. Sold call against Feb. 07 $15 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $5.20
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $2.80
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $1.20
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $0.45
Comment: Hold. Sold call against January 08 $40 position.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (XLE MM)
Date Purchased: 3/1/05
Current Price: $0.10
Comment: Hold.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (XLE MK)
Date Sold: 3/30/05
Current Price: $0.10
Comment: Hold. Sold put against January 07 $39 position.
