The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Friday, June 29, 2007
Email – #274
NEW TRADE
Today, we’re going to add a new position to the portfolio… a valuation reversal play, based on “too much too soon.” We are going to add puts of Novatel (Nasdaq: NVTL) to the portfolio, based on the fact that the stock has rallied almost 190% this year, yet the earnings don’t justify the move… at least not yet.
Novatel provides wireless broadband solutions, including, “3G wireless PC card and ExpressCard modems, embedded modems, communications software, and fixed-mobile convergence (FMC) solutions.”
However, the stock is presently overvalued with a PE sitting at almost 67, trading at 2.7 times sales and over 5 times book value. And check this out: in the last three months alone there have been 44 insider sells, and zero buys ! You read that right. And in the last 12 months, there have been 64 insider sells, and only four buys. If the insiders don’t want the stock here, why the heck should we?
Even with the company’s torrid stock rally over the past year, net income available to share holders is a meager $12 million. Thus, the company’s net income to market cap multiple is a whopping 72.
What’s more… for the year, the Executive Chairman, CEO, Co-Founder and CTO will pay themselves upwards of $1.5 million, including stock options. That means the executives are paying themselves 13% of net income. Sounds a little heavy to me, and perhaps not in the best interest of shareholders.
And get this, the CFO recently resigned. He says he wants to “pursue another opportunity.” My question is this, when a key player of a growth company suddenly resigns… something could be wrong. After all, why would he resign from Novatel, if the company were truly in such a great position? Trusting my instincts, there could be something wrong, or happening within the company that could affect earnings in the coming quarters. It feels like the insiders are bilking the company for all it’s worth.
As the chart below shows, the stock is up almost 190% this year… but even more interesting, every time the stock has hit this level over the past three years, it failed. If the stock has slowly moved up to this point over the last two years, I might not be so skeptical… but given the torrid run of the last six months, my trading instincts tell me a large profit-taking pullback is about to ensue.
With all of the aforementioned in mind, we are going to buy the December 2007 $22.50 puts (NVU-XX) for no more than $1.50. There are only about 200 contracts open, so it may be a little hard to get filled. However, I’m expecting the stock to move up slightly from here, which should make it easier to get filled. We’re getting in on this trade slightly early for two reasons:
1. To make sure you can get filled.
2. This stock could get cut in half at any moment, and I don’t want to miss the trade by waiting for the exact top.
Exit is everything,
Mark Whistler
Current Portfoli
Novatel Wireless (Nasdaq: NVTL)
Dec $22.50 puts NVU-XX
Purchased: New
Current Price: Buy for no more than $1.50 .
Mosaic (NYSE: MOS)
Sep 07 $35 puts MOS-UG
Purchased: 6/14/2007
Current Price: $1.15
Echelon (Nasdaq: ELON)
Nov 07 $20 puts EUL-WD
Purchased: 6/05/2007
Current Price: $3.60
International Coal Group (NYSE: ICO)
Dec 07 $5 calls ICO-LA
Purchased: 5/21/2007
Current Price: $1.40
Digital Realty Trust (NYSE:DLR)
July 07 $40 puts DLR-SH
Purchased: 3/14/2007
Current Price: $1.65
If you have any questions, feel free to call one of our VIP Trading Services representatives at 888.570.9830 (toll-free) or e-mail: viptrader@oxfordclub.com, or contact Pillar One Advisors Ron McCoy, Gunn Allen at 800.720.6576 or Neil Fern, RMB Group at 800.831.3114.
Bi
Mark Whistler is a specialist in high-level trading techniques, and has worked as a licensed trader on various trading floors for over a decade. He is the editor of The Volatility Trader and is an Advisory Panelist for Xcelerated Profits Report through Mt. Vernon Research. Mark has written for The Motley Fool, Active Trader Magazine, BullMarket.com, OptionInvestor.com, and Working-Money online. His first book, Trading Pairs (published by John Wiley & Sons, Inc.), appeared on shelves in 2005. The work is a comprehensive guide to pairs trading and statistical arbitrage. His second book, Trade with Passion and Purpose, has been on shelves since February of 2007. Whistler also writes regularly for Investopedia.com, TraderDaily.com and TraderMonthy Magazine.
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