Checking price screens this morning, I noticed that the stock of Garmin (GRMN) – a company which we valued in October and for which we designed a successful bearish investment structure that expired in January – had moved back up to the $50 per share range. Members can find IOI Materials related to Garmin at the following links:
- Tear Sheet on Garmin (10/27/2016)
- ChartBook on Garmin (10/31/2016)
- Guided Tear Sheet workshop series on Garmin
- Garmin investment review article (1/20/2017)
We refreshed our valuation and checked recent news. The only story related to Garmin was an article reporting that Garmin competitor, Fitbit (FIT), had reduced its fourth quarter expectations. The article mentions that Fitbit may be losing market share to competitors, including Garmin.
Garmin will announce its own fourth quarter on February 22, but has not made an earnings pre-announcement.
The bearish call spread investment we highlighted in last October’s strategy showed a 20% separation between the sold call’s strike price of $50 and our assessment of the firm’s most-likely valuation. However, checking our model again, the valuation range has moved up slightly due to “time value of money” considerations, and the separation between the 50-strike option and the new most-likely valuation is less than 15%.
(Members interested in this “time value of money” effect are encouraged to ask about this during Office Hours.)
Recalling that we prefer to sell options At-the-Money (ATM), we would prefer to enter into a look-alike investment until the ATM strike is $52.50. This will give us roughly the same separation between strike and fair value estimate as the October structure. If one has the opportunity to write an ATM call option at the $55 strike, this gives even higher of an Effective Sell Price and larger separation to likely fair value, so is even more preferred.
The document below shows both complex and simple valuation ranges for our original Tear Sheet and our newest, updated valuation.
Please drop me a line or bring up this topic during Office Hours if interested in more details!