Buy Bad News in Celgene, General Electric, Under Armour

The very fact that contrarian investing is hard makes it an effective strategy since it is done by so few investors.

Market lore states that following the Battle of Waterloo, British nobleman Baron Rothschild said, "The time to buy is when there's blood in the streets." A trio of MoneyShow.com contributors can figuratively apply that sentiment to three stocks that have been hit particularly hard by bad news.

Todd Shaver, BullMarket

Celgene Corp. (CELG - Get Report) has just seen its biggest drop in 17 years, and although the company has stumbled, I believe now is the time to stick with it and accumulate more shares.

The firm announced the discontinuation of the Phase III REVOLVE trial in GED-0301 for Crohn's disease. This was unexpected and unfortunate news. Celgene's decision comes after recommendation by the independent data monitoring committee upon its review of the overall benefit/risk during a recent interim futility analysis.

The company points to no meaningful safety imbalances identified during this analysis, suggesting a lack of efficacy for the drug. In our opinion, this represents more of a psychological blow than a fundamental one to the company.

At this time, Celgene has chosen to not initiate the Phase III DEFINE trial in CD. The company is awaiting review of the full dataset from the Phase II trial of GED-0301 in ulcerative colitis to determine next steps in this situation.

The firm has reduced its 2020 sales guidance to the range of $19 billion to $20 billion from its previous forecast of more than $21 billion. It also lowered its 2020 earnings-per-share guidance to more than $12.50 from more than $13.00.

Celgene's third-quarter profit did beat expectations, as earnings were $1.91 per share on sales of $3.3 billion, compared with $1.58 and $3.0 billion, respectively, in the year-earlier period. EPS expectations were for $1.75 to $1.85 a share, but sales were light of the $3.42 billion expected.

The company expects full-year earnings in the range of $7.30 to $7.35 per share, with revenue projected to be $13 billion. All of this sounds good, but Wall Street sure doesn't like it and investors sold the stock heavily.

Sometimes you just have to sift through the headlines to find the real facts. This one drug was only supposed to be a $1 billion revenue contributor. But the company is expected to still do some $20 billion by 2020. So we see no reason to panic.

You have to trust that the franchise is viable and will learn and progress past this current disappointment. This looks to us like a classic case of Wall Street exuberance on the downside with this out-of-favor sentiment swing. Take advantage of the drop. Buy the stock down here.

Admittedly, it may take a while and we must be patient. But, in my view, the company still remains a powerhouse, is very profitable and our long-term target is still a hefty $150. We continue to believe in Celgene.

Jimmy Mengel, The Crow's Nest

Here's a quick "blood in the streets" buy recommendation. Baltimore's Under Armour Inc. (UAA - Get Report) is getting murdered, with the stock dropping more than 19% on a disappointing earnings report.

The shares are down a whopping 56% this year. Despite the drop, we're buying. Under Armour is a well-known global brand that will turn it around after a disastrous year.

The company just reported third-quarter revenue of $1.41 billion, a decline of 5% vs. the same quarter last year. It was Under Armour's first year-over-year revenue decline as a public company. Analysts had expected revenue of $1.48 billion. Earnings per share came in at $0.22, a beat compared to analyst expectations of $0.19.

The company also slashed its full-year outlook for 2017. Management now expects 2017 full-year revenue to be up in the low single digits, whereas earlier this year it had predicted gains as high as 11%.

In a press release, Under Armour predicts full-year operating income to come in at "0 to $10 million." In other words, the company might not cut a profit in 2017.

These were all terrible developments, but keep in mind that just a year or so ago, they were the darling of the athletic apparel market. They have plenty of time to turn things around.

Under Armour has sponsorship deals with some of the most popular players in all of sports, including New England Patriots quarterback Tom Brady, NBA superstar Steph Curry and young MLB stars Bryce Harper and Aaron Judge. That doesn't include their robust lineup of international soccer stars.

The company is also growing in the international market while falling behind domestically. Third-quarter international revenue was up 35%, though that represented only 22% of overall revenue. I imagine they will start growing that international brand.

In other words, they'll figure it out. So, let's pick up some shares of Under Armour below $14.50 and stash them away for better days.

Chuck Carlson, DRIP Investor

One of the most difficult investment strategies to implement is contrarian investing. Indeed, buying out-of-favor investments is hard because it forces you to leave the herd, to go it alone on an investment. However, the very fact that contrarian investing is hard makes it an effective strategy since it is done by so few investors.

Now, it can be dangerous buying a down-and-out stock, as cheap stocks can get cheaper and cheaper and cheaper.

My favorite contrarian investment idea right now is General Electric (GE - Get Report) , which has fallen 17% over the past month; so far in 2017, GE stock has underperformed the S&P 500 by some 42 percentage points.

I have not been a fan of these shares for many years. So why my newfound interest in the stock for 2018? GE has been, by far, the worst-performing stock in the Dow Jones Industrial Average so far this year and over the last 12 months.

Those who are familiar with my "Dow Underdogs" strategy -- buying the worst-performing Dow stocks in one year for rebounds the next -- know that the biggest losers in the Dow one year tend to rebound smartly the following year.

I caution investors that I do expect these shares to become even cheaper in the next few weeks/months. For starters, I don't think quarterly earnings will be all that great.

I wouldn't be surprised if new CEO John Flannery does a "kitchen sink" with earnings over the next few quarters, flushing out as much of the bad stuff as possible to set up for a clean run later in 2018.

Indeed, I think the poor earnings will put more pressure on the stock in the near term, thus creating even greater value for a bounce in 2018.

Meanwhile, GE is a perfect candidate for year-end tax selling. Given the gains investors have posted this year, it is likely that tax harvesting -- where investors sell losers to offset winners -- will be more pronounced this year.

The stock's lousy performance this year will put it top-of-mind for investors looking to harvest losses. That tax selling could be an additional headwind that pushes the stock lower before year-end.

I may be in the minority, but I don't think a dividend cut will happen, at least over the next six to 12 months. But the specter of a dividend cut will not be a positive for the stock in the near term and could lead to additional selling. Quite frankly, I'm almost rooting for a dividend cut, as it would likely create the sort of selling capitulation that would signal a definitive bottom.

Insiders have been buyers of the stock in 2017. If I am bottom-fishing in stocks, I like to see insiders buying as well. To be clear -- while I'm warming to GE stock, I think a better buying opportunity will occur before year-end.

Source: https://goo.gl/m38UiB

How to Buy GlaxoSmithKline at a 15% Discount

 Investors seeking more returns can not only get some yield, but also healthy dividends from buying options on stocks. Those who are seeking additional opportunities can purchase GlaxoSmithKline (GSK),

Since the presidential election, markets have been on an upswing, but investors seeking more returns are not only able to get some yield, but can also lower their risk and increase yield by selling options.

As the markets rallied, the major indexes reached all-time highs and the U.S dollar hit a 14-year high, investors who are still seeking additional opportunities can purchase GlaxoSmithKline (GSK) , which is "cheap and pays a decent dividend," said Ron McCoy a portfolio manager with Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla.

        

As one of the U.K.'s big pharma companies, GlaxoSmithKline has a yield of 4.8% and traded at $37.72 on Friday, falling to its 52-week low. GSK trades at 13.5 times its 2017 earning estimates, which is inexpensive compared to the S&P 500.

"Investors can use options to further reduce their cost and lower their entry point," he said.

In his Covestor fund, the May $32 puts were sold and collected $0.55 per contract, "which we believe would be an extremely attractive entry point on the stock" McCoy said.

A seller of puts is obligated to buy the stock at the strike price of $32 up until the expiration and is paid a premium for taking the risk, he said. Since the May $32 puts are trading around $0.55 or $0.60 per contract, if an investor was assigned or "put the stock," it would result in a net cost on GSK of $31.40.

"That would be equal to just over 11 times its 2017 earnings consensus estimate of $2.76 which would be very cheap," said McCoy. 

Selling one of the $32 puts obligates the seller of the put to buy 100 shares of the stock at $32 if the buyer exercises the put.

Distinguishing between a right and an obligation is critical as they are both very different, since buyers of options have rights and sellers have obligations, he said. 

Another attractive option idea would be to do a buy-write, otherwise known as a covered call, with a $47 strike price using the January 2018 calls, McCoy said.

"By selling the calls against the purchase, one could lower their cost on GSK to around $34.50, and if all four dividends are collected and the stock is called away, it would be a return of over 12% in about 13 months," he said. "If it is not called away, the yield would be nearly 6% if you did nothing else which would be an attractive yield by most standards."

Selling Options for Dividend-Like Yields

Selling options will generate a premium which resembles dividend income, regardless if the underlying stocks are paying a dividend, said K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in Deland, Fla.

"If the objective is to produce or enhance the annual yield of the underlying stock, investors can write calls or write puts in addition to relevant positions in the underlying stocks," he said.

Put writers should always be prepared to buy back the stocks at "higher than market" strike prices and selling puts for income will make more sense if investors intend to own the stocks anyway, Ma said.

"In other words, the put premium received serves to reduce the cost basis of the stocks," he said. "In order to keep the put premium or owning the stocks, investors should be bullish on the stocks."

On the flip side, call writers should always be prepared to sell the stocks at "lower than market" strike price, Ma said. Selling calls for income will make sense even more if investors intend to sell the current overpriced stocks anyway.

"The call premium received, other than like a dividend income, serves to capture the overvaluation of the stocks," he said.

In order to keep the call premium or selling the overpriced stocks, investors should be bearish on the stocks.

"In either case, it stands to reason that the 'synthetic dividend yield' generated from writing options is riskier than the actual dividend yield received from owning the stock," Ma said. "The option premium should exceed the expected dividend yield of 2% to 3%,nowadays."

By Ellen Chang

Source: https://www.thestreet.com/story/13912669/1/how-to-buy-glaxosmithkline-at-a-15-discount.html