By Paul Price
Market Shadows’ Virtual Put Selling Portfolio sold another put today. We sold one put contract of the Franklin Resources (BEN) Jan. 2014 $150 strike put for $19.40 per share.
After pulling back more than $32 per share over the past month, BEN ($137.60) appears to be a gift. A return to even fifteen times forward estimates would support a 12-month goal of $174.
Over the latest decade, BEN’s earnings per share surged by about 474%. EPS rose from $1.98 in fiscal 2003 to an estimated $11.36 for the fiscal year (FY) ending September 30, 2013. Dividends expanded by 287% over that stretch.
At the current price, BEN is offered at 12.1x this year’s estimate, and 11.8x the Zacks FY 2014 estimate. That is cheap compared with its 10-year median multiple of 17x.
A secure 29-cent quarterly dividend provides a modicum of income at a 0.85% current yield.
Maximum profit from selling the put would be $1,940 - the amount of the premium we collected. That would occur if BEN closes at $150 or above on January 17, 2014.
If Franklin Resources closes below $150 on the option expiration date, we will be obligated to purchase 100 shares at a net cost of $150 - $19.40 = $130.60 per share. (BEN is currently trading at $137.60, so $130.60 is a 5.1% discount.)
That break-even price is exactly $7 below the stock's price of $137.60 at the time of our put sale. We were able to capture a price about mid-way between the bid - ask spread.
BEN could decline by up to 5.1% without causing a loss on this trade.
See our full Virtual Put Selling Portfolio here http://marketshadows.com/virtual-portfolios/put-selling-virtual-portfolio/.