From the Trading Desk
Welcome to the July edition of the MF & Co. Asset Management monthly newsletter.
For this edition:
- Afterpay Touch (ASX APT) up 60% since recommendation in June
- Making money with Options – Talking Trading Podcast with Evan McQuire
- Latest stock research from our Research team
- Covered call strategy on BHP, +5.54% expected return in 70 days
- Example income trade for our Wealth Management clients
- June results for the quant driven growth model portfolios
Afterpay Touch (ASX APT) up 60% since recommendation in June
Just last month, we mentioned Afterpay Touch (ASX APT) as an emerging company in the late payment services industry, grew from a few thousand clients in February 2016 to over 1.5 million customers in December 2017 and recently expanded in the massive US retail market.
Afterpay has announced today that sales are up, losses trending down and average customer purchases increasing. The US growth story has started with $11m in sales for the first full month and the stock is now EBITDA positive. You can view the announcement here and the stock is up over 20% at the time of writing today and up over 60% since 12th June when we put the article out.
Making money with Options – Talking Trading Podcast with Evan McQuire
Evan McQuire, Partner Managing Director of MF & Co. Asset Management recently gave an interview with Caroline Stephen of Talking Trading about ASX options trading in Australia. Listen to Evan discuss his view on the importance of great relationships with clients and how our clients benefit from our market experience.
Latest stock research
The Research team has been hard at work uncovering some good stocks in the past month. If there is any particular stock you would like us to look at, don’t hesitate to give us a call.
Here are a few pieces that we think could potentially add value to your portfolio. You can also search our library by going to the website and clicking on the magnifier icon on the top right of the page to search for a stock.
- Santos (ASX STO) – high potential growth opportunities in the market supported by increasing demand for natural gas and oil from Asian countries. Oil is trading higher now and will most likely remain this way for a while which will see STO profit margins stay high.
- Wattle Health (ASX WHA) – 3-year contracts signed with China, India and Macau and a joint venture for increased capacity. A higher risk play with very strong upside potential.
- Blackmores (ASX BKL) – Market leader in supplements with a massive China following and expansion into emerging markets. China’s supplement has double-digit growth and we should see strong upside potential for BKL for years to come.
- Bendigo Bank (ASX BEN) – Bendigo bank has been performing well in an environment where major banks are coming under pressure from the royal commission. A great bank to own as lending standards tighten for the majors and mortgages flow to the smaller regionals.
Covered call strategy on BHP – +5.54% expected return in 70 days
We will be launching a new Options Report product in the coming months, these are the type of trades you can expect from this product. The options report is free for all clients so please contact us to get on the mailing list or to open an account if you are intereste
At the start of trading yesterday, BHP released its review for the year ending 30th June 2018. The result was positive with the company meeting or exceeding full-year production guidance for petroleum, copper, iron ore and energy coal.
- Copper volumes were 32% higher than for the 2017 financial year
- Iron ore 3% increase in output (10% increase between the March and June Quarters)
- Metallurgical Coal 16% increase
- 48% increase in energy coal production
When BHP released its half-year results in February free cash flow was $4.9B, given the improved production numbers, full-year free cash flow could be as high as $12B. All of this means that when BHP releases its full-year results for the year ending the 30th June on the 21st August 2018, investors are likely to see increased dividends.
There is also the potential for the dividend increasing further as BHP completes the sale of its onshore US petroleum assets. “Bids have been received and we aim to announce one or more transactions within the coming months, targeting completion of any transactions by the end of the 2018 calendar year.”
So with all this positive news how do you take a position in BHP to capture at least the upcoming September dividend? We are recommending buying stock and selling an in-the-money call option. In this example, we have specified buying 1,000 shares but the quantity you trade can be adjusted to fit your portfolio size.
For this trade, we purchase 1,000 BHP at $33.70 and sell a 10 BHP 27th Sep 2018 $33.51 calls for $1.05. The options we are selling are European expiry style so it can only be exercised at expiry which means we will collect the dividend. Since the call option we are selling has a strike price of $33.51 and the shares we are buying are at $33.70, if the call is exercised we will actually end up losing $0.19 on the purchase and sale of the shares. The small capital loss is more than made up through the premium, dividend and franking credits.
In this example, we have estimated the BHP dividend remains the same as the February dividend of $0.705. As we have mentioned above, there is the potential for a higher dividend. The higher dividend, the higher the return.
Once we factor in all transactions we come out with a breakeven price of $31.64 and if the call is exercised we will sell at $33.51. This will realise a profit on the trade of $1867.14 or a 5.54% return on funds invested over a 70-day time frame before fees. If at the end of September the initial call sold is not exercised we can then hold the open position and look for another big dividend in early Feb 2019, all the while still looking for the potential to sell additional call options to generate premium.
All in all, it looks like a nice trade to open with a good return that also provides additional downside protection if there is a pullback in commodity prices.
Wealth Management income trade
These options trades will also be a part of the Options Report so email us to get on the list or to open an account.
This is a trade our Wealth Management Advisers have done in the past month for our Wealth Management clients.
The S&P ASX 200 (XJO) was quite strong from mid-June and we were of the view that the index wouldn’t make it through 6325 by early July. On the 21st of June we sold the XJO 6325 call with an expiry of 5th July receiving 16 points or $160 per contract before fees (10 contracts equals $1,600 in income). The market moved a little higher but stayed below 6325 and the call expired worthless on the 5th July.
Selling calls and puts on the index is a strategy that we deploy for our clients to generate a monthly income without a large outlay and can be done without a stock portfolio. Give us a call for more information about how we can do the same for you.
AU Model Portfolio results
The AU model is currently in all cash right now ready for new momentum as we come into the reporting season and is down 1.55% for the month. The model is still up 5.80% for the year. We should expect a number of trades to trigger and with the market as strong as it has been in the past few months, strong investor sentiment should see some buying come back into momentum stocks.
You can view the full results here.
US Model Portfolio results
The US model portfolio has become more active this month, currently at 75% invested. The system was up 3.62% after fees and is now up 1.35% for the year.
The model is starting to recover but is still a bit off the pace. We are still cautiously optimistic about the markets coming into the next half of the year especially around the trade wars that are happening. Additionally, the US model is unhedged, so the falling AUD has helped the US model recover as well.
You can view the full results here.
Henry is a co-founder of MF & Co. Asset Management with over 12 years experience as a trader, investor and asset manager. Henry’s focus is on High Net Worth Wealth Management and using algorithmic quantitative trading systems to invest for his clients. Henry also trains new Interns and Advisers on trading and risk management.