Sold PUTS Norfolk Southern Railroad

One of the drawbacks of value investing is that when the entire pool of potential investments is doing well, it is difficult to acquire an opportunity to buy at a good discount from a peak price. 

During the past year, Norfolk Southern Railroad has performed well for the Railways Investment Pool of the Value Investment Fund of During the last year, this is Norfolk Southern’s stock price chart:

The red marks indicate the buy points during the past year and the green marks indicate the corresponding sell points. The first transaction only earned a mere 15% annual return; whereas the second transaction equated to a 388% annual return. Naturally, the holding period was the driving factor between the two returns. 

In effect, the intrinsic value for Norfolk Southern is acceptable at around $210 per share. This means that if the stock price falls to $210, the Railways Fund would indeed purchase this stock.

With options, an owner of stock fears a sudden steep drop in price and thus they may purchase an option called a ‘PUT’ to force someone to buy the stock from the owner of that stock at a preset price. The key for the owner of a PUT is to set a floor price for their existing stock position. A seller of a PUT desires to own the stock at a certain price if it can get there. The Railway Fund sold 94.7868 PUTS yesterday for the right to own Norfolk Southern at what it deems is a fair price per share of $210. If you look at the graph above, the fund has bought the stock at $203 twice during the past year. The most recent high for Norfolk Southern was $247, thus at $210, the buy price is a 15% discount from that high. Since the selling of puts earns $427 of cash, the net effective buy price is around $205.50 per share, almost near the prior purchase points.

Here is the price sheet:

Highlighted in orange is the PUT at $210. The last transaction was $5.50 which equals $4.50 per PUT sold. The fund sold 94.7867 PUTS to earn $426.54 which bumped up the cash postion in the Investment Fund. This requires $20,000 to comply with this transaction if it should occur. The Investment Fund would sell one of its positive unrealized position in one of its REIT’s in order to raise the cash to satisfy the demand to buy the stock.

Please note the following from this chart. These PUTS expire on 03/19/2021. The fund could have almost doubled its earnings from the sale of PUTS by opting to sell the $220 PUT; but, one of the principles of value investing is risk aversion. Norfolk Southern is an acceptable risk at $210 or less. At $220 per share, the safety margin no longer exists and thus it defeats the purpose of the primary tenet of value investing – buy low, sell high. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

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