Pepsico Income Opportunity

Pepsico (PEP) disappointed investors on February 9 with a slightly reduced earnings outlook and the stock lost 6% of its value over the following few weeks. The actual news was the company is cutting costs (headcount, product focus) to improve margins for the long-term, but the market knocked it down for the 2012 outlook. At these levels, Pepsico yields 3.2% and has a long history of regular dividend hikes. With its global franchise and strong cash flow, Pepsico is a reasonable value here. But I don’t think buying Pepsico outright is the right play. Better is to sell  a put contract on it. I like the July 21, 2012 with strike 62.5, currently selling for 1.41. If the stock closes above 62.5 on July 21, you keep  the premium ($141 for each option contract). If it closes below 62.5, you get to own stock in a great franchise at a bargain basement price of 61.09, which is the adjusted cost basis  (62.5-1.41).  Every options contract sold represents 100 shares of stock.

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About jstradingnotes

I spend a lot of time analyzing the economy and securities. The effort has enabled me to generate multi-thousand percent returns on my trading capital over the past twelve years. The next few years offer an incredible opportunity to take outsized gains from the markets. Large structural imbalances in the major western economies will result in enormous market volatility as the imbalances get resolved, offering generational money-making opportunities. The major imbalances are excessive sovereign debt, crazy risk concentration in major banks, and enormous derivative exposure in the financial sector. A systemic shock can easily create a default cascade through the financial system where one failure precipitates another and another and so on. Central banks are very aware of the risks, and they are filling the financial system with liquidity by printing new money, risking massive inflation in a few short years for the United States and Europe. China has 2-3 trillion in dollar exposure, and they would like to have far less for fear of continued currency devaluation (they've lost billions holding dollars as the value erodes). As the size of their holdings prevent them from rapidly liquidating their dollar assets (which includes U.S. treasuries), they are instead spending their dollars on resources (copper mines, rare earth metal mines, oil wells, etc.). Lately they have been accumulating gold assets, perhaps with a view to making the Renminbi convertible into gold and displacing the U.S. dollar as the international reserve currency. Their gold buying is enormous and presents an easy investment thesis: ride the Chinese horse and buy gold and gold stocks. In this blog, I'd like to share some of my trading ideas and insights on the markets as these exciting times unfold.
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