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BLOG.MYOAKTREEADVISORS.COM: 12/03/12 Covered Call Pick: The TJX Companies (TJX)
12/03/12 Covered Call Pick: The TJX Companies (TJX)
The TJX Companies (TJX) is the largest off-price apparel and home design company in the United States. Founded in 1956 as Zayre, TJX now owns discount stores that go by the nameplates T.J. Maxx, HomeGoods, and Marshalls.
TJX has a market capitalization of $31.78 billion with 736.1 million outstanding shares.
TJX currently pays a $0.115 quarterly dividend for a current yield of 1%.
With a beta of 0.77, TJX trades with approximately 25% less volatility than the current market.
Continuing our theme from last week's Week In Review, we're headed back into the retail space with TJX. Now you might remember last month when we had Costco (COST) get called away from us and our reply was that we were going to hold off before buying more, as the retail space is currently highly competitive. So why then are we making an exception for TJX?
TJX has a lot of great things going for it. First off, their YTD chart shows an impressive run up for the stock this year. They started to slip back in September, but after a slight pullback the stock is rebounding. Secondly, their forward earnings estimates are being revised upwards to an impressive 25% for 2013. They also occupy a spot on Daily Graph's list of the 100 Fastest Growing Companies, which is impressive given the tepid growth they had even two years ago. Thirdly, they are another example of the discount play. With recessionary indicators high and restrained job growth continuing, families shopping for the holidays might choose the discount store over the more expensive brand names in order to save some extra money. We definitely think that going forward people will be back to value shopping rather than splurging.
What is strange about TJX is their approach to the revolution of retail, online shopping. The strange is, they don't really have one. They have stubbornly resisted the shift to the Amazon-esque model that nearly every other retailer has attempted to scramble in to. They continue to believe that eventually, people are going to want to go into the store for the shopping experience rather than sit behind a screen to do so. For us, this should be troubling, because online shopping and mobile computing are the current direction for success. But TJX has such impressively consistent annual margins with 7% net profit, 10% operating, and 26% gross. The retail space in notorious for small margins, and shrinking in this metric is an indicator of trouble for a company. So when a company like TJX is able to save money by NOT reworking their entire business model to accommodate online shopping, while continuing to pull enough sales and revenue to grow as they have, well that's something that tends to grab our attention. Still not convinced? TJX's net income beat "golden child" Amazon's by more than $860 million. Now that is impressive.
In terms of the Covered Call strategy for TJX, we are not going to get greedy despite everything that TJX has going for it. We still have the fiscal cliff and the sluggish economy to deal with, and with a low dividend yield we would like to grab a bit of a higher premium for the greater income and downside protection. That is why we are recommending buying TJX and selling the July 2013 $45 Call.
Note: Prices may vary from the time of post. Actual commissions paid will vary returns.
Static Return (Not Called):
(Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration
(2.81 + (2*0.115))/44.51 X (365)/228
= 10.93% Static Return
(Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration
(2.81 + (2*0.115) + 45 - 44.51)/44.51 X (365)/228
= 12.70% If-Called Return
Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarentee the above, or any, result. All investment decisions should be made based upon individual’s personal investment goals and risk tolerance.