Thursday, July 28, 2011

Xerox - Added a Fourth Lot on Weakness

Xerox reported earnings last week.  They met earnings expectations and reaffirmed guidance but fell far short of any "wow-factor" that some more heavily followed  tech names reported this year. 

Xerox also got some tv time on CNBC's Fast Money.  The clip is embedded below, but basically supports CCI's view that the business model is changing and the street does not yet necessarily recognize this change,and it is a value play (trading at 8x earnings and just a 1.07 price/book).  The clip also highlights the continued large position of hedge funds in this name.  I'm not sure if this is a good sign (i.e. th smart money is buying) or bad sign (i.e. the smart money is entering "pump and dump" mode). 

CNBC - hedge fund trade of the week

Despite poor performance of this position to-date, CCI continues to agree with the view that XRX represents a good value.  As the stock dropped based on earnings and general market performance CCI looked once again to add its fourth (and final) lot to this position.  Specifically as the stock hit $9.50, CCI put on a risk reversal. Sold the Oct $9 puts and bought the Oct$10 call for no out of pocket costs. 

Comparing this approach to buying the stock.
  • Only commits $9 of risk capital vs. $9.50 to buy the stock
  • We will not participate in the first $.50 of up or downside in the stock
  • Sacrificing one $.045 dividend payment
  • Have the opportunity to trade this position on a stock move.  Ideally if the stock moves up we will be able to cover the short put to remove the risk while at the same time selling an upside call to turn the call into a call spread. 

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