Daily Archives: May 24, 2018

Options

The Latest Gaming Craze Could Lead To a Quick 468% Return

The video gaming industry is extremely competitive, but can also be immensely profitable if a developer hits big on a certain game or franchise. Success stories in video games range from relatively simple mobile apps to massive projects with huge development costs.

Much like a movie, production costs for video games are mostly upfront. A popular game can scale very efficiently and generate very high margins. However, as I mentioned before, there’s also a ton of competition in the space and relatively low barriers to entry.

Popularity of video games goes in phases, like many other aspects of pop culture. A certain game or type of game may capture the crowd’s attention for a month or a year. Inevitably, copy cats of the most recent successful game or game type will start springing up. Some may even improve on the original concept, although many are just cash grabs.

The latest video game phenomenon is the so-called “battle royale” video game. This is a game where a set number of people (usually 100) are dropped onto an island with no gear. The players then have to run around and find weapons, shelter, etc. and it becomes a last man standing match. The popularity of this genre of game is at least in part because it’s platform agnostic – that is, it’s played about equally on game consoles, PCs, and even smartphones. (I’ve tried out a couple of the popular titles, and I have to admit, they are quite fun and engaging games.)

Here’s the thing…

With the success of several new battle-royale games, it is no surprise that the heavyweights of the gaming industry have turned their attentions to developing new games in the genre. Most recently, Activision Blizzard (NASDAQ: ATVI) has announced its extremely popular Call of Duty series will have a battle-royale mode in the next edition of the game.

Call of Duty titles always sell well when they are released, and often break sales records whenever a new game comes out. Adding a battle-royale mode could move the needle even more significantly. Taking one of the industry’s most popular titles and adding it to the most popular genre is obviously a strong move for ATVI.

The good news did not fall on deaf ears, as investors quickly jumped into ATVI stock. But, the real action was once again in the options market.

A size trader purchased 10,000 ATVI June 15th 75-77.5 call spreads for $0.44 with the stock at $71.40. The call spread involved the purchasing of the 75 calls while selling the same number of 77.5 calls. This strategy is done to reduce the cost of the trade, which subsequently reduces risk.

Total risk on this trade is simply the amount paid, or $440,000. Max gain on the other hand is $2.06 if ATVI goes to $77.50 or above by mid-June. In that case, the trade pulls in more than $2 million, or a flashy 468% in gains.

As you can guess, especially if you normally read my articles, this is the type of trade I love. It’s low risk, high upside, and has a solid thesis behind it. Needless to say, I would definitely recommend this trade if you believe the company is going to have yet another huge hit on its hands with the next Call of Duty game.

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Buy These 3 Timber Stocks as Lumber Prices Continue to Skyrocket

The U.S. home building industry faces a Jekyll and Hyde situation. The good news is that the home construction industry has built much fewer houses over the last decade than are needed by a growing population and new household formations. At the same time builders face headwinds from rising material costs, labor costs, and higher mortgage rates. The opposing forces may make it tough for home builders to grow profits, but material supplies—lumber producers—should continue to see growing profits from higher prices.

A recent news article noted that the National Association of Homebuilders says rising lumber prices have already increased the average price of a single-family home by $6,400 since January of last year. Here is a chart published by the Wall Street Journal showing the lumber futures price.

My expectation is that home builders will be able to build and sell enough homes to stay profitable. There is enough demand from the population needing additional housing to prevent enough of a slowdown to make building new homes completely unprofitable. If homes continue to be built, one of the winners will be the lumber producers.

There are three real estate investment trusts (REITs) that own timberland and sell lumber and other wood products. With the REIT structure these companies will likely pass along higher profits as rising dividends for share owners.

Weyerhaeuser Company (NYSE: WY) with a $27.6 billion market cap is one of the largest companies in the REIT sector. The company converted to a REIT in 2010. Over the last six years, Weyerhaeuser has doubled its timber holdings to 12.6 million acres. These holdings make the company the largest private timberland owner in the U.S.

To process and sell the timber, Weyerhaeuser owns 35 mills and 18 distribution facilities. In 2017 adjusted EBITDA grew by 30%. For the 2018 first quarter, EBITDA was up 20% year over year and net income per share was up 63%.

In December the company increased the quarterly dividend by 3.2%. This year, I expect a high single digit to low double digit increase. WY currently yields 3.5%.

Rayonier Inc. (NYSE: RYN) owns 2.6 million acres of timberland in the U.S. and New Zealand. The company divides its operations into forest product sales and real estate sales. Rayonier will sell land that was once best suited for growing timber but is now more valuable for residential, industrial, commercial or conservation use.

For the 2018 first quarter, adjusted EBITDA of $94.3 million was up 65% compared to a year earlier. Net income climbed by 15.8%. On Monday—May 21—the company announced an 8% increase in the quarterly dividend. Prior to this increase the dividend had not changed for over three years.

If timber prices remain strong there is potential for another increase or a year-end special dividend. RYN currently yields 2.8%.

In February 2018 Potlatch and Deltic Timber Combined to form PotlatchDeltic Corporation (Nasdaq: PCH). The result of the merger is a leading timberland REIT and lumber manufacturer. The company owns two million acres of timberland in the U.S.

The merger converted the Deltic assets to REIT status. As a result, management has already stated a special cash plus shares dividend will be paid at the end of 2018. The regular quarterly dividend was increased by 7% in anticipation of the improved results due to combining the two companies.

PCH currently yields 3.3%.

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