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(B)(N) AOL AOL Incorporated

May 13, 2013

Drama. AOL Incorporated has risen from the ashes of the AOL Time Warner merger in 2000, and now trades on its own and brings its own brand to the crowded marketplace of internet and web-based marketing, news and information services. We wonder, naively, of course, how (and so do they) so much of what is really important – The World Wide Internet – is paid for by instant come-ons for sex, soap, shoes, clothing, camping gear, cars, toasters, telephones, credit cards, and the kitchen sink, but what can we say? If it works for them, it’s our own fault, and AOL contributes mightily to the new sales & service landscape mapped for us by advertising budgets of all sizes.

The company entered the Perpetual Bond™ at $16 just a year ago (please see Exhibit 1 below) and is currently trading at $38 and well above the current Risk Price (SF) of $24. We say that’s a lot of enthusiasm for a company that hasn’t paid a dividend and greets us with the “News, Sports, Weather, Entertainment, Local & Lifestyle – movie reviews, TV trends and more. Get free email, AIM access, online radio, videos and horoscopes … and more” and there’s some nervousness among investors (Reuters, May 9, 2013, AOL shares sink as its websites still lose money) but it seems that sinking feeling is soon forgotten with just a few clicks.

The current market value of the company is $2.9 billion, which is not much more than the shareholders equity of $2.1 billion and total assets of $2.8 billion, but up significantly from $1 billion just a year ago. Our estimate of the quarterly downside volatility in the stock price is minus ($5) and our stop/loss at $33 ($38 less $5) stills trades above the Risk Price (SF) of $24 and keeps the company in the Perpetual Bond™.

To ride this out, we’ve bought the July put at $38 for $2.00 per share and sold an offsetting call at $42 for $1.00 per share, so that for an extra $1.00 per share ($2.00 less $1.00), we can continue to play at between $38 and $42 per share while the drama unfolds, and we hope that AOL continues to surprise us.

Exhibit 1: (B)(N) AOL AOL Incorporated – Risk Price Chart

(B)(N) AOL AOL Incorporated

(B)(N) AOL AOL Incorporated

AOL Incorporated is a global web services company whose business consists of online content, products and services that it offers to consumers, publishers and advertisers.

(Please Click on the Chart to make it larger if required.)

From the Company: AOL Incorporated is a Web services brand company and offers a suite of online content, products, and services to consumers, advertisers, publishers, and subscribers worldwide. The company’s Brand Group segment provides content created by journalists, politicians, celebrities, academics, policy experts, freelance writers and bloggers, aggregated content from third parties, and user-generated content through AOL.com and The Huffington Post sites, as well as to niche audiences on StyleList and TechCrunch branded properties. It also operates Patch, a community specific news and information platform; and MapQuest, which offers online mapping and directions services. In addition, this segment consists of entertainment brands, such as Moviefone, AOL Music, and Cambio; technology and marketplace brands comprising Engadget, DailyFinance, AOL Autos, and AOL Travel; and lifestyle brands, including Games.com, Kitchen Daily, Homesessive, and Makers. AOL’s Membership Group segment includes subscription access service, which provides online services, including telephone dial-up access to the Internet; and offers various communications tools, such as AOL Mail and AIM, which are email and instant messaging services. The company’s AOL Networks segment offers advertising, and online video and content distribution through various applications comprising Advertising.com, goviral, AOL On, ADTECH, Pictela, and Sponsored Listings, as well as AdLearn technology to manage, optimize, and analyze online marketing campaigns. The company distributes its AOL properties through subscription access services; open Web and the Apple App Store; toolbars, widgets, co-branded portals, Websites, mobile aggregators, third party Website, and social networks; and agreements with manufacturers of digital devices and other consumer electronics, and mobile carriers, as well as through search engine marketing and optimization distribution methods. AOL Inc. was founded in 1985 and is headquartered in New York, New York.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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