(B)(N) BMY Bristol-Myers Squibb Company

Drama. Mr. Cramer (Jim) has come down pretty hard on all us folks of the 21st century who don’t believe in the [P/E] (price to earnings ratio or multiple) augmented by the EPS (earnings per share) to get, eh presto, the projected “worth”, “value”, and “price” of the stock, Stock Price = [P/E] × EPS, whenever there’s a new EPS, realized, or just Reuters [I/B/E/S]’d (The Street, May 29, 2013, Cramer: Back to My Old Refrain).

For all the sailors who are still afloat with their [P/E]-compass, we’ve decided to just take the rest of their money. And that’s a shame, because it isn’t really their money – they don’t have any and it belongs to their clients who will never get it back – but we can rely on them to get more clients, and more money, because they are excellent “sails-persons”, so to speak.

In a recent Post, Earnings Don’t Matter, we outlined a scientific procedure that involves a falsifiable hypothesis and a test with data (and not just anecdotal evidence and funny stories) of whether it can be found to be false that:

1. Earnings don’t matter;
2. Buy Low and Sell High doesn’t work;
3. The Capital Assets Pricing Model (CAPM) doesn’t work; and
4. The Risk Price (SF) does work.

Number (4) is done and is the subject of many of these Posts. Please see the references below and for the current market, The Wall Street Put. However, the methods (1), (2), and (3), above, have nothing to do with “investing”; they are just a form of gambling but if enough people use them, and weren’t as lazy and ignorant as Mr. Cramer suggests they not be (ibid, Reuters), then those methods might work sometimes for investors or pundits who are ahead of the swell; but where’s the “arbitrage” and where’s the upside if everybody does that? Please see our Post, The Smart Funds.

Mr. Cramer tried but did not explain the stock price of Bristol-Myers in their turbulent career; nor what happened to FirstEnergy on Tuesday, other than “FirstEnergy (FE) [, which] was annihilated Tuesday, does not have good earnings or good revenue growth” (ibid, The Street). FirstEnergy did not have good earnings or revenue growth on Friday, either, but we’ll explain the problem below; please see Exhibit 2.

First, Bristol-Myers became eligible for the Perpetual Bond™ at $18 to $20 in 2009 and has not left it since because the ambient stock prices appeared to be at or above the “price of risk” (Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason). It’s currently in the Perpetual Bond™ with a stock price of $47 and a Risk Price (SF) of only $32 (please see Exhibit 1 below).

Our estimate of the downside volatility in the stock price is minus (-$4.50) so that we would not be surprised by any price between the current $47 and $43 or $51 during the next quarter. We’ve set the stop/loss at $44 but the dividend yield is 3% and the company expects to pay a dividend of $0.35 per share per quarter for a total payout of $2.3 billion to its shareholders this year.

We can take some of our cash or some of our profits on BMY to buy the September put at $45 for $1.51 today, and sell or short an offsetting call at $50 for $1.32 today, so that for the price of holding the stock at $47 and the cost of the collar, $0.19 per share ($1.51 less $1.32), and some transactions costs (which are minor for options), we can collect our dividends and hold the stock between $45 and $50 for the next several months, until more information becomes available. For more on the pharmas this year, please see our Post, (B)(N) GILD Gilead Sciences Incorporated, March 2013.

Exhibit 1: (B)(N) BMY Bristol-Myers Squibb Company – Risk Price Chart

(B)(N) BMY Bristol-Myers Squibb Company – May 2013

Bristol-Myers Squibb Company is a bio-pharmaceutical company, engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical products on a global basis.

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

In contrast to Bristol-Myers, FirstEnergy Corporation has seldom been in the Perpetual Bond™ (please see Exhibit 2 below) but most recently between $40 in 2011 and $48 in September 2012 when we were stopped out at $47 and haven’t owned it since because, and only because, the ambient stock prices are below the Risk Price (SF) of $46 and declining.

The indicated price volatility is minus (-$0.75) per share and the current dividend yield at these low, low, prices is 5%, but we’re not interested because we have no idea what the next stock price might be, and we don’t care until there is enough investor commitment to trade at or above the price of risk. Please see the price of risk, below.

Exhibit 2: (B)(N) FE FirstEnergy Corporation – Risk Price Chart

(B)(N) FE FirstEnergy Corporation

FirstEnergy Corporation is a diversified energy company. It holds directly or indirectly, all of the outstanding common stock of its eight electric utility operating subsidiaries: OE, CEI, TE, Penn, ATSI, JCP&L, Met-Ed and Penelec.

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

From the Company: FirstEnergy Corporation is a diversified energy holding company, and engages in the generation, transmission, and distribution of electricity in the United States. The company operates in Regulated Distribution, Regulated Transmission, and Competitive Energy Services segments. It owns and operates fossil, hydroelectric, nuclear, and wind and solar generating facilities. The company also provides energy-related products and services to wholesale and retail customers. It operates an electric distribution system, including 266,757 miles of overhead pole line and underground conduit carrying primary, secondary, and street lighting circuits, as well as owns substations with a total installed transformer capacity of approximately 144,776,431 kilovolt-amperes. The company distributes electricity through 10 utility operating companies within 65,000 square miles in Ohio, Pennsylvania, West Virginia, Maryland, New Jersey, and New York. FirstEnergy Corporation was founded in 1996 and has about 17,000 employees; it is headquartered in Akron, Ohio.

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*.