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Nestle call options


Guest JoelS
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Guest JoelS

Intrigued by David Winters' investment here, http://www.gurufocus.com/news/250785/david-winters-comments-on-nestle-sa

 

"With sentiment on Nestlé so poor, we saw a rare opportunity to initiate a position in long-dated call options on Nestlé shares at what we believe to be a very reasonable price. These options give the Fund the right, but not the obligation, to purchase Nestlé shares at any time before December 2017 at share prices of 60 and 68 Swiss Francs per share, not far from the 66.15 Swiss Francs per share where they finished trading in 2013. If Nestlé shares have even modest price appreciation by 2017, the Fund stands to reap a handsome return on the call options. Although these options carry more risk than simply owning the underlying shares, we believe the risk/reward equation is firmly in our favor in this case."

 

- has anyone on the board bought Nestle call options? If so, which did you buy? Are the options still attractive?

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I think Nestle is such a wonderful business  that I just own the equity and collect the dividend while waiting for the upside. Call options are predicated on the business reaching a certain price at a certain time. That may not happen as easily as Winter's expects . The emerging markets may not provide the upside immediately given currency issues and slowing EMs

 

 

As Buffett says " “Time is the friend of the wonderful business, the enemy of the mediocre.”. I am happy owning Nestle for a really long time

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

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I have some difficulty to understand why ppl call Nestle stock as cheap now

 

I think Nestle is such a wonderful business  that I just own the equity and collect the dividend while waiting for the upside. Call options are predicated on the business reaching a certain price at a certain time. That may not happen as easily as Winter's expects . The emerging markets may not provide the upside immediately given currency issues and slowing EMs

 

 

As Buffett says " “Time is the friend of the wonderful business, the enemy of the mediocre.”. I am happy owning Nestle for a really long time

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

 

I don't understand how this works. Do you have articles you can refer me to?

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I believe he is referring to the fact that the stock price should be reduced upon paying a dividend, and because the value of the call option is derived from the stock price, the dividend payment reduces the value of the call.

 

However isn't this usually "priced in" to the premium of the call?

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

 

I don't understand how this works. Do you have articles you can refer me to?

 

http://www.putcallparity.net/put-call-parity-of-european-options-with-dividends

 

 

call = stock + put - dividend - X (capital needed to exercise the option, adj for rates)

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Nestle is a great company I've never bought any though because I thought the withholding tax was 35% and you cannot claim the tax within an IRA. I just looked back and a SA article I read said the tax rate was 15 or 35%. Which is it for US investors?

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I think ADR dividend can be qualified dividend - so it's more like 15%

If they withhold your div tax I think you can claim it back if it's in a taxable account

Not sure how though

 

Nestle is a great company I've never bought any though because I thought the withholding tax was 35% and you cannot claim the tax within an IRA. I just looked back and a SA article I read said the tax rate was 15 or 35%. Which is it for US investors?

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I searched around and didn't find one

appreciate if anyone can post one

I don't feel this is really cheap - it's actually at the higher side of valuation against its peers but maybe it's worth the premium

 

Is there a write-up available somewhere about Nestle? There is one on VIC but it's 5 years old.

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That cannot be right, it would mean an implied volatility (aka call price) of 15%. I would be interested in seeing a write up to see if it's worth investigating in detail.

 

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

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  • 8 years later...
13 minutes ago, Gregmal said:

Bump. I think I’m the current environment, obviously adjusting for many years and now using a different date/strike, this is a wicked good trade to put on.

Greg, why do you like it?  Do you think that the underlying is cheap or that the options are very cheap relative to the underlying?  I have Nestle at 20x 2023 EPS, am I missing something?

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Nestle is an under appreciated consumer staples power house. The options are still cheap, yes. But I think they can grow earnings above inflation without trying too hard. So if you sit down and write up a list of all the shot folks are scared of right now, namely inflation and recession, Nestle becomes more potent and appreciated in those situations.
 

Also, because of its size, there is international arbitrage opportunities for the company as far as labor and product sourcing goes. American sugar is a good example historically. 

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I think an extra argument for Nestle right now is receiving dividends/gains in Swiss Francs, which should be a very attractive currency in an inflationary environment (well historically, in any environment).  Nestle have a long history of managing the currency, so can still make money even when all other currencies are against them, and then you receive the benefit.

 

The guy in charge seems alright e.g. aware of the bigger trends towards 'wellness' (versus the old-school e.g. Kraft).  And as per Russo, they have a decent 'capacity to suffer' when planning beneficial long-term opportunities.

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Thank you Greg and thowed.  I own L'Oreal, Campari, Heineken, Swedish Match and PM for the same reasons as you mentioned.  I used to own Nestle years ago, time to revisit.  Thank you again.  

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Posted (edited)

Nestle - multiple is too high and high EM exposure are my concerns. EM exposure will cause weakness due to currency issue and high energy prices reducing growth. i don't think it's safe pick here. I owned this in the past for many many years, but multiples were way lower back then.

Edited by Spekulatius
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