“If I have seen further it is by standing the shoulders of Giants” – Isaac Newton
1976: Apple Inc.; Current Market Capitalization: $117.52Bn
1977: Oracle; Current Market Capitalization: $106.22Bn
1982: Cypress Semiconductor; Current Market Capitalization: $3.57Bn
1982: Electronic Arts; Current Market Capitalization: $15.31Bn
1992: Network Appliance; Current Market Capitalization: $8.18Bn
1993: Nvidia; Current Market Capitalization: $14.92Bn
1995: Yahoo; $39.58Bn
1998: Paypal; Acquired by Ebay for $1.5Bn
1998: Google; Current Market Capitalization: $161.39Bn
2000: Eharmony; International relationship service
2001: SourceFire; Current Market Capitalization: $168M
2003: LinkedIn; Privately held online network of more than 17 million professionals
2003: Netezza; Enterprise Vale $450M
2005: Youtube; Acquired by Google for $1.65Bn
2008: Stock and Option Trades and PhilStockWorld; (To be continued….)
Quiz Question: What do all these companies have in common?
Answer: Sequoia Capital
Sequoia Capital prides itself on being “The entrepreneurs behind the entrepreneurs”. The company invested in, or was the business partner in, companies that make up 10% of the NASDAQ. The company’s list of partners is a who’s who of technology: Steve Jobs at Apple, Larry Ellison at Oracle, Bob Swanson at Linear Technology, Sandy Lerner and Len Bozack at Cisco Systems, Jerry Yang and David Filo at Yahoo!, Jen-Hsun Huang at Nvidia, Dan Warmenhoven at Network Appliance, Michael Marks at Flextronics, Larry Page and Sergey Brin at Google, Chad Hurley and Steve Chen at Youtube, and countless others!
Sequoia likes to contribute to companies that have the chance to become very significant, believing that the best seed and early stage companies evolve into great growth companies. They typically invest $100K-$1M in the Seed Stage, $1M-$10M in the Early Stage and $10M-$50M in the Growth Stage. Interestingly, they claim proudly that “almost everyone we have ever invested in has been a complete unknown at the time we met; many have been immigrants or first generation Americans with barely a penny to their name”. They don’t look for a history of success so much as the “collision of intelligence and ambition” which they promote as being an “unbeatable” combination.
Why this narrative on Sequoia Capital? Simply to highly that these venture capitalists are as prestigious as any in the world with an outstanding track record and, when they invest, investors should take notice. On August 9, 2007, shares in property services company, E-House (China) Holdings (EJ) rallied as much as 41% on its New York Stock Exchange debut. By the end of the day, the stock ended at $19.43. Within days it had dropped below $14, before surging higher – more than doubling in value by the end of October, to a price of $36 per share. In the intervening months since then, the stock has halved in value, closing on Friday at $18.88. In January alone the stock was as high as $28 and as low as $15. If there is one consistent theme in the movement of E-House shares, it is that they are V-o-l-a-t-i-l-e!
E-House raised over $200M in its IPO and was, in its first investment round, funded by (you guessed it!) a Sequoia Capital partner, Neil Shen (who also funded Ctrip.com). Shen claims that “E-House’s rapid expansion in the primary and secondary real estate markets and its nationwide network have given it a competitive edge”. The company itself claims to be the nation’s largest real estate company going on transaction volume from 2003 to 2006 and hopes to benefit from sales of new properties, which have increased 38% in the past six years.
Just a couple of weeks ago I mentioned that NYX was trading at $72.67 and that a January 09 short call strike 80 offered a credit of $9.80, resulting in a an outlay of $62.87. In just two weeks the stock has risen to $81.28, up almost 12%. At the time I mentioned that a trader who was patient would make a 27% return on risk if the stock rallied just 10%, the investor would make 27% return on capital outlay. Well the stock has already rallied that 10% so now an investor can sit patiently, waiting for time-decay to erode the value of the option premium. The whole point of this trade was to make a very good return over the course of a year while minimizing risk (compared to simply buying the stock) and fixing a gain that would ensure the investor would be content (if the likes of Blackstone, Carlyle Group and Buffett don’t do much better than 27% per year, it seems like a pretty good place to start finding contentment!).
I refer to that simply because I know the duration of the trade bores some shorter-term investors and E-House offers those investors attractive returns in a shorter timeframe. For example, by purchasing the stock and selling a call option in May at strike 20 for $4.20, the risk and reward profile looks like the following:
Stock Cost: $18.88 (debit)
Short Call Strike 20: $4.20 (credit)
Net Cost: $14.68 (close to the all-time low for the stock)
Maximum Profit: $5.32
Return on Capital Outlay: 36%
So, the stock must rise just 5% in 103 days in order to make a 36% return. In the interim, the investor is protected even if the stock falls 22% from its current price. Too good to be true? Nothing comes for free and, in this case, the reason the option premium is pumped up is that earnings will be due out sometime in February. If history repeats itself, this stock should be very volatile and that can mean down too. So, investors would have to bet that a stock with a penchant for 50% moves doesn’t drop more than 22%. For those who don’t enjoy BIDU-like volatility, this is definitely one to stay away from! For those that believe in the long term prospects of the company, such a drop would be an opportunity to add to the position while lowering effective cost basis to $14.68 in the interim.
Have a fantastic week!
Optionsage
