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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77  
Subject: Re: Un Port Buy: Medtronic Date: 11/27/2010 1:37 PM
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As I just posted in reply to the general fool.com post about MDT, it's one of the stalwarts in my portfolio -- and in particular, IMHO, a good candidate for writing covered calls on... won't crash too terribly (except, like everything else, in disasters such as fall '08 of course;-), won't soar too suddenly -- you'll get assigned maybe one or two quarters a year (with extra capital gains if you choose wisely the strike at which you sell the call) and net about 12% to 20% a year including dividends (gross of, alas, short-term-gains taxes, of course -- might be nice to do in a IRA, if yours allows covered call writing;).

If your investment thesis is that MDT is wildly undervalued and will soar when the market recognizes that, then of course writing calls on it would be quite unwise (that's what I think of other ex-high-growers becoming-value-plays that I own, like, say, CSCO -- no covered calls on THOSE for me, at this time, as I think a 10%-plus rally could easily occur any time with little warning), and you should just be content with the modest dividend while waiting for your thesis to play out (and if you're right and I'm wrong, you'll be sitting pretty on your 10%-or-whatever capital gains while mine have been called away beyond the first 6-7% or so... that's about how much I aim to be OTM when I write 3-month calls on MDT, with its volatility of around 24).

However, do consider: what's the catalyst that will make MDT soar over 10% in a single quarter (making writing calls unwise)? With its size, I can't see one -- even one new big breakthrough from their R&D wizards would not move the needle that much, I think. Other "mostly sleepy stalwarts" like MSFT are more prone to such spikes (more so than the volatility, just a bit higher than MDT's, acknowledges) because of strong dependencies on a few products (Windows and Office making the huge majority of MSFT's profits) and financial wizardry (MSFT's hugely successful bonds and the implied promise/hope of a special dividend -- and higher ordinary dividends -- from such funds); CSCO's trigger might similarly be financial (finally instituting a dividend, as so often mooted; maybe the ability to repatriate huge mounds of cash now held abroad in a "tax amnesty" of some form; ...) and therefore similarly sudden and unpredictable. MDT doesn't seem to me to be prone to such sudden upside-triggering effects and events... (I'd be delighted to hear otherwise from fellow fools of course -- fighting confirmation bias in myself is always one of my top priorities!-).
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