Monday, November 24, 2008

Establish McKesson Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of McKesson Corporation (MCK).

Perhaps you are not yet very familiar with McKesson. It might surprise you to know that it is the largest health company in America in terms of revenue with $100+ billion annually -- Yes; it generates even more sales than Johnson & Johnson. Its primary business is drug distribution and it delivers approximately one-third of all drugs in America. Incredibly, its total market capitalization is only $9 billion -- so its P/Sales ratio is an amazingly low 0.1. The current year P/E is only 9 and return-on-equity is an impressive 70%. With management's focus on continued revenue growth; and even more importantly their profit margin improvement plans, this seems like a great time to purchase this high quality company at a very reasonable price. One future growth driver could be in the international arena since currently only 8% of revenues are from outside the U.S. Another possible area of growth is the fact that there is a lot of room for future increases in the use of information technology in the health care industry, and McKesson already has a Technology Solutions division (although currently relatively small) which should benefit and grow as investments in healthcare information technology are pursued by the Obama administration's stated healthcare technology and cost containment policy initiatives.

Established McKesson Corporation (MCK) Covered Calls for Dec08:
11/24/08 Bought 300 MCK @ $30.72
11/24/08 Sold 3 MCK Dec08 $30.00 Calls @ $2.35

Annualized Return If Exercised (ARIE): +79.9%
Downside Breakeven Protection: 8.0%

The annualized return shown above includes an ex-dividend on Nov. 26th of $.12 per share.

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