Tuesday, January 20, 2009

Establish American Oriental Bioengineering Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of American Oriental Bioengineering (AOB) covered calls.

American Oriental Bioengineering is a consumer healthcare products company in China. They manufacture and distribute more than 40 State Food and Drug Administration approved prescription pharmaceutical products as well as several over-the-counter medications primarily in the areas of women's health, anti-virus, and respiratory conditions.

AOB has grown revenues at a 60%+ compounded annual growth rate for the past 4 years from a combination of organic growth as well as from seven acquisitions. They expect an additional organic growth rate of 30% in 2009. Yet the stock is priced attractively for a value-oriented investor. The balance sheet is very strong with cash exceeding total debt and strong free cash flow. The current price/earnings ratio is a relatively modest 7 and profitability is impressive at 25% return-on-equity.

AOB should continue to benefit from the Chinese government's ongoing commitment to improving the healthcare of its citizens -- in fact, healthcare reform is one of the target areas of China's large economic stimulus plan. The demographics favor healthcare as well since currently only 8% of the population is 65 years of age or older -- this percentage will increase in upcoming years.

Established American Oriental Bioengineering Covered Calls for Feb09:
01/20/09 Bought 500 AOB @ $4.66
01/20/09 Sold 5 AOB Feb09 $5.00 Calls @ $.30

Absolute Return if Unchanged: +6.4%
Annualized Return If Unchanged (ARIU): +72.9%
Absolute Return if Exercised: +13.7%
Annualized Return If Exercised (ARIE): +156.7%
Downside Breakeven Price Point: $4.36
Downside Breakeven Protection: 6.4%

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