Is Brown the New Black?

But UPS shares always seemed expensive, and I never bought any. Still, UPS has hovered for years on my stock "wish list," something that I urge all investors to maintain. You never know when a buying opportunity is likely to arise, and when it does, you want to be prepared.

Last week, opportunity knocked when UPS announced that winter storms in the Midwest over the critical holiday period would reduce fourth-quarter earnings, and the stock plunged 7%, to just over $77 a share. The bad weather contributed to both a lower volume of shipments and higher costs for ice and snow removal and overtime. Even so, UPS said it expected to meet its full-year forecasts.

Anyone trying to get through airports just before Christmas will recall what a mess it was. It wasn't just the snowstorms, but also a computer failure at a Delta Air Lines (DAL) carrier and a crippling number of US Airways baggage handlers who called in sick that disrupted travel (and package deliveries) to an unusual degree. A winter storm over the holidays is hardly unexpected, but this strikes me as an extraordinary confluence of events, unlikely to be repeated anytime soon.

So the market's reaction struck me as a classic overreaction and buying opportunity. FedEx (FDX) also dropped on the news, even though it said its earnings and revenue wouldn't be affected. Indeed, this strikes me as such a one-time event that I wouldn't even call it a "special situation," which, as I've discussed in this column, can provide a buying opportunity. Special situations typically take months, even years, to resolve.

At a forward price/earnings ratio of 22, vs. 16 for the S&P 500, UPS still isn't exactly cheap. But longer term, I like UPS's prospects. I don't know about the rest of you, but I'm doing an increasing amount of my shopping on the Internet. I've found it reliable, cost-effective and amazingly convenient. True, I wish there was less cardboard and packaging to throw out (why does Amazon.com (AMZN) send a single book in a giant box stuffed with plastic pillows?), but I see online shopping as an irreversible trend. Some worry about a competitive threat from FedEx, but I think it will be hard for anyone to match UPS's efficiency, reliability and courtesy. And package delivery, by its very nature, can't be outsourced to low-wage countries.

Given the market's relatively low volatility of late, call option premiums have been shrinking. I'm convinced the options market is dominated by speculators, not long-term fundamental investors like myself, which sometimes gives us an advantage. I was able to buy the January 2006 80 calls and the January 2007 85 calls for a little over $4 each (meaning I bought the right to buy UPS shares at $80 in January 2006 and at $85 in 2007). That's less than a 10% premium for the '06 calls and less than 15% for '07, which struck me as reasonable. And I didn't put much capital at risk.

I moved swiftly last week to take advantage of what I thought might be a narrow window of opportunity, but it turned out there wasn't any rush. With the overall market showing continuing weakness, UPS shares have dropped even further, to near $75 this week; the stock hit $87 last month. So if you agree with my reasoning, you can get an even better price than I did. And if it keeps dropping, I plan to buy more.