Santarus (SNTS) is a biotech pharmaceutical company that produces drugs to treat endocrine and digestive system disorders. The fundamental picture here is good, as the company has had several positive earnings surprises, and all signs point to continued strength.
In the most recent earnings report on August 6, the company reported $89.4 million in revenue in the second quarter, which represents an 89% increase compared to the year-ago quarter. This was in part due to the fact that sales doubled for its drugs ZEGERID and CYCLOSET compared to the 2012 second quarter, and that sales for its top seller, GLUMETZA, remained strong at $44.4 million (a 39% increase).
And SNTS met the bottom line too, with $0.24 EPS coming in six cents ahead of analyst estimates.
SNTS has seen a wild rally this year, up 126%–but a short-term pop could be likely, since the stock saw a pullback Tuesday below the $25 level. This could be a good chance to snap up a strong company and generate income with covered calls.
Recommendation: Buy SNTS at $25, and sell to open the September $30 calls at 20 cents or more. This puts your cost basis at $24.80. If SNTS is trading above $30 at September expiration, and your shares get called away, you get to keep both that 20-cent premium plus $30 per share for a 20% total return.
Worst-case scenario, if SNTS is trading below the $30 strike price at September expiration, you get “stuck” with a biotech stock that’s looking very strong—and that you can continue to sell calls against.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with a the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
Stay tuned! Bryan is currently working hard on a brand new strategy that amplifies your income potential by utilizing a conservative options strategy based on stocks you may already own.