If you’ve been following me here at OptionsZone, then you know that I’m amped about the phenomenal opportunities the IPO market has to offer right now. And today I’m going to bring you my next best-of-breed IPO recommendation: Grand Canyon Education Inc. (LOPE).
If you haven’t already read The Right Way to Invest in IPOs, I suggest you take a look so you can become familiar with my methodology when it comes to investing in newly public companies.
LOPE: A Solid Stock in a Solid Sector
Grand Canyon Education, which offers online education programs, has rock-solid fundamentals, and falls in a sector that has performed very well during the past few years — even in the midst of the greatest bear market we have seen since the Great Depression.
Online education is a sector with some very high-beta momentum stocks like Apollo Group (APOL), ITT Educational Services (ESI), Strayer Education (STRA), Career Education (CECO) and New Oriental Education & Technology Group (EDU). Many of these names were among the very few stocks hitting new all-time highs as the market crashed in 2008.
LOPE is scheduled to report third-quarter results after the market close Nov. 3. As one of the fastest growing companies in its sector, I think the company will handily beat earnings estimates.
An Undervalued Gem
Take a look at the table below.
| LOPE | Industry | |
|---|---|---|
| Quarterly Rev. Growth (yoy) |
71.8%
|
8.6%
|
| Gross Margin (ttm) |
66.98%
|
56.93%
|
| PEG Ratio (5-year expected) |
0.93%
|
1.14%
|
A price/earnings to growth (PEG) ratio of less than 1 signals that a stock or sector may be undervalued, while a PEG ratio above 1 signals that a stock or sector may be overvalued.
With a five-year expected PEG ratio of less than 1 in an industry that is running slightly above 1, more institutional money will likely flock to LOPE than to other names in the sector because of the value and high growth potential.
LOPE About to Break Out
This is all great stuff that points to LOPE as a best-of-breed fundamental play, but as you likely know, I’m a technical guy. And I’m happy to say that LOPE is setting up nearly perfectly from a technical standpoint.
LOPE’s chart is following all the rules of a bullish ascending triangle pattern, which is confirmed when the price breaks out of the triangle formation to close above the upper trendline.
My first target for LOPE is at $25, and my second is at $29 over the next three to six months. With the stock currently trading around $18.50, if you bought shares of LOPE, you’d be looking at a return of 35% if it hits the first target, and 57% if it hits the second.
That’s nothing to scoff at, but like I said in my earlier article, the way to trade IPOs for the biggest percentage gains and the least amount of risk is through options. And with the technicals showing that LOPE is very close to breaking out, you should act now by buying call options on the stock.
In selecting what LOPE call options to buy, consider whether the target price is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5%.
But whichever calls you plan to trade, you should do it soon, because it doesn’t look like you’re going to have a big window of opportunity before LOPE goes screaming higher.
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