Now that we know Donald Trump has won the election, despite all the nonsense over electors not casting their assigned votes, we can get down to business selling covered calls on some unloved financial stocks.
These little guys have been beaten down because of Consumer Financial Protection Bureau fears, but it looks like that agency may blow up under Trump. So now is a good time to buy a few of these stocks anyway — since they are undervalued — and make some cash by selling covered calls against them.
I like selling covered calls on undervalued companies for income because I don’t want to buy a bad stock that just happens to pay a rich premium, and get stuck with it if the price goes down.
Many investors foolishly ignore small and mid-cap stocks when they have the greatest possibility of long-term returns. That’s too bad, because they also can offer large premiums and selling covered calls can reduce risk. That’s why I use this strategy in my forthcoming stock advisory newsletter, The Liberty Portfolio.
In no particular order, here are the trades:
Covered Calls for $1,000: PRA Group (PRAA)
PRA Group Inc (NASDAQ:PRAA) is a massive global purchaser of bad debts. It was growing at a fabulous rate, the stock was soaring, and then the CFPB started wagging its fingers at debt sellers. The bureau said sellers were still responsible for breaking laws if the debt buyers broke the law. Ridiculous!
So the sellers curtailed debt sales, and that meant PRA Group had fewer debts to collect on, and make money from.
However, if the CFPB goes away — especially before they institute any more silly rules — there’s money to be made here. PRAA stock is already off its lows in anticipation.
The stock closed Wednesday at $35.95. I would consider buying the stock here and then selling the Jan $35 covered calls for $2.40. Backing out the 95 cents you’d lose if PRAA stock is called away, that provides you $1.45 per share, or a 4.1% return for a seven-week holding period. That’s 30% annualized.
Sell two contracts to bring in $290.
Covered Calls for $1,000: FirstCash (FCFS)
FirstCash Inc (NASDAQ:FCFS) is a company I’ve followed for 12 years. I somehow became a national expert in consumer credit, have spoken several times with senior management, and the company diversified away from all controversial consumer finance products years ago.
It also recently merged with one of the largest consumer finance players in the country, giving it a massive footprint in the U.S., and it effectively controls the pawn shop market in Mexico.
FCFS has a very bright future ahead of it, particularly in Latin America. It has also consistently provided great premiums on its covered calls.
First Cash trades at $45.90, which I think is a value given its 16% EPS growth on a going-forward basis, its solid balance sheet and consistent cash flow. You can sell the March $50 covered calls for $1.60 — although be patient in trying to get that number because the open interest isn’t too large yet. That’s a 3.2% return.
Sell two contracts for $320. Even better, if the stock gets called away, you’ll make another $4.10 per 100 shares!
Covered Calls for $1,000: PRA Group (PRAA)
Casey’s General Stores, Inc. (NASDAQ:CASY) has this lovely business model where it runs convenience store/restaurants throughout much of the Midwest.
CASY is a great example of a company that exists because of the culture of the Midwest. Not every person there is strolling into sushi bars and drinking artisan coffees at specialty coffee shops. The Midwest is filled with wide-open spaces, where drivers need to pull over and refuel a lot more than they do in an urban environment.
Hence the reason Casey’s has become a staple in this region, and more power to them. CASY stock is up more than 40% over the past two years, and there may be more to go should the economy improve under Trump.
The stock closed Wednesday at $120.45. I would consider selling the Jan $120 covered calls for $5.10. That gives a fantastic return of over 4% on premium alone. If called away, you still get $4.65 in total net premium. So sell one contract, and that will net you $465.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.