CBS (NYSE:CBS) stock investors have not had a great 2018 so far; however, they may still consider adding CBS stock to their portfolio for the rest of the year. Specifically, there are three bullish plays in CBS stock that I want to share with you, as each play could lead to impressive profits.
Headquartered in New York City, CBS Corporation is among the largest media companies globally. Since mid-2017, CBS investors have found themselves in the middle of a “family feud” and on-going lawsuits between CBS management and its controlling shareholder National Amusements Inc. For those who aren’t “in the know,” National Amusements is the movie theater company owned by Sumner and Shari Redstone, which is also the parent company of both Viacom (NASDAQ:VIAB) and CBS Corporation.
The Redstones have been advocating a merger between CBS with Viacom. While CBS management has been trying to free itself from its controlling shareholder through exploring several legal options for over a year, on Sept. 10, CBS stock suffered further and sold off following the resignation of Les Moonves, the chairman, CEO and president, who came under multiple allegations of sexual misconduct.
Yet, the departure of Mr. Moonves has somehow brought stability for all stakeholders. Both parties have agreed to stop the legal battle; the Redstone family has agreed to not push for a merger between CBS and Viacom for at least two years and CBS management has stopped pursuing nuclear options, which would dilute the controlling position of National Amusements from 79% down to 17%.
As a result, the stock price has stabilized around the mid-$50’s level and investors are now wondering if the CBS stock price can finally reflect the strength of its core businesses, namely content production and digital distribution, which, in the past decade, have made CBS the most-watched television network in the U.S. On July 30, the company declared its most recent quarterly dividend at an approximate yield of 1.3%, payable on Oct. 1. During its Q2 earnings call on Aug. 2 2018, CBS turned in record-high results when both analysts and investors realized that the current share price did not do justice to the balance sheet and future business prospects.
If you are also of the opinion that the new management is going to improve its balance sheet further and that CBS stock is ready for a rebound on either technical and fundamental grounds, you may want to add CBS to your portfolio this October. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for CBS stock (prices are based on CBS Corporation stock’s closing price of $56.55 on Sept. 27):
Three Bullish Strategies on CBS Stock
1. Buy 100 shares of CBS Corporation stock at a limit price of $56.55. You should expect to hold this long stock position for up to one to six months for an approximate 6-8% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of CBS at a limit price of $56.55 and, at the same time, sell a CBS Jan 2019 $55 call option, which currently trades at $3.83. The $55 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in CBS stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Thursday, Sept. 27, at expiry, this trade would break even at a CBS Corporation stock price of $52.72 and the maximum return would be $228 at a price of $55 at expiry (excluding trading commissions and costs).
Assuming you would enter this put selling strategy at the closing prices on Thursday, the upside is that you keep the premium as long as CBS stock closes above $55 when January options expire (excluding trading commissions and costs).
The downside is that if CBS stock trades below $55 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $50 per share.
At expiry, this trade would breakeven at a CBS stock price of $53.0.
The Bottom Line on CBS Stock
I believe a rebound in CBS Corporation stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, a test of the previous lows and toward the mid-$40’s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
