If you’re afraid you’ve already missed the big market rebound, or if you’re afraid this is a dead cat bounce and we’re going to retest the lows, then this high income generating trade is worth considering. This is a powerful growth stock, the market is being too short sighted (as usual) and the premium income on this trade is big.
Sell Put Options on GrubHub (GRUB) with a strike price of $75 (11.6% out of the money), and expiration date of March 15, 2019, and for a premium of $1.45 (this comes out to approximately 23% of extra income on an annualized basis, ($1.45/$75 x 12 months). This trade not only generates attractive income for us now, but it gives you the possibility of owning shares of GrubHub at an even lower price if the shares fall even further than they already recently have, and they get put to you (we’d be happy to own this powerful growth stock, especially if it falls to a purchase price of $75.00 per share).
We believe this is an attractive trade to place today and potentially on Monday as long as the price of GrubHub doesn't move too dramatically before then (it's going to be volatile because they just announced earnings, and analysts are updating their price targets), and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 20%, or greater.
Here is a look at the price targets and recommendations of the 29 street analysts covering GRUB (as of this morning, including yesterday and today's wave of updates)...
GrubHub is a powerful growth stock, a leader in its industry, and it has a lot more room to grow (if you don't know, GrubHub operates as an online and mobile food-ordering company, which connects diners with local takeout restaurants). We previously wrote in detail about GrubHub here.
GrubHub is currently focused on growth, and the company is spending heavily on growth (a good thing in this situation). And while sales are growing very rapidly (both organically and through acquisitions), near-term profitability is not being maximized, long-term profitability is! And of course the already bullish street analysts are still missing the very attractive long-term value of this company (lots of upside!).
GrubHub announced earnings yesterday, and it was moderately disappointing for short-term investors, but fantastic for long-term investors, in our view. Specifically, GrubHub came in below the street expectations for EPS, revenue, and guided lower on EBITDA. However, all of these metrics are growing rapidly, and the company is focused on long-term growth (a very good thing for long-term investors). Here is a brief earnings update and the company's press release.
Why Sell Put Options Instead of Buy The Shares Outright?
Even when we believe the long-term value is there, it can be hard to buy shares right after a market rally like the one we've seen so far in 2019. Some investors fear 2019 has been a dead cat bounce and we could see a retest of the lows. However, it is exactly this fear and uncertainty that makes the premium income available on this options trade so high. If the market (and shares of GrubHub in particular) decline sharply then you’d get to buy GRUB at a much lower price. And if the shares don't ever fall then you simply keep the attractive premium income no matter what.
Asset Allocation and Risk Management:
As a reminder, if the shares of GrubHub get put to you, you’ll have to have cash on hand to purchase them (or if your account is approved for borrowing, you can use margin). Also, as a general rule, sell an amount of puts equal to the amount of shares you’d be comfortable buying if the shares get put to you. For example, if you’d be comfortable with 3% of your account being invested in GrubHub then sell that amount of put options (remember, one put option contract is equal to 100 shares of the stock).
In a nutshell, we believe GrubHub is an attractive long-term growth stock, and the premium income currently available in the options market is attractive. If the shares get “put” (at an even lower price) we'd be happy to buy and own them for the long-term. And if the shares don't get put before the option contract expires next month then you can be happy simply keeping the high premium income generated for selling the puts, no matter what.
For reference, you can view all of our current holdings here.