Polaris: Play With the Deck Stacked

Left to Right companies are those whose stock values rise over time, creating wealth for long term holders. Polaris Industries faced multiple challenges over the past few years yet it still handily meets that criteria. Over the last seven years PII posted outstanding growth across every major metric. Patient shareholders who held on for the ride were extremely well rewarded. The company's 2016 -2017 travails served up a great chance for true believers to buy into Polaris cheaply on temporary weakness. Early in 2016, the stock dipped to under $68. This month PII climbed back to as high as $137.66, more than double the price at that crazy sell-off low. Q4 earnings were a few cents above expectations. More profit progress appears on tap for 2018. Despite that good news, Polaris sold off sharply (-13.29%) on Tuesday as the broad market plunged. The truth is that Polaris had gotten a bit ahead of itself. PII's average P/E since 2010 has run about 18.9x. A typical yield has been 2.01%. At this month's peak those numbers were a tad pricey, at 22.6x and 1.69%. All three previous sojourns to similar valuation levels (red-starred, below) also preceded share price pullbacks. Tuesday's closing quote indicates PII is back to just under fair value. The present P/E is slightly lower than the stock's average level over the most recent five years. Polaris' projected 2018 yield of 2.16% is now a bit above normal. With Polaris now near its proper price, how can we put the odds in our favor? Tuesday's high market volatility layered over PII's stock-specific plunge, made for almost unbelievable option premiums on its January 17, 2020 expiration date puts. In mid-afternoon, with PII down about 14.4% on the day, I was able to collect $11.43 per share for agreeing to stand ready to buy at $90. I received $13.40 for selling the 2020 expiration date $95 strike. The slightly more aggressive, but still well out-of-the money, $100 strike put was going for almost $15. If exercised prices on those options dropped down to levels last seen near 2016's lows, when we all should have been loading the truck with PII shares. Writing these puts on Jan. 30, 2018, was like getting a second chance to buy Polaris at 25% to 31% below fair value. That was better-than-bear-market sized protection against loss vs. the trade inception price. Option sellers can never force option owners to sell them the underlying shares. If PII remains above the respective strikes the options will simply expire worthless. That would be a fine result for the put writers. The examples shown above would provide gains of from $1,143 to $1,490 per 100-share contract sold if the options go on to expire unexercised. There's nothing bad about getting paid thousands of dollars without ever having to have laid out any money at all. Why did I say the deck was stacked in your favor? From the trade inception price, option sellers will make their maximum profits if PII: Goes up. Remains unchanged. Declines, but by less than the built-in, 25.9% to 31.6%, margins of safety. Those three results cover a huge majority of all possible outcomes. Polaris traded above the break-even point on the middle-of-the-road, $95 put, about 90% of the time during the previous half-decade. The few brief instances when PII meandered under that level never lasted for long. I'm sitting on large gains with PII shares I bought during 2016. I've already made quite a bit on covered calls which expired at various points since then. I recently rewrote new covered calls out to Jun. 15, 2018, and Jan. 18, 2019 expiration dates. I've also booked nice profits on many PII's Jan. 19, 2018 expiration date puts which expired worthless earlier this month. This week's new put sales simply added another new chance for even more gains. My worst-case scenario would be owning more PII shares in the future at very reasonable prices. The current valuation for Polaris suggests option writing is more appealing than outright share purchase right now. Ratcheting up to closer to the money strike prices would increase potential gains while trading off some degree of the safety cushion. The choice is yours.

Polaris: Play With the Deck Stacked

Over the last seven years PII posted outstanding growth across every major metric.

Columnist Conversation

Monday Morning Fibocall for 9/20/2021

Interested in Uranium? Just Saying

A $396,000 Vote of Confidence in American Woodmark (AMWD)

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.