Steelcase: Dull, but Profitable

It's fun and exciting owning volatile glamour stocks. They're in the news and talked about often on CNBC and other media outlets. Many times, though, you can make more money by putting capital to work in less flashy names that garner almost no press coverage. Industrial furniture manufacturer Steelcase falls into that category. SCS's shares have traded in a moderate range from about $12 to $20 since 2013. That offered swing traders numerous chances to buy and sell for very tidy profits while also collecting decent dividend income along the way. A bad reaction to SCS's latest quarterly report sent the stock down to under $14. At $13.93, SCS yielded 4.02% while sporting a current year P/E of 14.7x. Both metrics were attractive relative to the stock's average P/E of 16x and typical yield of 2.81%. EPS are expected to rise slightly in 2018 before starting to ramp up nicely over the next few years. Value Line projects 95-cents in the current year growing to $2 per share not later than 2023. A simple regression-to-the-mean valuation supports an end of 2019 target of $19.20 per share and a possibility for $32 by 2023. Those are not farfetched. SCS topped out between $17 and $20.50 during each of the calendar years 2013 through 2017. Full year EPS never exceeded $1.07 during that half-decade stretch. Steelcase's four should have sold moments (red-starred below) all occurred when over enthusiasm pushed the stock to P/Es hovering near 20x. With profit growth on the verge of becoming more exciting, a future return to higher multiples than today's appears likely. Owning SCS outright should prove rewarding as the 4% yield combines with $2 to $5 per share of upside potential. Option writers can collect attractive premiums right now as the elevated implied volatility and absolute low price sent option prices soaring. Actual prices on the Jan. 18, 2019 expiration date $12.50 and $15 puts (with SCS @ $13.93) are shown below. Being forced to own this fine stock for either $11.70 or $13.10 doesn't seem scary at all. Another fine way to play would be using a buy/write combination. That involves purchase of any multiple of 100 shares and simultaneous sale of a $15 call and a $15 put for the same Jan. 18, 2019, expiration day. Executed in a margin account, using existing free buying power to secure the put, the out-of-pocket cost would be just $1,108 per 100-share commitment. Attaining the best-case scenario would require just a 7.7% upturn from the trade inception price by expiration day. That modest gain would translate into a 39% cash-on-cash profit due to the leverage factor provided by the dual option sales. What if SCS just sits quietly and does absolutely nothing by Jan. 18, 2019? The static return scenario is outlined below. Traders who saw this somewhat disappointing result unfold would still be doing okay. Between the dividend payments and option premiums collected they'd still have made over $200 per 100-share commitment even though the stock went nowhere. It is possible that SCS could end up below the $12.84 break-even price on this buy/write combination. As with any stock which fluctuates to under your purchase price, you'd then be sitting with a paper loss. In this case that would be on 200 total shares, rather than just the original 100. In the unlikely chance this scenario plays out I'd suggest simply waiting for the next decent rally. Steelcase has spent well over 90% of the previous five years much, much higher than that $12.84 break-even level. Steelcase is exactly the kind of low-risk, high yield stock that investors should be buying, but can't get enthusiastic about. Be smarter than the crowd. Buy SCS shares, sell some SCS puts, or consider setting up the entire buy/write combination.

Steelcase: Dull, but Profitable

Sometimes there's more money to be made in dull stocks than glamour names.

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