I've spotted a covered call candidate in B. Riley Financial, Inc (RILY) . The company, which has financial interests in TheStreet's owner, Arena Group (AREN) , operates in investment banking, institutional brokerage, private wealth and investment management, financial consulting, and corporate restructuring.
Riley offers a play similar to what we saw recently in Cowen Inc. (COWN) , for which in early March I posted a covered call idea. That trade was underwater for a bit, but the shares were buoyed by takeover speculation in July. Earlier last week, the company agreed to be purchased by TD Bank (TD) for $39.00 a share.
At the end of July, Riley posted a loss in what was somewhat of a "kitchen sink" quarter and was driven completely by a markdown on the company's investment portfolio. A very common occurrence in this part of the market in the second quarter.
The company saw good growth from the non-cyclical parts of its business. In addition, with July producing the largest monthly gain for the S&P 500 since late in 2020, the company's investment portfolio is bouncing nicely so far in the third quarter. Like most in this part of the market, earnings tend to be somewhat "lumpy." That said, the company has delivered a net of $17.00 a share of earnings since fiscal 2019.
In addition, B. Riley pays a dividend of a buck a share a quarter, given the stock a yield of just north of 6%. This should help to put a floor under the equity. If Cowen is the start of an acquisition uptick in the industry, B. Riley Financial would make an easy "bolt on" buy, given a market cap of approximately $1.6 billion. This seems to price the company holdings at a significant discount, especially if markets continue to recover.
One director of the company seems to think the stock is undervalued given the over $2.7 million worth of shares he has scooped up so far here in August.
Option Strategy
Here is how one can initiate a position in RILY via a covered call strategy.
Using the January $55 call strikes, fashion a covered call order with a net debit in the $49.00 to $49.50 a share range (net stock price - option premium). This strategy provides both downside protection and potential upside in the low teens, including dividends even if the stock flat lines over the option duration. This is acceptable given the five-and-a-half-month time frame of the trade.
