Let's discuss a financial name that I believe is an attractive covered call candidate. It very cheap on a variety of metrics and has also seen some recent insider buying.
Cowen Inc. (COWN) is known primarily as a boutique investment bank. In addition to investment banking, this New York City-based financial services firm offers sales and trading, research, prime brokerage, and investment management services to over 6,000 institutional and private clients, and companies in search of financing. Cowen also manages its own investment portfolio, consisting of a few private equity special situations..
The company benefited from the Covid-19 pandemic in a couple of key ways. First, the substantial market volatility generated higher trading volumes, allowing its institutional brokerage and services revenue to surge 59% to $728.5 million in 2021 from $459.1 million in 2019.
Second, and more importantly, since the extreme volatility -- which normally kills underwriting and M&A activity --- was largely confined to six weeks in the spring of 2020, the firm's investment banking unit benefited from the greater focus on healthcare during the pandemic, as well as the SPAC craze, which accounted for 53% of the 471 U.S. IPOs in 2020 and 59% of the 1,033 U.S. IPOs in 2021. Cowen cashed in, with 32% of its 2021 banking revenue derived from SPACs. As a result, that division's revenue rocketed 192% (2021 versus 2019) to north of $1 billion.
The market rewarded this SPAC exposure, sending the stock to over $40 a share as late as early August 2021.
However, SPAC has since become somewhat of a four-letter word, with just over 80% of the 2021 vintage worldwide still searching for deals. Furthermore, with the biotech sector off nearly 30% since August 2021, it can be argued that IPOs and secondary offerings in that space will dry up as cash-strapped companies look for less-dilutive alternatives while the cash-rich big-caps wait for the dust to settle before reentering the M&A arena.
Owing largely to these negative investment banking dynamics and more recent broader Russia-Ukraine uncertainty, shares of COWN are now trading at a trailing P/E ratio (non-GAAP) of around 3 and for around 4.5 times forward earnings estimates.
The stock trades for about $2 a share above book value, while Cowen recently boosted its dividend payout to where the shares now yield north of 1.6%.
Cowen also recently boosted its stock buyback authorization by $50 million, which would retire approximately 7% of its outstanding float at current trading levels.
We believe it has done a solid job of delivering growth over the years (see below). Meanwhile, insiders added some $1.2 million in stock to their holdings in late February, a nice vote of confidence.
Here is how one can initiate a position in COWN via a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the July $30 call strikes, fashion a covered call order with a net debit in the $26.30 to $26.50 a share range (net stock price - option premium). This strategy provides just under 10% of downside protection as well as potential upside of nearly 15%.
Keep in mind, the duration of this strategy is only four and a half months and COWN already is in oversold territory based on earnings valuation.
(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive columns from daily columns and trade ideas from Tim Collins, Paul Price, Doug Kass and others.)