Identifying great companies is relatively easy. Just look backwards for superior growth fundamentals over a sustained period.
Finding a way to play those firms, which typically command sky-high valuations, is much more difficult.
Specialty retailer Tractor Supply Company (TSCO) clearly passes the first test. From fiscal 2009 through fiscal 2019, which ends Feb. 1, 2020, TSCO's earnings per share, or EPS, likely will have surged by more than 500%. Continuous shareholders, who braved 2009's Crash and bought at the low, did even better. In exactly 10 years they pocketed greater than 669% in total return.
Few companies sported better records than TSCO during that decade. Tractor Supply is a proven growth stock with a remarkable track record.
Since 2010, TSCO carried an average multiple of 22.5-times while paying about 1.02% in current yield. Every pullback to below-average valuations (green-starred below) proved to be a good buying opportunity.
TSCO's four "should have sold" moments (red-starred) reflected well-above normal price-to-earnings. All but this year's peak of $114.25 also occurred with TSCO paying well below typical yields. As of Sep. 25, TSCO, at $90.61, could be had for just 19.1-times this year's and 17.3-times next year's projected EPS. At that price the shares yielded 1.54%, around 50% more than its historical average-yield level.
A return to a more typical valuation could easily send TSCO up to north of $115 by the end of fiscal 2020, about 17-months out. That goal is far from an upper limit. Previous peaks from 2014 through 2016, saw TSCO's price-to-earnings reach 29.8-times to 33.7-times.
I'm not alone in my thoughts. Yahoo Finance seconds my opinion with a 12-month target of $115.16 for TSCO. Yahoo's consensus estimates are very close to Value Line's projections for this both this year and fiscal 2020.
Achieving Yahoo Finance's goal would provide a very respectable 12-month total return in excess of 28%.
Owning TSCO outright near $90-$91 should be nicely profitable. Option writers with long time horizons could make good money on TSCO's future rebound, while securing double-digit margins of safety, which would not apply to simple buyers of the stock.
Recently added Jan. 21, 2022 expiration date puts at strikes of $90, $95 and $100 are shown below with their actual market prices, with TSCO at $90.61.
Selling puts commits you to stand ready to buy 100-shares per contract at a net price of the selected strike minus the per-share premium collected up front. The "if put" column above shows the respective forced purchase prices if the puts are eventually exercised.
The most conservative of those strikes, the $90 series, drops the "if exercised" net entry point to 16.7% below the already reasonable trade inception price. How cool is that?
Maximum profits on this, or any other option sale, is always 100% of all premium collected up front. If TSCO closes at $90 or higher through expiration day, where it already is, every 100-share commitment would net a $1,460 gain.
Future stock market action can never be guaranteed. That said, owning TSCO at the $90 strike's break-even point of $75.40 would have been a winning position 100% of the time dating back to mid-June of 2018, more than 15-months ago.
With sales, earnings and dividends growing nicely, it appears unlikely that TSCO will regress over the coming 2.3 years until expiration day in January of 2022.
Hindsight is always easy. Real Money Pro readers, though, were tipped into buying Tractor Supply near $53 back in June 2017, prior to its final low just south of $50. As it slid lower, I bought tons of shares making it my largest single-dollar holding at that time.
Piling in at multi-year lows, even when fundamentals remain strong, requires incredible conviction in your own estimate of a stock's true worth. At its final bottom of $49.90, TSCO had fallen by almost 49% from its April of 2016 peak.
Momentum traders wouldn't have gone near the stock near $50. Value investors, though, should have been salivating.
Today's price is not as cheaply valued as it was at TSCO's July 2017 nadir. That's what makes the put writing play so compelling right now.
Buy some TSCO shares, sell some near-the-money or in-the-money LEAP puts, or consider doing both. It's a favorable time to be establishing new positions in this premier growth stock.
Paul Price provides stock trade and investment ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.