Here's How to Cash in on Those Pesky Political Ads

Nexstar Media Group is America's largest operator of local television stations. This year's election ad spending is on track to see all-time record spends by both parties, much of it devoted to TV viewers. Nexstar is a major beneficiary of that trend. EPS are expected to come in at about $14.40 this year, up almost exactly triple from 2019's $4.80. Value Line thinks NXST can earn even more in 2021 while Yahoo Finance's analysts look for a slight dip next year, to $12.16, as the presidential political ad spend fades away. Either way, NXST appears exceptionally cheap. At its Friday close of $90.40 the shares were offered at just 6.3-times this year's projected profits. From 2014 through 2019 NXST typically commanded almost 19-times. Nexstar has been a true growth stock since 2012. All major metrics advanced nicely. Dividends were initiated in 2013 and increased each year since. Book value soared from 10 cents, in 2012, to north of $49. EPS moved up about 1,400%. Investors noticed, pushing NXST shares more than 700% higher. In April 2019 NXST surged to about $120. Last January it peaked at over $133 before the Covid-led crash kicked in. Even 17 times 2020's estimate could justify a rise to $244. Nexstar is a proven left to right stock, which dramatically multiplied wealth for continuous shareholders. NXST's attractive current yield of 2.48% is just icing on the cake. I'm not alone is seeing Nexstar's appeal. Yahoo Finance calls the shares undervalued and looks for an ultra-conservative $117.89 price by this time next year. Why do I say it's too low a target? That price represents just eight times this year's expected EPS. Even so, hitting Yahoo's goal would deliver almost 33% in total return over the coming 12-months. Independent research from Morningstar is more bullish than that. It labels NXST as a four star, out of five, buy. Morningstar calls its present-day, as opposed to year-ahead, fair value estimate for NXST as $120. Owning Nexstar shares outright appears to be a good choice. Option-minded traders who think it can go to at least $120 by January 2022 might want to consider an aggressive buy/write combination for that expiration date and strike price. Actual pricing for the $120 calls and puts out to Jan. 21, 2022, with NXST at $90.40, are shown below. Buy/write combinations involve purchase of at least 100-shares of stock along with the sales of a cover call and a naked put. Cash flow details of the recommended trade, executed in a margin account, are shown below. Money collected from the option sales can be used to help pay for the shares bought. That substantially reduces the initial net cash outlay. If held right through expiration day there are just two possible outcomes. NXST will either close at $120, or higher, or below $120. If the former condition is met the following best-case scenario would unfold. A minimum 32.8% upturn would translate into a stunningly good 164.1% total return in about 1.2 years. That annualizes at an equally impressive 136.7%, assuming no dividend increase in 2021. Outright owners of NXST would need to see $236 or so to pocket similar percentage returns by Jan. 21, 2022. IF NXST fails to gain, and hold $120 by expiration day the worst-case scenario detailed next would play out. Barring a major collapse, even that does not appear scary. You'd end up with a double-sized position, but at an average cost of just $81.85 per share. Any decline of less than 9.4% from the trade inception price would still allow for immediate liquidation for at least a small profit. I like the risk/reward prospects on this somewhat aggressive combination. Play NXST the plain vanilla way, or via the more sophisticated option combination. You'll likely be well compensated either way.

Here's How to Cash in on Those Pesky Political Ads

Nexstar Media Group is America's largest operator of local television stations and during this political season, it's giving new meaning to the term 'left to right' stock.

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