I'm Still in Love With Sally

Late last year I wrote positively about Sally Beauty Holdings at $12.75 per share. The shares appeared cheap, at just 6.9-times what was then its current year's earnings per share estimate. Here is one of the graphics I used in that Dec. 30 write-up. My 12-month target price was $25.90 on a stock that previously traded as high as $35.30, almost six years earlier. SBH's numbers looked great to me... but Value Line's rating system disagreed. It carried Sally as a Strong Sell for year-ahead performance and thought it might be as low as $11, a full 18-months out. Everybody is entitled to their own opinion. Over time, though, my take on the stock was proven correct while Value Line's viewpoint could not have been much worse. Since Dec. 30: Fiscal Q1 Results beat estimates by 5 cents Value Line's fiscal 2021 estimate for SBH was raised to $1.90 /share 2024 - 2026 EPS estimate was increased 25%, to $3.00 /share Debt is lower, cash balance is higher SBH rose by 43.2%, to $18.26 from $12.75 Since Dec. 30, SBH outperformed the S&P 500 ETF by 1380%. In December I recommended buying SBH shares as well as setting up the following June 18, 2021 expiration date $15 buy/write combination. Selling in-the-money puts along with out-of-the-money calls appeared aggressive at that time. It no longer does, with SBH already trading north of $18. The best-case scenario only requires SBH to hold at $15 or higher through expiration day. If it does, which now seems very likely, the raw return on the combination play would be up 85.18%, an annualized rate just shy of 183%. Now that fiscal 2021 projected earnings are a bit higher and the balance sheet is healthier, what is SBH really worth? If SBH hits the current year's estimate (the fiscal year ends Sept. 30, 2021) and trades at a normalized, 14.7-times multiple it could rebound to about $27 - $28 by this fall. That implies greater than 52% upside even from $18.26. That goal is not far-fetched. SBH topped out between $28.30 and $35.30 during each of the five years stretching from 2012 through 2016. EPS back then ran from $1.24 to $1.65. Despite much improved fundamentals Sally's share price is cheaper on an absolute basis than where it sat exactly nine years ago. SBH thus looks poised to make a good-sized catch-up move higher. It's not too late to hop on board this now-moving train. Options are now available out to Sept. 17, so I'm advising buy/write combos using $17.50 strike prices rather than $15s. Actual Friday closing prices on the shares and those options are shown below. All it will take to lock in best-case results is for SBH to hold at $17.50 or better through expiration day. That's not a big ask considering the stock was already above that number on trade inception day. If that plays out as expected, the raw return will be up 46.3% and the annualized rate would be 86.2%. How cool is that on a stock that doesn't even need to go up? What if SBH fails to maintain $17.50? If so, the worse-case scenario detailed next will unfold. Combination writers would end up with double-sized positions in SBH. They'd also be required to pony up an additional $17,500 to cover the 10 exercised puts. Barring really bad news, however, even that scenario appears far from scary. Break-even on the entire package drops to just $14.73 per share, providing a greater than 19% margin of safety vs. the $18.26 trade inception price. Any decline of less than $3.53 per share would allow for immediate liquidation for at least a small, and perhaps a substantial profit. The pandemic laser-focused management on cost cutting, beefing up online sales and expanding customer loyalty programs. Benefits from those moves should help sales and profits expand well into the future. Buy some SBH shares, sell some naked puts or consider going with full buy/write combination at the suggest strike price or any other that you feel comfortable with.

I'm Still in Love With Sally

Sally Beauty Holdings' stock, that is. Here's why.

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