Keep on Trucking With These 3 Plays on Heartland Express

Heartland Express is a conservatively run, medium haul, truckload carrier based out of Iowa, with a debt-free balance sheet and no pension liabilities or preferred shares. Since 2012, management has retired almost 5% of the outstanding shares strictly using free cash flow from operations. At its Feb. 15, 2021 quote of $18.76, the shares pay a 0.43% current yield. Analysts from both Value Line and Yahoo Finance now expect all-time record EPS from HTLD in 2021 and beyond. The relatively slow growth rates of the recent past seem ready to rise over the next few years, providing a catalyst for reverting back to a more-typical multiple on the shares. All HTLD's major business metrics are favorable. Its low price-growth persistence merely confirms the stock hasn't reflected the firm's solid fundamentals in recent years. That trend appears poised to change for the better. HTLD held up quite well during last winter's Covid-related panic sell-off. Its absolute nadir was $15.70, which represented 18x forward earnings. As of mid-February 2021, its forward P/E is not much higher, at just 18.8x. That is a decent discount to Heartland's typical multiple of about 22x. A simple regression-to-the-mean valuation reversion could easily send the shares back up to north of $22 by the end of this year. That goal is far from an upper limit. HTLD peaked between $22.70 and $28.00 during each of the seven years from 2014 through 2020. This year's fundamentals are expected to be better than during any of those previous periods. Excepting last March's fleeting low, HTLD has been available at this low a P/E since the early days of 2013. From that low in Feb. 2013, HTLD shares rose from $13 to $28 over the next two years. The four later times when HTLD was offered near today's valuation (green-starred below) all led to significant, very tradable bounces. Yahoo Finance conservatively calls for $20.67 by this time next year. That seems low to me, but would still deliver double-digit total returns for present-day buyers. HTLD fetched $19.78 as recently as Jan. 25, 2021. Option-savvy traders might want to sell naked puts out to Sep. 17, 2021 or set up $17.50 or $20 strike price buy/write combinations on HTLD. As of Feb. 12, 2021, with HTLD @ $18.76, the $17.50 puts were paying about $1.80 and the $20 strikes were delivering around $2.50 per share. Worst-case, forced purchase prices dipped to either $15.70 or $17.50, respectively. Remember, HTLD's absolute panic low of March 2020 was $15.70. The more conservative, $17.50 buy/write, had cash flow characteristics as shown below. At 4:00p.m. ET on the Sep. 17, 2021 expiration date, there are just two possible outcomes: HTLD will either close at $17.50 or above, or below $17.50. Achieving the best-case scenario does not even require HTLD to go up. It was solidly north of the strike price as of trade inception. The cash-on-cash net gain for that very likely result would deliver a comfortable 26.7% total return in just 217 days. That annualizes at 45.53% on shares which go up, sideways, or even down by up to $1.26 per share. All is not lost even if HTLD unexpected closes below $17.50 on expiration day. The structure of the buy/write combination would protect against up to a 16.5% decline. Any dip of less than that would allow for immediate liquidation for at least a small profit. Those willing to shoulder a bit more risk could set themselves up for larger potential upside by using $20 strike price options, rather than the $17.50s. Best-case results, which require HTLD to close at $20 or better next September, would turn any gain of at least $1.24 per share into 35.9% total returns, equivalent to 61.2% annualized. Worst-case results would involve owning a double-sized long position in HTLD, but at a net average cost of just $17.35 per share. Any decline of less than 7.5% would still allow for immediate liquidation for at least a small profit. Understanding and using options to reduce risk allows for turning a low-risk, predictable stock into a vehicle for very respectable total returns. Buy some HTLD shares, sell some Sep. 17, 2021 puts or consider setting up full buy/write combinations on this well-run company. Disclosure: Long HTLD shares, short HTLD options.

Keep on Trucking With These 3 Plays on Heartland Express

3 options strategies offering very nice returns in HTLD.

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