Lasso This Texas Company While It's Cheap

Texas-based Nexstar Media Group is not a household name for most investors. Those who've been aware of it, though, have made great gains over the years. NXST is America's largest local TV broadcasting group, reaching 38.8% of U.S. households in 100, primarily mid-sized, markets. Nexstar's long-term growth has been outstanding, as evidenced by the table below. Since 2012, earnings per share surged by over 1,400%. Dividends went from nil to $2.24 per share. Book value went from almost nothing to nearly $50. The stock established an all-time high of $133.25 last January before getting slammed by Covid-19 along with the rest of the market. It fell momentarily to south of $44 before starting its continuing rebound. As of Friday, NXST closed at exactly $85. That still gave 8-year, continuous shareholders better than 1,244% gains, plus dividends. Election year campaign ad spending is pushing 2020's profits to new all-time highs. Analysts from both Value Line and Yahoo Finance see Nexstar positing from $12.58 to $14.40 in EPS this year. Even that lower number puts NXST at just 6.8-times this year's estimate. If the company achieves Value Line's profit projection the multiple would drop to just 5.9-times. Assume a lower than typical, price-to-earnings of 17-times and NXST could be a $244 stock before too long. The stock's 2.64% current yield is a nice bonus while you wait for share price appreciation to take place. Yahoo Finance rightly calls the shares undervalued. Its 12-month target price is $116.78, based on a somewhat more conservative EPS assumption. Even so, that implies a 40% total return potential by this time next year. Independent research house Morningstar assigns NXST a 4-star, out of 5, Buy rating. Morningstar deigns to provide year-ahead goal prices. It does, however, indicate what it estimates are present-day fair value estimates for each stock it covers. For NXST that number sits at $120, 41.1 above last week's closing quote. Clearly, NXST appears too cheap to ignore. Owning shares outright looks like a good idea. Option savvy traders might wish to employ buy/write combinations out to Feb. 19, 2021 or Jan. 21, 2022 expiration dates using strike prices at the $100 mark. That would represent a bullish bet on NXST rising over the coming seven to eighteen months. Actual pricing on those options, with NXST at $85, are shown below. The following example illustrates potential best and worst-case scenarios for the Jan. 2022 $100 strike price buy/write combination with 100-shares plus one covered call and one naked put. In margin accounts with excess free buying power the money collected for selling the options can be used to lower the initial cash outlay needed to purchase the shares. If held right through expiration day there are just two possible outcomes. NXST will either close at $100, or higher, or below $100. If it rose by at least 17.7% from the initial $85 price the best case scenario detailed below will play out. You'd end up with no shares and a hefty cash profit of $6,326 on that initial cash outlay of just $4,010. That would have morphed a medium-sized gain in the underlying stock into a terrific 157.7% profit. Because the time horizon stretches out almost 1.5-years the annualized rate of return dips to a still fabulous 105.1%. How cool is that? There can be no guarantee that NXST will rise, and hold, the $100 mark through Jan. 21, 2022. If not, the worst-case scenario laid out below would unfold. Barring a major sell-off, however, it's still likely you'd end up with at least a small profit. Any drop of less than $16.63 per share would avoid a loss on the entire buy/write combination. Closing above $68.37 on expiration day would ensure a gain if the position was immediately liquidated. The buy/write combination provides downside protection, which outright ownership of the shares does not. It also allows for an equivalent move, on a percentage basis, for NXST holders who see an upward march from $85 to $219 per share. Buy some NXST shares, sell some LEAP puts on it, or consider setting up the full buy/write combination.

Lasso This Texas Company While It's Cheap

Nexstar Media Group offers growth at a bargain valuation.

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