Stay Tuned for This Down-and-Out Stock

Poor stock price action in shares you own always breeds insecurity. Did you make a horrible mistake? Should you cut and run before things get even worse? How can your positive view on the stock be correct if everybody else seems to disagree? The only logical way to know whether to bail out, or buy more, always lies in the company's numbers. It pays to get the latest available information and redo your work on the stock in question before throwing in the towel. This week's Value Line updated data on Qurate Retail Group , the owner of QVC, Home Shopping Network -- previously HSN -- and Zulily. Here's what the company's past decade and future projections showed. Note that the 90 cent loss shown in 2019's estimate included a $1 billion non-cash charge for an asset write down of the Oct. 2015 purchase of Zulily. Qurate was nicely profitable on continuing operations in 2019. Cost saving and synergies from the more recent merger of QVC and HSN should start kicking in this year. Tax savings related to the billion dollar write down of Zulily's asset value will augment 2020's cash flow, as well. All told, Value Line's analyst sees this year's earnings per share, or EPS, for QRTEA coming in at $1.50, a record so far. Per share revenues and cash flow are also expected to set new records. Those factors makes the stock's recent plunge hard to fathom. From 2010 through 2018, Qurate fetched an average multiple of 22-times. As of Friaday, it was available for just 5.8-times this year's estimate. The last time QRTEA was available that cheaply was during the darkest days of 2009. Buyers at that low point were rewarded with a 13-month surge from $2.40 to $16.80. At its peak in 2015 QRTEA exceeded $31. Even a partial regression-to-the-mean valuation revision could easily send QRTEA back to north of $22, from last week's close below $9. Three insiders, including the company's CEO, its chairman and media mogul John Malone, invested over $14 million in QRTEA last May at an average price of $12.49. By definition, they thought it was worth much more. It turned out that their timing was early. None of them have given up on their positive take, though. Value Line sees QRTEA reaching $17 within 18-months, then climbing even higher by 2024. Independent research house Morningstar calls the stock's present-day, not year-ahead, fair value as $11.70. Simply rebounding to that level would provide a better than 32% rise from last week's quote. Yahoo Finance expects Qurate to earn well more in 2020 than Value Line does. They see this year's EPS jumping to $1.95, taking the shares back to $14.50. That implies upside of 64%, and it's far from an upper limit. QRTEA's trailing 52-week high is $22.29. Buying QRTEA shares now appear to be a classic low-risk, high reward opportunity. Option-savvy traders who envision the huge potential might do even better by setting up a two-year, aggressive buy/write combination using well out-of-the-money $12 covered calls and deep-in-the-money $12 naked puts. Actual prices, with QRTEA at $8.70 on Friday are shown below. These combinations involve going long shares of the stock in question while shorting covered calls and naked puts, typically for the identical expiration date. The table below illustrates the money flow details on a 1,000 share, 10 call and 10 put sizing. Upon reaching the Jan. 21, 2022 expiration day there are just two possible outcomes for this trade. QRTEA will either close at $12 or higher, or below $12. Getting to the best-case scenario would require QRTEA to rise by at least 38% from its $8.70 trade inception price. Potential profits could be staggering. That 38% minimum increase in the underlying shares would translate into a 471% cash-on-cash return over the 24-month holding period. That's an incredible 235% annualized rate. What if Qurate fails to reach $12 by then? In that event the buy/write would unfold as described below. You'd be obligated to double your QRTEA position size while ponying up an additional $12,000 in cash. Barring a major setback, though, that prospect is not unappealing. Your average cost per share would drop to $7.05. Thus any decline of less than 18.9% from the trade inception price would still generate at least a tiny profit. What are the chances QRTEA will be worse than that? Pretty slim, based on the stock's history. Owning QRTEA at $7.05 would have been a winning position 100% of the time dating back to before the start of 2010, more than a full decade ago. During that span EPS grew from $0.62 to an estimated $1.50 - $1.95 in 2020 (depending on whose estimate you believe). There are few stocks offering such exceptional risk/reward characteristics right now. Join Qurate's insiders, but at a much better price than they committed to. Buy some QRTEA shares, sell some puts or consider setting up a buy/write combination out to Jan. 15, 2021 or Jan. 21 of 2022. Disclosure: Long QRTEA shares, short QRTEA options, long QRTEA Jan. 2022 call options.

Stay Tuned for This Down-and-Out Stock

There are plenty of reasons to believe in Qurate Retail Group, owner of QVC, Home Shopping Network and Zulily -- and here's how to play it.

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