Let's Blow the Lid off the Idea That Speculation Can't Work

Most traders have been told to stick with quality and avoid stocks of companies that aren't showing profit growth. Those are both admirable qualities, but they're not the only way to make money in the market. Sometimes, less attractive stocks get so cheap -- ridiculously cheap -- that it pays to buy them despite their obvious flaws. Shares at absolutely low prices (read: under $10 - $15) often surge by huge percentages for those brave enough to establish positions when most others have no interest in them. Signet Jewelers was pummeled to near $10 last summer despite remaining highly profitable on operations and offering a double-digit yield. Buyers at August's low of $10.48 saw major rebounds when earnings per share started recovering faster than expected. As of Thursday, SIG had risen by over 156% plus dividends in about six months. Even after that surge SIG sold for just 7.4-times this year's estimate while paying 5.99% in current yield. Realogy , owner of Century 21 Realty and other housing-related businesses, was another dog stock last year. It had plunged from about $33 in August 2017 to just $4.33 by August of 2019. Not only was it unloved, it also eliminated all cash dividends. Intrepid believers who ignored the negativity, and initiated stakes back then, were up greater than 191% on Thursday: RLGY now trades for about 13.1-times this year's estimate. Interface Inc. was a third beaten up name last August despite relatively stable fundamentals and a reasonable 2.7% yield when it hit $10.37. As of Thursday, TILE fetched $16.32, up more than 57% plus dividends from last summer's nadir. The stock sells for only 9.7-times this year's estimate while still providing 1.58% in current yield. My 12-month target price range for TILE sits at $25 to $35. TILE is due to report Q4 results on Feb. 26. What my latest find in terms of a totally unloved stock that could rebound sharply? It's the venerable old name Tupperware Brands . It can't be much more hated than it is now. As of Thursday, at $5.72, TUP was available for just 2.2-times Yahoo Finance's 2020 EPS estimate for it of $2.66. Like Realogy, Tupperware eliminated cash dividends last year. Keeping those funds in house, rather than sending them out to shareholders, wasn't popular when it happened, but it makes the company stronger. TUP's 52-week high remains $31.66. In previous years it was well above that. It doesn't seem a stretch top think the stock can eventually rebound to at least 10-times to 12-times earnings. That suggests $25 - $30 as a conservative 12 to 24-month goal price. Tupperware's officers and directors certainly have not given up on the stock. From April 19, 2018 through Nov. 15, 2019 there were multiple insider buys at prices higher than $43. They continued to buy all the way down to under $9. Now, we can own TUP way cheaper than them. From sub-$6 upside appears as good, or better, than it did for SIG, RLGY or TILE. Option-savvy players can use buy/write combinations to play TUP for outstanding upside potential accompanied by reasonable risk abatement. The graphic below showed actual option pricing out to Jan. 15, 2021 with TUP at $5.75. Buy/write combinations involve purchasing shares while also shorting covered calls and naked puts on the same stock, using the identical expiration date. I ran two different ways to play TUP to illustrate the differences that take place when you vary the strike prices selected. Both combinations employ 1,000-share positions. The more conservative example uses a $5 strike price for the put options and a $7.50 strike for the calls. In margin accounts, with adequate free buying power, the money collected via option sales can go towards paying for the shares being purchased. That reduces the initial cash outlays and increases leverage without ever incurring margin interest costs. There are three general categories of results on this $5 put, $7.50 call combination. On expiration day TUP could be at $7.50 or higher, between $5.00 and $7.49 or below $5.00. Finishing at the high end of those would produce the best-case scenario detailed below. The net result would be a 150% gain over just 337-days. That's pretty stunning considering it only requires a 30.4% increase from the trade inception price. Middle-of-the-road results would occur if TUP closes between $5 and $7.49 on Jan. 21, 2021. There would be a range of potential gains depending on exactly where TUP closes on expiration day. Here are the particulars for that mid-case scenario which encompasses anything from a 75 cent decline to a $1.74 gain from TUP's trade inception price. As long as TUYP holds $5.00, immediate liquidation of the original 1,000 shares would generate substantial profits. Even the lowest end of the range would generate a $2,000 cash-on-cash gain representing a 66.6% profit. At $7.49, the highest end of the scenario, that gain balloons to 149.9%. If TUP drops below $5 and stays there through expiration day, the following worst-case scenario would be in effect. You'd end up with a double-sized, 2000 share position, at an average net cost of just $4.00 per share. That unlikely event would still allow you to avoid a loss if TUP's closing quote was $4 or better. How cool is that? Anything less than a 30.4% decline from the trade inception price would still have caused no harm, other than opportunity cost. Using a $7.50 strike for both the calls and puts offers much more upside with just a modicum of extra risk. With this combination there are just two possible outcomes. On expiration day TUP will either be $7.50 or above, or below $7.50. This best-case scenario delivers a staggering 500% cash-on-cash return in under a year. If TUP fails to reach, and hold, $7.50 by Jan. 21, 2021, the worst case detailed below would unfold. It is far from scary. Any decline of up to 23.7% would leave buy/write combination players with at least a nominal gain. That doesn't appear to be a big risk. Tupperware has never changed hands that low in its entire history. There you have it. Simply buying TUP shares should work out well. Using buy/write combinations could be even better. It would take a move from $5.75 to $34.50 to generate the same 500% gain that the more aggressive combo will provide on any increase of 30.4% or greater by expiration day.

Let's Blow the Lid off the Idea That Speculation Can't Work

I have proof speculation can pay big, and let's use Tupperware as a case study.

Columnist Conversation

Wednesday Morning Fibocall for 10/21/2020

Trifecta Trades

Tuesday Morning Fibocall for 10/20/2020

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.