This Bargain Stock Has Decades of History, Promise of Big Returns

Invesco has been kicking around the investment world since 1935. Its shares were listed on the New York Stock Exchange starting in 2007. IVZ manages money plus owns and operates mutual funds and exchange-trade funds. Its best known exchange-traded fund is the Invesco QQQ Trust Series 1 which serves as a proxy for the Nasdaq index. IVZ recently acquired MassMutual's asset management affiliate Oppenheimer Funds, bringing its total assets under management (AUM) up to about $1.2 trillion. The stock has been in the dumps, providing a tremendous entry point. On Friday, IVZ closed at just $15.70 around its lowest absolute price since the dark days of 2011, when Greece was on the verge of default and much of Europe seemed headed for trouble. Bargain hunters who picked up IVZ back then paid as low as $14.50, just 9.2-times that year's earnings per share. They locked in yields of 3.31%. Within months IVZ had rebounded to over $26. By late 2014 it was $41.50. Invesco is having a down year due to integration costs relating to its recent acquisitions. Cost savings and other synergies, though, are expected to start contributing to future earnings soon. Value Line sees GAAP earnings dipping to $1.50 this year, rising to $1.80 next. Yahoo Finance shows adjusted earnings per share estimates for IVZ of $2.47 and $2.71 for those same years. Whichever number you prefer to use, the stock is cheap. Not only that, its 31-cent quarter cash dividend provided an almost 8.2% current yield at $15.15. Applying a conservative 14-times multiple to next year's generally accepted accounting principles estimate would support a $25.20 target price by around January of 2021. Achieving that goal would provide greater than 86% in total return. That possibility is far from crazy. IVZ topped out between $24.40 and $42.10 during each of the previous nine full years running from 2010 right through 2018. It fetched $22.20 year to day in 2019. Yahoo Finance sees a year-ahead target for IVZ of $21.64. Yahoo notes its low price-to-earnings, high yield and history of trading much above its current quote. Independent research from Morningstar seconds our bullishness. It assigns IVZ a 4-star, out of 5, buy rating. Morningstar deigns to provide 12-month targets. It does, however, indicate what it feels is present-day fair value for each stock it covers. For Invesco that number reads $23 per share, almost 49% above where it sat on Aug. 28. Plain vanilla investing suggests simply buying shares will work out very nicely. Option savvy traders with reasonable horizons might be able to do even better. Negative sentiment on anything investment related has IVZ's long-term call options priced very cheaply. There's a good play in going long some Jan. 15, 2021 call options while simultaneously selling some higher strike calls to reduce risk and the amount of the initial cash outlay. Doing those trades is called playing a bull call spread. The table below shows the details of two different possible choices in setting bull calls spreads with IVZ. The first one goes long on Jan. 2021 $10 calls, while shorting $18 calls with the identical expiration date. The net cash out drops to just $4.80 per share or $480 per each 100-share options contract. If IVZ closes at $18 or higher on Jan. 15, 2021, the owner of this spread will pocket $800 for each $480 invested. That $320 per contract gain equals a 66.6% cash-on-cash maximum profit. Buying Jan. 2021 $13 calls at $3.20 while selling $20 calls at 70 cents requires just $250 out of pocket per 100-share commitment. If IVZ is $20 or better on expiration day, the owner of this spread will receive $700 for each $250, a $450 per contract gain. If IVZ closes at $18 or higher on Jan. 15, 2021, the owner of this $10 times $18 spread will pocket $800 for each $480 invested. That $320 per contract gain equals a 66.6% cash-on-cash maximum profit. Buying Jan. 2021 $13 calls at $3.20 while selling $20 calls at 70% requires just $250 out of pocket per 100-share commitment. If IVZ is $20 or better on expiration day the owner of this spread will receive $700 for each $250, a $450 per contract gain. Do the math: $450 / $250 =180% cash-on-cash. How cool would that be? In the market, not everything works out as expected. What are the break-even points on these two spread trades? Getting all your money back on the $10 x $18 spread would only need IVZ to be at least $14.80 upon expiration. That's not much to worry about considering it's price at trade inception. Breaking even on $13 x $20 bull spread would need IVZ to be $15.50 or above upon expiration. That's just 2-cents above the original price. Worst-case results would be losses of 100% of all net money put out to set up the trades. That would be $250 per 100-shares on the $10 x $18 spread or $250 on the $13 x $20 combination. It appears unlikely those losses will be the final result, though. IVZ hasn't changed hands for as low as $14.80 since October of 2011. Put writers can get generous premiums for committing to buy IVZ at lower than current market prices as well. I pocketed $6.10 per share last week for selling some IVZ Jan. 15, 2021 $20 puts. Buy some IVZ shares, play with its options, or consider doing both.

This Bargain Stock Has Decades of History, Promise of Big Returns

Invesco's stock is cheap, and its 31-cent quarter cash dividend provided an almost 8.2% current yield at $15.15.

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