Two Great Ways to Play This Bargain-Priced Stock

We now live in very volatile times. Wild swings, though, can provide exceptional opportunities. Less than one month ago, the management of United Natural Foods substantially upped both its short-term and long-term EPS guidance. The key takeaway was the headline item shown below. Within three years -- UNFI's fiscal years end July 31 -- they expect to be posting greater than $5.25 in annual EPS. On June 25, the day after that announcement, UNFI hit an intra-day peak of $39.73. It was even higher at $42.40 as recently as June 2, less than two months ago. If UNFI is on track to earn $5.25 within three years, it could easily rise to $80 to $100 over that span. By the time FY 2022 wraps up next summer, I see UNFI hitting at least $50. The shares fetched as high as $83.90 back in 2015 when EPS were on pace to hit just $2.86. There has been no further news from UNFI since June 24, yet the shares drifted back significantly. During the July 19 stock market debacle, when the DJIA was down as much as 970 points, UNFI briefly touched $30.61. I was a buyer that day and felt great to get another chance to add to it on July 22 when it once again became offered within 70 cents of that Monday low. Last week's sell-off, in opposition to the high volume dump that took place on June 9, came on way below normal trading activity. Low volume plunges are typically great times to pick up shares on the cheap. Independent research house Morningstar figures its computer-generated, present-day fair value estimate for UNFI as $39.63. Buying UNFI shares outright looks like a great play. Knowing all that, here are two different ways to play for a big upturn in UNFI using options. Actual prices for the stock and its Jan. 20, 2023, $40 strike price options, with UNFI at $31.47, are shown below. I'm using aggressive, in-the-money $40 puts in the example below. The graphic shows dollar amounts on 10 put contracts. It could be done with as little as one contract. Selling naked puts means standing ready to buy 100 shares per contract sold, if exercised later by the option's owner. If held through expiration day there are just two main categories of results. UNFI will either close at $40 or above, or below $40. If the former situation plays out the following best-case scenario will unfold. You'd keep 100% of all premium dollars received up front without ever having to buy any UNFI shares. If you sold the puts against free buying power in a margin-type account it would represent an infinite return on what was a negative cash outlay. Suppose UNFI goes absolutely nowhere on a net basis through expiration day. If so, the static price scenario displayed next would apply. Your net exercise purchase price would drop to just $25.80. That would allow for immediate liquidation, if desired, at a nice profit. The 21.97% return shown above far understates the actual return as it presumes you would have been exercised near the starting date of the put sale. That is not impossible, but it is highly unlikely. Regardless of how you figure your gain, making $5,670 on a stock that did not go up is a pretty neat trick. What if UNFI remains not only below $40, but also declines from its trade inception price? Any decline of less than 18% would still allow for liquidation at a profit. A final price point below $25.80 would leave you with a paper loss. No matter what, sellers of those $40 naked puts would be suffering less than traders who purchased UNFI at $31.47 to begin with. The graphics below describe a Jan. 20, 2023, $40 buy/write combination of UNFI. It again uses a 1000-share quantity but could be done on a much smaller basis. As with the naked put sales, I've worked up the numbers for the best case, neutral and worst-case scenarios. If UNFI closes at $40 or better, as I expect it will, the results would be pretty spectacular. A stagnant price point would still provide a rewarding gain. Any decline of less than 18.7% would allow for immediate liquidation for at least a small gain, and possibly a pretty good one if UNFI closes not too far from where it sat at trade inception. What's the bottom line here? UNFI appears poised to move substantially higher over the next few years. It could rebound to $40 in a flash. It was north of $42 less than 60 days ago. Buy some UNFI shares, sell some puts or consider setting up full buy/write combinations.

Two Great Ways to Play This Bargain-Priced Stock

Last week's selloff came on way below normal trading activity, which are typically great times to pick up shares on the cheap.

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