This Was the Best Drama on ViacomCBS

Entertainment giant ViacomCBS has been a wild ride lately. Its 52-week range ran from $14.78 to $101.97 before plunging back to just south of $40. As of Friday, VIAC sat at $41.71. Major buys by a now-discredited and ultra-leveraged hedge fund pushed the stock unrealistically high before margin-call related panic selling sent it reeling on March 26. VIAC still has a greater than 17% short interest. That offers the potential for a short squeeze by the Reddit crowd, or other traders, which could lead to a future pop higher. ViacomCBS management made a savvy move when the shares were flying high. It executed a secondary offering of stock and convertible bonds with VIAC at $85. That filled the company's coffers at an extraordinary favorable price. In the short run it strengthened the balance sheet. Over the long term, it provided flexibility for share buybacks, dividend increases or simply growing the business. VIAC made a quick, and very wise, decision to take advantage of an unusual and unjustified run-up. Issuing shares at well above book value is immediately accretive to book value. ViacomCBS is a decent company. From 2011 through 2020, all major metrics grew nicely as illustrated below. Better still, VIAC shares do not fully reflect the strides made over those nine years. That implies a catch-up move higher appears in the cards now that the stock has been pummeled. What is VIAC really worth? Throw out 2020 as a COVID-related outlier and ViacomCBS' average P/E has run about 15.5-times, accompanied by around 1.22% in current yield. At last week's closing quote of $41.71 those figures were just 9.9-times Value Line's 2021 EPS estimate along with a much better than typical 2.30% yield. Amazingly, VIAC is now offered for far less than its previous peaks dating back as far as 2013, when EPS were only $3.00, and the annual dividend rate was half of what it is today. A simple regression-toward-the-mean valuation of 15-times could easily support a $63 target price by next winter. That implies total return potential greater than 53% over the coming year. I'm not alone in thinking VIAC offers good value. Yahoo Finance carries slightly lower earnings estimates for VIAC than Value Line does. Even so, they see the shares hitting $54.50 by this time next year. If they're right, a 33% total return awaits rather than 53%. Is there anybody reading this article that wouldn't sign up for only that type return? Value Line loves the long-term prospects for VIAC. It sees EPS climbing to $7 not later than 2026 supporting a mid-range target price of about $105 per share. I wrote about, and played, VIAC on that crazy selloff day back on March 26. A log of my actual put sales that afternoon is shown below. Premiums were huge that day as the news of the margin-call related block sales did not break until after the closing bell. The margins of safety shown below reflect the original premiums and break-even point from Mar. 26th compared with VIAC's Apr. 23, 2021 closing quote. I sold a total of 26 contracts of the Jan. 20, 2023 expiration date puts at strikes of $30, $32 and $40. All together I committed to a worst-case, if exercised net investment of $68,380. What did I get for taking on that obligation? The table below shows the details. My accounts were credited with $13,620 of cash. Unless VIAC drops by over 28% from last week's close, I'll end up keeping all that money without ever having to buy the shares. Most people count a 20% decline as a full bear market. My two more conservative strike prices could withstand 36.1% - 41.5% declines without causing any damage. In addition, if left alone through expiration day, my gains will not become taxable until I file my 2023 tax return in April of 2024. If you agree that VAIC looks good, it's not too late to mimic my trades. Here were the closing prices on VIAC and its Jan. 20, 2023 options as of April 23, 2023 with the shares at $41.71. Worst-case, forced purchase prices on the $35 - $45 puts drop way down. Those who own the shares or set up new long positions could also benefit from selling covered calls for the relatively generous premiums shown above. The crazy action in VIAC and other stocks held by that over-leverage hedge fund were not indicative of problems with the companies themselves. Fundamentals say ViacomCBS is too cheap to remain this low. Buy some VIAC shares, sell some puts or consider doing both.

This Was the Best Drama on ViacomCBS

Let's look at VIAC one month after its fall in late March.

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