By Paul Price of Market Shadows
Some stocks are fine to simply buy and hold. Others are best suited for in-and-out trading. Sports and recreation company Life Time Fitness (LTM) meets all my criteria for long-term ownership yet seems better used as a vehicle for capturing medium term (3 – 12 month) moves.
Yoga, Pilates, indoor rock climbing, squash, racquetball plus normal workout zones, team sports and spa services comprise a growth industry in today’s America. LTM’s EPS numbers bear that out. The company is on track in 2013 to show the eight all-time record in the past nine years.
The one miss? The Great Recession of 2008-09 led to a one-cent per share dip from $1.83 to $1.82 before growth resumed. Despite LTM’s steady performance the shares closed on Thursday at $45.42, greater than 30% below the peak price of $65.09 in 2007.
Full year EPS were $1.78 in 2007. Earnings are expected to be $2.92 for calendar year 2013. The poor stock performance was due to compression from a 36.5 P/E in 2007 to just 15.6x this year and a consensus of 14.4x estimated for 2014.
Previous ‘best buying opportunity’ entry points have come at similar, to even higher, P/E multiples over the past couple of years. Tradable moves of 40%, 30% and 45% followed within months of each of the most recent three bottoms.
Life Time has been building up sales, earnings, cash flow, and book value at double digit rates. Debt is manageable. A return to a normalized 17.5 P/E could easily support a $55 twelve-month target price, about 21% above the current quote.
Option savvy traders might wish to write (sell) some May 2014 puts while the shares are depressed. With the shares @ $45.42 the $45 strike last traded at $3.30 while the $40 put brought in $1.55 per share. That drops the ‘if put’ break-even points to $41.70 and $38.45 respectively.
Maximum profit on either put option sale would be 100% of any premium collected. That scenario will play out if LTM simply remains above the chosen strike price through the 4 PM close on May 16, 2014. The best-case results will be achieved if LTM declines very slightly, stays flat or if it goes up over the coming 6.5 months.
The $38.45 per share net exercise price of the more conservative $40 strike is less than than the lowest actual trading price for LTM since 2011. The $45 put, if exercised after a sale for $3.30, would provide a $41.70 entry point. Life Time closed above that level about 95% of the time since 2011.
Those ‘if put’ levels equal just 14.7x or 13.5x actual trailing earnings of $2.84 through Q3 2013.
Sooner or later LTM will make the big move that reflects all its expected future prospects. In the meantime I am content to take percentage gains as the shares cycle between undervalued and overvalued levels.
Independent research firm Standard & Poors agrees that Life Time Fitness could easily reach $55 – $60 again before too long.
I'm buying shares as a primary investment vehicle. Collecting some option premium along the way offers some gravy with the main dish.
Market Shadows added 100 shares of LTM to our Virtual Value Portfolio (VVP) this morning @ $45.40. We also decided to sell two May 2014, $45 strike price puts for $3.31 per share. This article was written after the close on Oct. 31. The prices for our trades reflect the actual quotes shortly after today's opening. The bid-ask spreads are shown below. The last trade prices were real money trades done in my own account.
Market Shadows' VVP and Virtual Put Selling Portfolio will now show the long shares and the short options contracts as open positions.
Disclosure: Long LTM shares, short LTM covered calls, short LTM naked puts.
