Expedia Group (EXPE) stock could be worth considerably more and EXPE stock is attractive to value investors based on its free cash flow. Moreover, short-put plays are attractive to long investors for extra income.
My thesis on why Expedia stock is fundamentally inexpensive here can be seen in my new GuruFocus article, “Expedia Group Looks Like a Bargain.” Expedia is now producing good revenue growth, bookings are up, and the company expects this to continue. As a result, the company is generating large amounts of free cash flow (FCF).
The article shows that its FCF will likely expand as its capex spending falls. You can read how I project that its FCF could rise significantly in 2024 and 2025.
As a result, EXPE stock could be worth $27.4 billion, as the article points out. That is over 50% higher than its market cap today, implying that EXPE stock is deeply undervalued. That article showed that EXPE stock could be worth at least $201 per share.
Shorting OTM Puts in EXPE Stock
Moreover, since EXPE does not pay dividends, existing investors can get paid by shorting out-of-the-money (OTM) puts for yield. That way their existing holdings are not in jeopardy of being sold.
If the stock falls to the strike level of the short play, the investor has to use cash and any margin used to secure the trade. That provides a disciplined way to buy in at a cheaper price. But the investor gets to keep the income from the short sale.
Here is an example of how that works.
Look at the April 26 expiration period, which is a little over 3 weeks away (24 days). It shows that the $120 strike price provides a short seller with a bid-side income of 41 cents. That works out to an immediate yield of 0.3417% (i.e., $0.41/$120.00).
So, first, the investor has to insert $12,000 in cash and/or margin in their brokerage account (i.e., 100 shares per put contract x $120.00). Then, after receiving brokerage approval to do cash-secured short put trades, the investor enters an order to “Sell to Open” one put contract at the $120 strike price for expiration on April 26.
The account will then immediately receive $41 per put contract trade. So, for example, with 3 puts sold short this way (after securing $36,000), the account will receive $123.00. The account will keep this cash no matter what happens. So, it works out to a yield of 0.34% (i.e., $123/$36,000).
Higher Expected Returns
Moreover, if the investor can do this 4 times in a quarter they stand to make an expected return of $492. That works out to a quarterly ER yield of 1.367% quarterly and 5.47% annually. That means that the investor has created a pseudo-dividend yield while waiting for the stock to rise.
Note that an investor can make more money, with more risk, by shorting the nearer $125 strike price put. That provides $98 in income for every contract shorted, but the investor has to secure $12,500 with the brokerage firm. This is a 0.784% yield, but the strike price is 5.59% below the spot price, not 9.37% as with the $120 strike price put contract.
Downside Risk
The main risk is that if EXPE falls below $125 or $120, the investor's secured cash will be used to buy the stock at that price. This could result in an unrealized loss, especially if EXPE stays below that strike price.
However, note that the breakeven price is somewhat lower than the strike price. Therefore, the stock would have to fall to $119.59 (i.e., $120-0.41), or 9.35% before the unrealized loss occurs. This provides plenty of room for the long-term investor to hang on, especially since the stock is worth over $201 per share.
Moreover, even if this occurs, the investor could use the new shares to do covered calls at out-of-the-money prices (i.e., higher than $131.84 per share today). That would provide additional income to cover portions of any unrealized loss.
The bottom line is that EXPE looks undervalued here for long-term investors. They can get paid to wait by shorting OTM puts without having to worry that their shares will be called away if the stock rises.
If EXPE falls from here, the investor gets to buy in for more shares at a cheaper price than today, along with additional income from the short-put play.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
