This Internet Startup Is Flying High
In the late 1990s, management teams raced to add dot.com to their names. If a company sold pet food, they became pets.com. Of course, shoes were available at shoes.com and houses.com was certain to be a real estate giant. Well, that didn’t work as expected. Many of those companies failed.
But, some survived, Stamps.com Inc. (Nasdaq: STMP) is still flying high. The company recently reported its fourth quarter earnings and the stock jumped on the news. Earnings per share (EPS), adjusted for pretax expenses and stock option expense, were $4.68.
The results exceeded Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was for earnings of $2.75 per share. The online postage provider posted revenue of $132.5 million in the period, which also topped Street forecasts of $119 million.
For the year, the company reported profit of $150.6 million, or $8.19 per share. Revenue was reported as $468.7 million.
For the coming year, Stamps.com expects full-year earnings in the range of $8.80 to $9.80 per share, with revenue in the range of $530 million to $560 million.
The stock has been a long term winner.
Unlike many dot.com companies, Stamps.com created a product that lends itself to the internet business model.
The company is a provider of Internet-based mailing and shipping solutions in the United States. The Ccmpany offers mailing and shipping products and services to its customers under the Stamps.com, Endicia, ShipStation, ShipWorks and ShippingEasy brands. These products save trips to the Post Office.
Under the Stamps.com and Endicia brands, customers use its United States Postal Service (USPS) only solutions to mail and ship a range of mail pieces and packages through the USPS. USPS mailing and shipping solutions enable users to print electronic postage directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection.
The company also offers customized postage under the PhotoStamps and PictureItPostage brand names.
These are services customers are willing to pay for because they add value and that contributes to the company’s financial success and long run returns that have beaten the market.
The company is likely to continue delivering strong financials and that could lead to even more gains in the stock price. However, the stock is now trading at more than $200 a share. Small investors may find high priced stocks like this to be difficult to trade.
The problem with high priced stocks is that an individual with a small account cannot afford to own much of the stock. With just one or two shares, the gains from a position would not help the small investor achieve their goal of quickly growing wealth.
An options strategy can be useful to address those concerns.
A Trade for Short Term Bulls
As with the ownership of any stock, buying STMP could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
A Specific Trade for STMP
For STMP, the March 16 options allow a trader to gain exposure to the stock.
A March 16 $205 call option can be bought for about $9.00 and the March 16 $207.50 call could be sold for about $10.00. This trade would cost $1.00 to open, or $100 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $100.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in STMP the maximum gain is $1.50 ($207.50 – $205 = $2.50; $2.50 – $1.00 = $1.50). This represents $150 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $100 to open this trade.
That is a potential gain of about 150% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.