This Trucker Is Now a VC Fund, and That Could Mean Large Gains
Trade summary: A bull call spread in Ryder System, Inc. (NYSE: R) using the December $55 call option which can be bought for about $2.50 and the December $60 call could be sold for about $0.90. This trade would cost $1.60 to open, or $160 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $160. The maximum gain is $340 per contract. That is a potential gain of about 112% based on the amount risked in the trade.
Now, let’s look at the details.
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“While the launch of a $50 million venture capital fund by the shipping, logistics, and truck rental company Ryder System may have seemed like an odd strategic move, it’s actually the culmination of roughly three years of investment activity from the Florida-based company.
Ryder’s push to create its own venture fund is actually part of a broader trend among corporations who have used the COVID-19 epidemic in the US as an opportunity to start investing in startups — even as a large portion of the population struggles to find work.
And it’s one that is vital for a company like Ryder, which has seen investments into new technology in its once sleepy little industry top $6 billion, according to company executives. That’s a massive figure promoting new tech development in a business where Excel spreadsheets used to be considered state of the art.
Ryder’s not alone in recognizing the need to get in front of technological innovations before an upstart comes along and puts well-established businesses in the rearview mirror.
Over the first half of 2020, 368 corporations made their first investments into startup companies, according to data from the industry analytics provider, Global Corporate Venturing. It’s a broad shift from the last corporate investment boom and bust period twenty years ago where large corporations were some of the last investors in the tech industry and the first to pull their capital out.
And the amount of first time investors into corporate venturing is nearly double the previous surge in corporate backing in the third quarter of 2019, when 177 new companies made their first investments in venture capital.
Ryder has worked with the venture firms Autotech Ventures and the corporate innovation and accelerator Plug and Play as a limited partner, but the new $50 million fund is its first direct investment vehicle for venture.
“We had a strategic directive from our board of directors and our CEO to begin to look at the disruption confronting our industry and to understand better how to navigate those waters,” said Karen Jones, the executive vice president and head of new product development at the logistics company.
“Everybody was reading all about blockchain and automation and electric vehicles ad autonomous vehicles and asset sharing.”
Transportation and logistics historically didn’t cross paths much with the tech industry — but the advent of globally connected mobile devices; improved, miniaturized sensing technologies; increasing vehicular automation; and accelerating delivery demands from customers have pushed the “sleepy little industry” as Jones called into a period of hyper-adoption.
“There’s just been a ripe opportunity in our particular industry to disrupt it with the technology that’s available,” said Jones. “[And] if we’re going to be disrupted let’s get in front of it and turn it into an opportunity instead of a threat.”
At Ryder, the emphasis seems to be on creating an investment structure with as much flexibility as possible.
The venture firm doesn’t have a cap on its commitments to deals. The only real solid commitment is that it’s looking to spend $50 million over the next five years.
The company will likely invest in technologies like: last-mile deliveries, asset sharing, electric vehicles, autonomous vehicles, and next generation data, analytics, and machine learning technologies, Jones said. But even there, Ryder doesn’t want to limit itself.
“We want to entertain other thoughts. Maybe we haven’t thought of everything,” Jones said.
There are four people on the company’s investment team working alongside Jones: Rich Mohr, the chief technology officer for fleet management; Kendra Philips, the chief technology officer for the company’s supply chain business; Bob Brunn, the vice president of investor relations and corporate strategy; and Mike Plasencia, the director of finance for the company.
They’ll report up to the CEO and CFO and confer with presidents of different business units on potential portfolio investments, Jones said.
Companies in the portfolio will be judged both on their potential strategic value to the company and on their potential for economic returns, said Jones.
For startups, that potentially means access to Ryder’s 50,000 customers. “The ability to help a startup test out and prove their technology and help us improve efficiencies is a great benefit to both sides,” Jones said.”
This news comes as the stock is consolidating recent gains.
This consolidation comes with the stock facing resistance on the long-term chart.
A breakout could lead to a 100% gain in the stock, in the long run. A short-term options trade could attain that gain in less time.
A Specific Trade for R
For R, the December options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A December $55 call option can be bought for about $2.50 and the December $60 call could be sold for about $0.90. This trade would cost $1.60 to open, or $160 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 $160.
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 R, the maximum gain is $340 ($60- $55= $5; 5- $1.60 = $3.40). This represents $340 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $160 to open this trade.
That is a potential gain of about 112% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying R 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 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 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.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.