How to Get Paid to Buy IT at a Steep Discount
At about $246.81 a share, Gartner (IT) is trading about 55% below its 52W high.
Do you think IT stock is a good long-term bet at current levels? What about at a 30% discount at about $175 per share? If you think that is a steal, and have some cash ready to go, here is a trade.
8.7% annualized yield at 30% margin of safety, by selling Put Options.
- Sell a long-dated Put option expiring 12/18/2026, with a strike price of $175
- Collect roughly $770 in premium per contract (each contract represents 100 shares)
- That’s about 4.7% annualized yield on the $17,500 you’re setting aside for the possibility of buying the stock
- This cash parked in a savings or money market account will earn an extra 4.0%, taking total yield to 8.7%
- And you give yourself a chance to buy IT stock at deep discounted price of $175
However, this is not the only stock strategy in town. Trefis High Quality Portfolio is a sophisticated framework designed to reduce stock-specific risk while giving upside exposure.
Possible Trade Outcomes: You Win Either Way
| Stock Price Outcome | What It Means For You |
|---|---|
| IT stays above $175 | You keep the full $770 premium – 4.4% extra income over the next 344 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| IT closes below $175 | You’ll be obligated to buy 100 shares at $175. But thanks to $770 premium, your effective cost basis is just $167.3 per share – a roughly 32% from current level. |
But to hold this trade with conviction, you want to see long term upside in the stock. Because if it comes to it, you want to be excited about buying the stock cheap.
First, you want fundamentals to check out. For details, see Buy or Sell IT Stock or check Gartner Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold IT Stock Long-Term
Gartner’s entrenched position as a leading IT research and advisory firm, coupled with strong secular tailwinds from digitalization and AI, makes it a business we are comfortable owning for the long term. Its subscription-based revenue model provides predictability, and its strong brand and high switching costs create a durable competitive advantage.
Competitive Advantage
We classify IT’s economic moat as WIDE, with the primary source being Pricing Power
- Gartner reported a 106% wallet retention rate in Global Business Sales in Q2 2024, indicating that existing customers are spending more on average, a strong sign of inelastic demand.
- The company has a track record of increasing prices, with a September 2024 report noting that price increases were expected to continue in FY24, supported by high retention rates.
- The ‘Gartner Magic Quadrant’ is widely considered an industry benchmark, giving the company significant brand power and influence over purchasing decisions, which in turn supports its pricing power.
Industry Tailwind
The industry tailwind is STRONG, with CAGR projection of 9.3% (Gartner)
Secular Trend: Digitalization and AI Adoption
Key Risks: A slowdown in IT spending due to macroeconomic pressures and potential reputational damage from ongoing ‘pay-to-play’ allegations are the primary risks.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: As of the end of 2024, Gartner has a robust balance sheet with substantial cash reserves and manageable debt, with a gross debt to EBITDA ratio under 2x, mitigating bankruptcy risk.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
Multi Asset Portfolios Offer More Upside With Less Risk
Single markets are unpredictable but different assets react differently. A multi asset portfolio cuts downside shocks while keeping upside on the table.
The asset allocation framework of Trefis’ Boston-based, wealth management partner yielded positive returns during the 2008-09 period when the S&P lost more than 40%. Our partner’ strategy now includes Trefis High Quality Portfolio, which has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices