How To Earn 9.7% Yield While Waiting to Buy URI 30% Cheaper
At about $892.1 a share, United Rentals (URI) is trading about 12% below its 52W high.
Do you think URI stock is a good long-term bet at current levels? What about at a 30% discount at about $620 per share? If you think that is a steal, and have some cash ready to go, here is a trade.
9.7% annualized yield at 30% margin of safety, by selling Put Options.
- Sell a long-dated Put option expiring 1/15/2027, with a strike price of $620
- Collect roughly $3,620 in premium per contract (each contract represents 100 shares)
- That’s about 5.7% annualized yield on the $62,000 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 9.7%
- And you give yourself a chance to buy URI stock at deep discounted price of $620
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 |
|---|---|
| URI stays above $620 | You keep the full $3,620 premium – 5.8% extra income over the next 374 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| URI closes below $620 | You’ll be obligated to buy 100 shares at $620. But thanks to $3,620 premium, your effective cost basis is just $583.8 per share – a roughly 35% 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 URI Stock or check United Rentals Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold URI Stock Long-Term
As the market leader benefiting from the secular shift to equipment rental, URI is a compelling long-term holding. Its scale provides a durable cost advantage, and its robust business model is well-positioned for continued compounding.
Competitive Advantage
We classify URI’s economic moat as WIDE, with the primary source being Cost Advantage
- Significant market share (~15% in North America) and network of over 1,686 locations provide economies of scale.
- History of strategic acquisitions to consolidate the industry and enhance efficiency.
- Investment in proprietary technology like Total Control® platform increases customer stickiness.
See United Rentals Full Analysis.
Industry Tailwind
The industry tailwind is STRONG, with CAGR projection of 5.6% (ResearchAndMarkets.com)
Secular Trend: Shift to Rental over Ownership
Key Risks: Economic downturns reducing construction and industrial activity, and intense competition.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: Debt is well covered by operating cash flow (36%) and interest payments are well covered by EBIT (5.8x coverage), despite a high debt-to-equity ratio. Net leverage is manageable at 1.8x.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
Multi Asset Portfolios Offer More Upside With Less Risk
Markets move differently but a mix of assets smooths volatility. A multi asset portfolio keeps you invested and reduces the impact of sharp drops in any single area.
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