Forget Speculative Stocks -- This 'Boring' Stock Could Generate A 17% Return

The capital rotation out of speculative growth stocks continues.

#-ad_banner-#This month, we've seen Whole Foods Market (Nasdaq: WFM ) get crushed after the company missed earnings estimates and reported same store-sales below investor expectations. Shares of speculative tech stocks have also been hit hard, with Twitter (NYSE: TWTR ) and LinkedIn (NYSE: LNKD ) hitting new 52-week lows, and cloud computing champion (NYSE: CRM ) more than 20% off its late February highs.

Interestingly, the declines in high-valuation growth stocks have come at a time when the overall economy is showing signs of a stable recovery. Last week, it was reported that sales of "trophy homes" hit a new record, according to an analysis by DataQuick, and consumer credit posted its largest gain in a year.

The increasingly bullish economic picture has given the Federal Reserve more latitude to continue tapering its bond-buying program. And perhaps the prospect of higher interest rates is to blame for driving institutional investment managers out of speculative stocks and into more stable blue-chip securities.

With interest rates still near historic lows, it is easier to justify long-term speculation on growth stocks because it is possible to wait nearly indefinitely for companies to generate profits. But rising rates are likely to reduce the long-term attraction of a company not yet producing positive earnings.

Whether the reasoning behind this move is a function of interest rates or shifting investor confidence, the fact remains that high-beta growth stocks are struggling right now, while stable cash flow-generating stocks continue to be bid higher.

Today, we're going to take advantage of this trend by setting up a bullish income play by selling puts on a highly profitable company. My goal is to generate a 17% per-year return, while giving us a chance to pick up this attractive stock at a discount if shares pull back over the next six weeks.

Old Dominion Freight Line (Nasdaq: ODFL ) is a well-respected transportation company that specializes in less-than-truckload shipments. The company is expected to earn $2.82 a share this year and to increase earnings 16% in 2015, to $3.27.

An expanding U.S. economy should certainly help support the company's growth, and while ODFL doesn't pay a dividend, a stock price less than 20 times next year's earnings leaves room for shares to climb.

As put sellers, we don't actually need ODFL to trade higher in order for us to capture our 17% per-year return. Since I am recommending we sell the ODFL June 60 Puts, we just need the stock to remain above the $60 strike price for the next six weeks. This looks like a good bet based on the current bullish trend for the stock and the underlying trend of investors allocating capital to cash flow-positive businesses.

I suggest using a limit order at $1.20 when entering this trade to make sure you get an attractive level of income.

For each put option contract that we sell, we will be obligated to buy 100 shares of ODFL at $60 if the stock closes below this level when the puts expire on June 14, costing you $6,000 per contract. But since we are generating $120 in income from the put sale, we only need to set aside $5,880 of our own capital in case shares are assigned. This means our net cost for purchasing the stock will be $58.80 per share, a 3% discount to recent prices.

If ODFL remains above $60 through the expiration date, the $120 in income we collected will be ours to keep free and clear. This represents a 2% return on the $5,880 in capital we allocated to purchase shares in 43 days. Our per-year rate of return works out to 17%.

Action to Take --> This put-selling strategy is an excellent way to generate income from your investment account during bullish periods for the overall market or for individual stocks. While bearish action can create more risk, it also increases premiums on option prices, which in turn, boosts the amount of income we receive from implementing this strategy.

In short, the market essentially pays us well for taking on the obligation to purchase shares. During high-risk times, we are paid exceedingly well, and during lower-risk periods, we are still paid an attractive per-year rate of return. The key is picking the put option contracts that are less likely to be exercised, and of course, picking underlying stocks that we don't mind owning if we are assigned.

This article was originally published at

Transportation Company Could Pay 17% 'Dividend' to Select Traders

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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