This recently public company (August 2020) is on a tremendous growth trajectory (very high growth rate) as it delivers its highly differentiated, technology-enabled, value-based care model for Medicare. The shares are worth considering for purchasing outright, however this report highlights a particularly attractive income-generating options trade. Specifically, the trade puts compelling upfront income in your pocket (that you get to keep no matter what) and it gives you a shot at picking up the shares at an even lower price. We believe this is an attractive trade to place today (and potentially over the next few trading sessions) as long as the price doesn’t move too dramatically ahead of the company’s earnings announcement expected on March 8th.
Oak Street Health (OSH)
Share Price (OSH):
Oak Street Health, Inc. (OSH) operates a network of primary care centers to deliver value-based care exclusively to Medicare eligible patients in medically-underserved communities. It currently operates over 75 centers in 11 states in the US, serving over 100,000 patients. It also has a pilot collaboration with Walmart (WMT) under which it is assessing expansion opportunities, initially by setting up its centers at 3 Walmart locations. The company was founded in 2012 and has since then witnessed explosive growth. In the most recent TTM period, it generated ~$808 million in revenue, representing a 72% y/y growth. In August 2020, OSH completed the initial public offering of its common shares whereby it raised $351 million and listed on the NYSE.
OSH Revenue:
source: Seeking Alpha
We recently completed a detailed full report on OSH, and you can access that report here.
The Trade:
Sell Put Options on OSH with a strike price of $45 (~13.5% out of the money, it currently trades at ~$52.02), and an expiration date of April 16, 2021, and for a premium of at least $1.10 (or $110 because options contracts trade in lots of 100). This comes out to approximately 2.44% of extra income in just 46 days—which may not sound like a big return—but it is a lot for such a short time frame (it’s approximately 19.3% of extra income on an annualized basis, calculated as ($1.10/$45) x (365/46) days). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($45—the strike price) if the market price falls below $25 and the shares get put to us before this option contract expires in 46 days. And we get to keep the upfront premium income no matter what.
Important to note, your broker will require you to keep $4,500 of cash in your account ($45 strike x 100 shares) to secure the trade (assuming you don’t want to use margin).
source: Factset
Also important to note, you can adjust the strike price of this trade (for example to $40) or the expiration date (for example to March 19th) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of OSH doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our thesis on this trade is simply that OSH is an attractive long-term investment (thanks to its high sales growth, expected to be 34.9% for the current year and 49.2% next year), but the shares are volatile in the near-term. We also like that the shares have sold off a bit in the last few weeks (see earlier price chart), which gives a little extra margin of safety (and because it helps increase the upfront premium income somewhat—what markets are volatile and fearful, premium income available in the options market increases).
Very briefly, from a valuation standpoint, OSH trades at approximately 13.9 times sales, which is actually reasonable for a company with such a high revenue growth rate. And as mentioned earlier, OSH’s FUBO’s revenue is expected to grow at an extremely high rate this year and next year.
And for a little more color on these shares, here is a look at the the aggregate price target and rating per the 11 Wall Street analysts covering the shares and reporting to Factset.
Almost all of the analysts currently rate the shares a buy, and they have an aggregate price target of $67.11, significantly higher than the current share price.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. In OSH’s case only earnings is a concern (because it doesn’t pay a dividend). And regarding earnings, OSH is expected to “announce” after the market close on Monday March 8th. This adds significant near-term price uncertainty and potential volatility to our trade. However, we feel that the high upfront premium income more than compensates us for this risk—especially considering we like the shares as a long-term investment too.
source: Briefing.com
Conclusion:
OSH is an attractive high growth business with a large total addressable market (i.e. a lot of room to run). However, the near-term volatility is unnerving to some investors, thereby making this options trade attractive. Not only does the trade put attractive upfront premium income in your pocket (that you get to keep no matter what), but it gives you a shot at picking up shares of this attractive long-term business at an even lower price (if the shares get put to you before the options contract expires).