After Learning Its Lesson, This Stock Stands Out as an Attractive Value Play
This 'meat and potatoes' trade on an education concern offers 16% upside potential with built‑in downside protection.
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Today we are lining up a "meat and potatoes" covered call trade. I find myself executing trades like this more frequently these days. The stock is reasonably valued and the company just posted better-than-expected quarterly results this past week.
The way I am setting up this trade is to provide significant downside protection by choosing a call strike nicely below the current trading level of the equity. This provides my portfolio with a win-win situation.
The most likely scenario is I pick up a return in the mid-teens when my covered call position expires in the money in September. That's something I am more than willing to do in an overbought market. If the stock does stage a decent decline, I put a stock in my portfolio I think is reasonably valued now at a significantly lower entry point.
The stock in question is Stride, Inc. (LRN) . This online education company saw its stock get cut in half after posting fiscal first-quarter results in late October (the company’s fiscal year starts on July 1).
The shares were greatly impacted by a poorly executed new platform rollout that caused an exodus of frustrated parents and students. Student enrollment was impacted by 10,000 to 15,000 individuals by management’s estimates.
Stride just reported fiscal second-quarter results that show the company might have learned some valuable lessons from its botched execution. Q2 earnings per share came in at $2.50 a share, beating the consensus by more than $0.15 a share. Margins increased by 30 basis points.
Revenues rose in the high-single digits, which slightly beat the consensus estimate. Management also reaffirmed fiscal year 2026 sales guidance. More importantly, management noted that its core platform rollout issues are largely behind it now. Calls to customer service and other related issues have dropped, as a result.
Enrollments were up nearly 8% on a year-over-year basis. This was driven by 29% growth at Stride’s Career Learning middle and high school programs, which make up over 40% of overall sales.
Management also noted it has a $500 million stock buyback program in place through October 2026, of which nearly $90 million of shares were bought back in Q2. Given Stride's just over $3.5 billion stock market capitalization, this should be a significant tailwind for EPS growth. Stride can accomplish this as it has a strong balance sheet.
Even after a nice bounce following Q2 results this week, the stock trades for roughly 10 times forward earnings estimates. The Wall Street analyst consensus has EPS growing nearly 10% for the next fiscal year on continued 5% revenue growth.
The stock is not sexy, but its priced in value territory. And I can enhance that value while layering on downside protection with the following covered call trade.
Option Strategy
This is how one can initiate a holding in LRN via a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the September $75.00 call strikes, fashion a covered call order with a net debit in the $64.25 to $64.75 a share range (net stock price - option premium).
This strategy provides downside protection of 23% with upside potential of roughly 16% over the option duration even if the stock trades down 10%.
At the time of publication, Jensen was long LRN.
