I'm Squeezing More Value Out of a Small-Cap Value Play
This is my strategy with this reasonably priced healthcare stock in an overbought market.
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Today I will highlight how to use a covered call strategy to get a better return out of a name already trading at a reasonable valuation.
The name in question is Progyny, Inc. PGNY, a New York-based company specializing in fertility and pharmacy benefits, serving 6.4 million members with a network of over 1,000 specialists and strong client retention rates.
Despite robust growth and profitability, Progyny's stock has declined some 45% over the past 12 months due to missed revenue forecasts, a lowered 2024 outlook, and the loss of its largest client. It should be noted, though, that the stock is starting to slowly move up over the past few weeks. Progyny also possesses a solid balance sheet, and the shares have seen recent insider purchases.
The company went public in 2019 and is currently not that far above the price it debuted at on the Nasdaq market. Progyny is focused on filling a coverage gap in medical insurance, providing fertility benefits that include financial assistance with in-vitro fertilization (IVF) treatments delivered by a network of more than 1,000 specialists. It also provides concierge member support from patient care advocates or PCAs. In addition to the revenue typically received from clients and members under benefit plans, Progyny collects a per employee per month fee from employers for access to its PCAs.
While the birth rate in the United States has dropped significantly in recent generations, the company is benefiting from the fact that more couples are encountering fertility challenges. This is a factor both of a changing environment and more importantly the increase in the median age women are choosing to have children.
While the company did recently lose its largest client (approximately 10% of its overall customer base) to a rival it remains the leading go-to provider of fertility benefits to company employees in the U.S. and had a 99% retention rate among clients apart from that loss.
The company has a pristine balance sheet with just over $230 million of net cash. Based on that and its operating cash flow of $127 million in the first nine months of 2024, the stock has an operational cash flow yield of around 10% at current trading levels. The company does not pay a dividend, but the CEO and Executive Chairman each made significant purchases in the shares at the end of December.
In an overbought market, PGNY trades for just over 12 times estimated 2024 profits and should see a small increase in earnings and revenues in 2025 even as the company adjusts to its recent client loss.
Option Strategy
This is how one can initiate a holding in PGNY with 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 August $20 call strikes, fashion a covered call order with a net debit in the $17.50 to $17.70 a share range (net stock price - option premium).
This strategy provides downside protection of 16% with upside potential of 14% even if the equity falls some over the option duration — a good solid single in what is already a reasonably priced stock.
At the time of publication, Jensen was long PGNY.
