Pullback in Small-Cap Stock Puts It Back in the 'Buy Zone'
This fomer 'stocking stuffer' is providing another opportunity.
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Late in December I profiled some attractive "stocking stuffers" trading under $10 a share just before the holidays. One of these was a company called LifeMD LFMD whose equity was trading at five bucks a share. By this spring, the shares had sprinted sharply higher, and I noted in an article then that I was waiting for a pullback to add to my covered call holdings in this name.
As they say, timing is everything in life and the stock had a major pullback this past week, not too long after my covered call position in LFMD had expired in the money. I really like the covered call angle around LifeMD. Not only are the options against the equity lucrative, but they have more than solid liquidity given this is a small-cap stock.
LifeMD consists of several businesses. These consist of a vertically integrated, proprietary digital care platform, an affiliated pharmacy and a 50-state affiliated medical group, as well as a U.S.-based patient care center. In addition, LifeMD owns nearly three-quarters of a SaaS document business called WorkSimpli.
A driver of recent growth as part of LifeMD's telehealth business has been some GLP-1 weight management offerings that were launched just over two years ago.
The stock dropped some 40% this past week, finally providing a lower and buyable entry point. The trigger was a second-quarter earnings report that missed both top and bottom-line expectations. In addition, management lowered its full-year sales guidance to $250 million to $255 million from $268 million to $275 million previously.
It should be noted that year-over-year sales growth in Q2 was still nearly 23%. The net loss in the quarter also dropped to just $2.9 million from a net loss of $7.7 million from the same period a year ago. LifeMD’s balance sheet also continues to improve and adjusted EBITDA in the WorkSimpli business more than doubled in the quarter. What's more, even with the reduced guidance, revenues should still grow nearly 20% in 2025 compared to the company’s prior fiscal year.
The company is in the process of a significant transition to branded GLP-1 medications but is still seeing more than 400 signups daily for those offerings. The company added some key offerings in the quarter and is increasingly integrating AI into its operational processes.
With the pullback, the shares now trade just under $7. This is less than half the stock’s just over $15 a share in mid-June, when the equity was in frothy territory. Three analyst firms have reissued Buy ratings since Q2 numbers came out, maintaining price targets in the low-teens.
Here is how I am taking advantage of this week’s decline.
Option Strategy
This is how one can initiate a holding in LFMD 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 March $6 call strikes, fashion a covered call order with a net debit in the $4.70 to $4.80 a share range (net stock price - option premium). This strategy provides downside protection of nearly 30% with upside potential of approximately 25% even if this equity trades down by just over 10% over the option duration.
For those that want to target a slightly higher potential return accepting a bit less downside risk mitigation, utilize the March $7 call strikes for your covered call orders.
At the time of publication, Jensen was long LFMD.
