Once you identify a good value play, you have several options for how to trade it, Real Money Columnist Paul Price says.
Investors can spend a lot of time looking for stocks that markets have undervalued.
One that’s of particular interest to Real Money Columnist Paul Price is cabinet and countertop maker American Woodmark (AMWD) – Get American Woodmark Corporation Report. It’s one of his largest dollar holdings (meaning that this is one of the stocks in which he has the most money invested).
Even though the company’s stock has fallen over the past year, Price remains confident in the underlying business. To him this share price, while frustrating, means there is still an opportunity to get in on an undervalued asset.
“What makes me so sure this stock is ready to rebound strongly? ” Price wrote recently. “Fiscal 2021, which ends April 30 of this year, was a horrible year due to lumber-price spikes that were not initially compensated for with product price increases. EPS will likely have been approximately halved.”
That’s set to change with the company’s next financial report. “Management indicated that about $55 million in extra revenue is expected in the end of April quarter due to those price increases finally filtering through to the top line. With less than 17 million shares outstanding that will have a major positive impact on all future reports.”
That additional revenue should make this stock look much healthier to investors. Not to mention, Price adds, it’s easy to show strong growth when you’re coming off some depressed numbers. (There’s really nowhere to go but up, hopefully.)
The key question is, what’s the right play here? For value investors like Price, finding an undervalued stock is the name of the game. He wants to find strong companies before the market wises up, and then collect his profits when it does. But how should you execute your trades once that happens?
In the case of American Woodmark, Price identifies three approaches “depending on your available investment capital and mindsets.”
The first is to buy some shares for unlimited upside with no preset time horizon.
The second is to go long a bull call spread. This involves “purchase of call options, while shorting the same number of higher strike price calls, typically for the same expiration date.”
The third approach is to short naked puts. While the maximum profit in such cases is equal to the total premium dollars collected up front, those can be significant, Price argues.
More details are available in Price’s Real Money column.
