Trade Alert: The Happy Hunting Ground
I’m constantly in awe of the uniquely American ability to put a happy face on selling just about anything, including death.
With more than 1,500 funeral homes and 470 cemeteries across North America, Service Corporation International (NYSE: SCI) is the largest deathcare company in the U.S.
Despite its expansive footprint, the $7.3 billion company still only controls about 16% of the U.S. market. So growth-via-acquisition continues to be a big part of its long-term growth story.
The other component of SCI’s growth story is its unusual sales cycle, particularly when it comes to so-called pre-need. The company generally starts pitching prospective customers at least 20 years before their time is expected to come.
During the first phase of pre-need, a customer pays decades in advance for a funeral plot that’s funded via an insurance policy. In return, SCI collects a fat 25% sales premium on the policy up front and a modest return at payout.
Then, maybe a decade or so later, the pre-need pitch extends to the actual funeral services, which are funded via an externally managed trust fund. Here, any investment return on top of what is needed to pay for the funeral is gravy from the company’s standpoint.
Lastly, there’s the funeral, itself, or what SCI refers to as “at need.”
These days, the company has shifted more into the mode of a real-estate firm, with tiered offerings depending on what the customer is willing to pay. The increasing trend toward customization of the event itself is another growth opportunity.
As distasteful as selling death may be, it does produce sizable margins and substantial free cash flow.
The only knock on SCI is that it’s a bit more levered than I’d prefer. But its biggest debt maturities are distant and reasonably well staggered, while the major rating agencies have a stable outlook on its obligations.
This trade will generate immediate income of $60 per contract now, with the possibility of buying SCI at an 8.5% discount to where it currently trades if the stock gets put to you. Investors should set aside $3,500 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the June 15, 2018, $35 Put on SCI.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $35 per share.
- Current Stock Price: $38.25
- Limit Order Price: a credit of $0.60 or more.
- Tell your broker: “I want to sell a put on Service Corporation International (NYSE: SCI) stock. Specifically, I want to ‘sell to open’ one June $35 Put for a credit of $0.60 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.60 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $60 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $35 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying SCI at an 8.5% discount to the current market price, while locking in a yield of 1.9%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.