By Paul Price of Market Shadows
NYC-based laboratory testing services provider Bio-Reference Labs (BRLI) took a big drop recently due to fears of reduced government payment rates for their services. Management now thinks they will earn $1.65 this year and $1.86 in 2014. Both would represent all-time highs, although they are somewhat reduced from previous guidances of $1.76 and $2.05, respectively.
Based on the company’s long-term record, the selloff appears overdone. The stock has given back almost all its 2013 gains.
Increased volatility provides opportunity for option sellers. Market Shadows sold 3 contracts of the BRLI May 2014, $30 puts for $3.60 per share this morning in our Virtual Put Writing Portfolio.
Here are the quotes when we traded at about 10:00 a.m. EST when BRLI was at $28.30.
Our maximum profit would be 100% of the premium received ($3.60 per share, 3 contacts representing 300 shares, i.e. $1,080). That will happen if BRLI closes at $30 or better on May 16, 2014. If BRLI remains below $30 we will be forced to buy 300 shares for an exercise price of $30 (the strike price) minus $3.60 (the put premium) which equals a net $26.40 per share–the “if put” price.
$26.40 would be 16x this year’s earnings and just 14.2x the already reduced 2014 EPS expectation. From 2005 through 2012 BRLI traded for an average P/E of 21.3x.
I thank Market Shadows’ reader Doug for alerting me to this fine company.
Disclosure: I went long BRLI shares, short BRLI puts in my own account today.
