Nutrisystems, Inc.: Covered Call Opportunity

With the upcoming NutriSystem Inc. (NTRI) Q2 2007 earnings announcement on July 24th, there might be an opportunity to capture some call option premium dollars if you are long the stock.

Three reasons to consider writing a covered call on the pre-announcement date of July 24th, 2007:

1) Although revenue growth is still positive and strong, it is on a downward slope
2) NTRI option premium are rich driven by the historical volatility
3) Analysts are getting better at forecasting this growth company, providing a smaller opportunity of significant upward revisions.

I have followed NTRI for a year and a half now and I am in kicking myself for missing this exploding stock. If you read one of my older posts, you will see that this stock does not fit my in with my value selection criteria. But with that said, I do see an upcoming opportunity to capture an option premium for all of the faithful longs.

Here is an updated chart of what the stock has done since I first began following the company in October.

Exhibit 1

Also, here is a chart that I have created plotting the historical quarterly revenue % growth vs. stock price. This is a great picture highlighting the accelerating revenue growth that you wish all of your stocks can achieve. In Q4 2005, revenue growth vs. prior year story peaked at 784% with the latest quarter (Q1 2007) coming in at 62%.

Exhibit 2

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In Exhibit 3, you will see that the analysts are expecting the growth to continue to drop to a level of 10-15% during 2008

Exhibit 3

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From here, I wanted to see the reaction of the stock during these earnings announcements and will there be any opportunity to place an option bet to capture some value. There will be 18 trading days from the close of July 24th (earnings date) and when the August 08 contracts expire. Here are the last 11 earnings announcements and the performance.

Exhibit 4.1 – Dataset

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Over the entire dataset of eleven 8-K earnings announcements, the stock has traded an average of +13%, with a max of +19% and a minimum of –0.1%. But before “backing up the truck” to buy call options to maximize profits, look at the last three quarterly results:

18 Day average of +1.3%, with a maximum of +6.8% and a minimum of –3.3%.

Exhibit 4.2 – Graph of results

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To me, this range provides small opportunity to buy any calls or puts. But knowing the historical volatility of the stock, a long holder of NTRI might want to consider a covered call option strategy to capture some additional value by selling a call 5-10% above the July 23rd close price before the earnings announcement.

I will revisit this trade on July 23rd and provide you with a "mock" trade that I would put into place for my fake portfolio.

Author disclosure: I do not own any shares of NTRI.

Comments

[WilliamTrent]

Nice work. NutriSystem is on my Small Cap Watch List and I have been watching it but have not bought yet either.

For those of us who don't yet own it, do you think writing puts would be a reasonable way to capture a volatility premium and possibly lower entry point? Or do you think the downside risk is too much now for such a play?