A protected covered call or collar search performed using PowerOptions tools, seeking to find the highest returning position for profitable companies with a maximum potential loss of 8% and a stock price in an uptrend, produced United Rentals (NYSE:URI) as shown below:
Right behind United Rentals were network storage company NetApp (NASDAQ:NTAP) discussed previously in this article, electronic payment solutions company VeriFone (NYSE:PAY) discussed previously in this article, airline company US Airways (LCC) and bedding products company Tempur Pedic (NYSE:TPX).
A protected covered call may be entered by selling a call option against a purchased or existing stock and using some of the proceeds from selling the call option to purchase a put option for protection or "insurance." The United Rentals protected covered call has a potential return of 3.7% (43.5% annualized) and a maximum potential loss of 7.2%. So, even if the price of the stock drops to zero, the maximum potential loss is 7.2% (at expiration).
The highest returning positions as shown above were found by selecting to search and sort by the highest returning positions. Profitable companies were found by searching for companies with a Price-to-Earnings ratio (P/E) greater than zero. Stock price for companies in an up trend were found by including companies with a 100-day moving average greater than the 200-day moving average. The 8% maximum loss parameter was selected, as a loss of 8% or less can typically be recovered in a modest amount of time using income generating investment methods.
United Rentals is the largest equipment rental company in the world. The company recently acquired RSC Holdings on April 30, 2012. In United Rentals URI and RSC Investor Integration Update Call held on May 14, 2012, the company indicated the integration of the two companies is going well and increased the cost synergies target from the combination of the two companies to $230 million. The company also noted that construction activity is improving in most key sectors, especially related to manufacturing.
Competitors to United Rental include American Equipment Company (private), Hertz Global Holdings (NYSE:HTZ) and Sunbelt Rentals (private).
The prospects for United Rental look very promising, especially with the acquisition of RSC, but the company has a percent short interest of 31%. Percent short interest represents the number of shares sold short compared with the number of shares outstanding. Apparently, a lot of investors are betting against the company.
The company's stock price has quadrupled over the last year as shown below:
The company's stock price is currently near its previous support level in the $38 range, so this might be a good time to invest in the company, but a large percent short interest can be a bullish indicator or a bearish indicator, so just to be careful, an investor in the company might consider entering the protective covered call listed in the table above, as it positions the investment for a potential return, even if the price of the stock is stagnant, and also provides protection in case the stock price takes a hit. The specific call option to sell is the 2012 Jun 38 at $2.60 and the put option to purchase is the 2012 Jun 34 at $1.25. A profit/loss graph for one contract of the protected covered is shown below:
For a stock price below the $34 strike price of the put option, the value of the protected covered call remains unchanged. If the price of the stock increases to around the $45 range, the position can most likely be rolled in order to realize additional potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.