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The Trade of a Lifetime

November 01, 2013 | About:
Some stocks are fine to simply buy and hold. Others are best suited for in-and-out trading. Sports and recreation company Life Time Fitness (LTM) meets all my criteria for long-term ownership yet seems better used as a vehicle for capturing medium term (three to 12 month) moves.

Yoga, Pilates, indoor rock climbing, squash, racquetball plus normal workout zones, team sports and spa services make for a growth industry in today’s America. The firm’s EPS numbers bear that out. The year 2013 is on track to show the eight all-time record in the past nine years.

The one miss? The Great Recession of 2008 to 2009 led to a one-cent per share dip from $1.83 to $1.82 before growth resumed. Despite LTM’s steady performance the shares closed Thursday at $45.42, greater than 30% below its peak price of $65.09 at their 2007 peak.

Full-year EPS were $1.78 in 2007. They are expected to be $2.92 for calendar year 2013. The poor stock performance came due to compression from a 36.5 P/E to just 15.6x this year’s and 14.4x the consensus 2014 estimate.

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Previous "best buying opportunity" entry points have come at similar to even higher P/E multiples over the past couple of years. Tradable moves of 40%, 30% and 45% followed within months of each of the most recent three bottoms.

Life Time has been building up sales, earnings, cash flow and book value at double digit rates. Debt is manageable. A return to a normalized 17.5 P/E could easily support a $55 12-month target price, about 21% above the current quote.

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Option savvy traders might wish to write (sell) some May 2014 puts while the shares are temporarily depressed. With the shares at $45.42, the $45 strike last traded at $3.30 while the $40 put brought in $1.55 per share. That drops the "if put" break-even points to $41.70 and $38.45 respectively.

Maximum profit on either put option sale would be 100% of any premium collected. That scenario will play out if LTM simply remains above the chosen strike price through the 4 p.m. close on May 16, 2014. The best-case results will be achieved if LTM declines very slightly, stays flat or if it goes up over the coming 6.5 months.

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The $38.45 per share net exercise price of the more conservative $40 strike is less than than the lowest actual trading price for LTM since 2011. The $45 put, if exercised after a sale for $3.30, would provide a $41.70 entry point. Life Time closed above that level about 95% of the time since 2011.

Those "if put" levels equal just 14.7x or 13.5x actual trailing earnings of $2.84 through third quarter 2013.

Sooner or later LTM will make the big move that reflects all its expected future prospects. In the meantime traders should be content to take nice percentage gains as the shares cycle between undervalued and overvalued levels.

Independent research firm Standard & Poors confirms my view. Life Time Fitness could easily reach $55 to $60 again before too long.

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Buy some shares as a primary investment vehicle. Collecting some option premiums along the way offers some gravy along with the main dish.

Disclosure: Long LTM shares, short LTM options

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.0/5 (6 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
I'm curious, are they benefitting from the abandonment of space by department stores and other merchandise retailers?

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