Call Options Or Put Options On StoneMor Partners (STON)?

| October 31, 2012 | 0 Comments

STON OptionsStoneMor Partners (STON) is our spooky Halloween stock.  They operate 274 cemeteries across the US.

STON currently trades for $23.33 per share.  The shares are up 21% from the 52-week low of $19.18.  But the stock has fallen back 16% from the 52-week high of $28.01.

Is this an opportunity buy call options on STON as investors gobble up this stock for its sweet dividend?  Or should you buy put options on STON as debt levels soar?

The bulls make a convincing argument…

As one of the largest deathcare services companies in the US, STON is well positioned to profit from one of life’s few certainties.

As the saying goes, nothing’s certain but death and taxes.

As a publicly traded Master Limited Partnership (MLP), STON has done an exceptional job of growing their business through acquisitions of cemeteries and funeral homes.

It’s a strategy that’s allowed them to grow the size of their business and pay out considerable sums of money to shareholders. 

In fact, STON pays an annual dividend of $2.36 and has a dividend yield of 9.8%.  That’s a hefty yield compared to the paltry sums investors receive from other income investments like Treasuries or bonds. 

The huge dividend is likely to bring in more buyers as investors seek out ways to generate income in a low interest rate environment.  And that should send the stock soaring back toward the 52-week high in the weeks ahead.

But the bears have a compelling case as well… 

STON’s high dividend yield aside, the company’s debt burden has some investors running scared.

At the end of last quarter, STON had $214 million in debt.  But they only had $7.7 million in cash.  That’s a troubling amount of debt for any business.

 What’s more, despite rising revenue, the company isn’t profitable.  Last quarter STON lost 11 cents per share.  And to make matters worse, they failed to live up to estimates that they would only lose 7 cents per share.

Obviously, it’s difficult to fund their dividend from cash from operations when they’re losing money.  That leaves taking on more debt or issuing more shares as the likely source for the cash to continue funding their payouts.  And that can only last so long before they have to cut their dividend.

As long as there are questions around the sustainability of STON’s dividend, the stock has little hope of going anywhere but down.  

If you think the bulls are right, take a look at buying the STON January 2013 $25.00 calls for around $0.60.

If you think the bears are right, take a look at buying the STON January 2013 $22.50 puts for around $1.00.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.