Come on, Let's Get Realogy

Realogy RLGY is the parent company of some of the best known names in real estate. Its major brands are shown below.

The firm came public back in 2012, pricing 40 million shares at $27. The stock climbed quickly to north of $55 and held above $49 through the middle of 2015. EPS fell in both 2018 and 2019 and the shares plunged to as low as $4.30 before recovering to about $14 in February of 2020, just before the COVID crisis took hold.

Jittery traders dumped the shares once again as the virus-induced shutdowns figured to negatively impact real estate transaction. Last spring saw RLGY change hands for as low as $2.10 even though book value remained above $15 per share.

All the initial assumptions proved inaccurate. City folks reacted to the crisis by buying up homes in the suburbs and countryside. By the end of 2020, adjusted earnings per share had risen to $2.01 from $0.52. The stock touched $15.07 on Dec. 17, 2020, and closed out last year at $13.12.

Fundamentals continue to improve. Each of the most recent four quarters have been solidly profitable. As of March 31, trailing 12-month EPS were up to $2.84. Full year estimates, which may well be too low, see further gains by year-end.

Traders can't seem to grasp that RLGY's business is booming. After surging briefly to the mid-$19 area, Realogy slid back to close on Friday June 4, at just $17.70. That represents just 6-times expected adjusted earnings for the current year.

Shares that fetched from $28 to $55 from 2013 through 2018, on generally much lower profitability, are still on the bargain rack.

It's hard to say what should be RLGY's proper multiple. History suggests it could trade again near 19-times earnings. I'm assuming just a 14 multiple in calling for an end of this year potential goal price north of $41.

Hitting that somewhat modest target would deliver about 134% in upside from $17.70.

Analysts have been ridiculously, and wrongly, pessimistic on Realogy's prospects throughout its recovery. They expected EPS of just 10 cents in June of 2020 and were stunned when profits were 46 cents. Then they called for only 83 cents last September and were startled to see RLGY post $1.36.

In this year's Q1 the average estimate was for an 8 cent loss. Instead RLGY earned 34 cents in that seasonally weak period.

Now you can see why I think they might still be too conservative in their full year 2021 and 2022 projections. Yahoo Finance calls Realogy undervalued, but only sees it hitting $20.40 by this time next spring. I see no rationale for thinking a nicely profitable and growing company should sell for under eight times trailing earnings.

Research house Morningstar hasn't even bothered to assign an analyst to RLGY. Its computer generated price to sales ratio is just 0.31-times. Their projected year-ahead price-to-earnings is now 7.56-times and the current quote represents just a 15% premium to book value.

Realogy's high beta of 2.8 may be scaring more conservative investors away. In the meantime, though, it is creating huge option premiums for traders willing to bet on RLGY going higher.

Buying shares outright is the plain vanilla way to get unlimited upside on shares with such large upside potential.

Here were the actual option prices for Realogy's Jan. 21, 2022 expiration date $17.50 and $20.00 options with the shares at $17.70.

Selling $17.50 puts for $2.85 would drop the worst-case, forced purchase price to just $14.65. Shorting the $20 strike puts at $4.30 creates an "if put" price of $15.70, a full $2 below last week's closing quote.

If you like RLGY at near $18, it would certainly look even more appealing at those much lower entry points.

An alternative way to play RLGY would be to set up a Jan. 21, 2022 buy/write combination using the $20 strike price for both the calls and puts.

Cash flow details on those trades are detailed below using a 1,000-share, 10 call and 10 put quantity. The same percentage results would be available using as little as 100-shares.

If held through expiration there are just two possible outcomes. RLGY will either close at $20 or higher, or below $20.

If the former situation plays out the best-case scenario which follows would occur.

Any move higher of at least 13% would morph into a cash-on-cash total return of 77.46% over just 0.633-year. That annualizes at greater than 122%. Outright purchasers of RLGY at $17.70 would need to see it reach $31.41 to achieve the same 77.46% advance.

What if RLGY fails to reach and hold $20 next January?

If so, the worst-case scenario shown next would apply. Barring unexpectedly bad news, though, it would still likely provide decent returns.

Those who sold full $20 buy/write combos would end up with double-sized long positions in RLGY, buy at an average cost of just $15.64 or so. Any downturn of less than 11.6% would allow for immediate liquidation for at least a small profit.

If RLGY closes at $19 on expiration day the paper gain would be $3.36 per share on the now 2,000-share position, or $6,720.

If RLGY closes on Jan. 21, 2022 exactly unchangedfrom its trade inception price the net paper gain would be $2.16 per share or $4,320 on the now double-sized long position. How cool is that?

Realogy is a rare bargain in a relatively pricey market.

Buy some Realogy shares, sell some naked puts or consider going with full buy/write combinations.

At the time of publication, Price was long shares and short options on RLGY.