Establishing a Position in an Undervalued Infrastructure Name
Here's the strategy I'm using to accumulate a position in this small-cap company.
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Today, we are teeing up a small-cap infrastructure company as a covered call idea. Orion Group Holdings ORN is a specialty construction firm, which was previously known as Orion Marine before it made several small acquisitions and broadened its markets by adding concrete construction services.
While the company’s market cap is just over $300 million, liquidity is sufficient in the options to make the stock a viable covered call trade candidate. The orders I placed on it this week executed rapidly.
The infrastructure ecosystem has benefited tremendously from the poorly named Inflation Reduction Act, or IRA, which was legislated in the summer of 2022 and provided hundreds of billions of dollars to myriad projects. Orion is headquartered in Houston, TX and services the infrastructure, industrial and building sectors. The company has capabilities such as marine-focused construction and dredging services, marine pipeline construction as well as concrete construction offerings for large-scale projects on land.
The stock has fallen more than 40% from recent highs in late July, although the shares do seem to be regaining some strength. There were a couple of factors behind the pullback. First, Orion's second-quarter results that came out on July 24 missed badly on the bottom line and a bit less on the top line. However, this was almost entirely due to two large marine infrastructure projects. One that is already back on schedule and an other that should soon be so. The company also raised approximately $25 million via a secondary offering earlier in September, which also was a bit of a headwind for the equity.
The company, however, continues to win its share of awards and is expanding its presence in Florida. Its backlog at the end of the second quarter was nearly $900 million and management expressed confidence the company was set up for a strong second half of the year and would have good comparables in the last two quarters of 2024. Also encouraging to us is that several members of the management team made small purchases of the stock after it fell following second-quarter results. The two analyst firms that cover the stock also stuck with their Buy ratings on the equity.
Orion is projected to have a small profit this year on nearly 20% revenue growth. Earnings are estimated to move up sharply in 2025 to around $0.35 per share as sales post an increase in the low teens.
The stock is priced nearly at the bottom of its 15-year range using its current price-to-sales ratio from a historical basis. I can also significantly lower any downside risk in the stock by using the following covered call strategy, which I executed earlier this week.
Option Strategy
This is how one can initiate a holding in ORN with a covered call order. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the March $5 call strikes, fashion a covered call order with a net debit in the $4.30 to $4.40 a share range (net stock price - option premium).
This strategy provides downside protection of nearly 25% with upside potential of 15% even if the stock falls a bit more than 10% from here over the next approximately six months.
At the time of publication, Jensen was long ORN.
