Assertio Holdings: Compelling Income Opportunity Apart From Upside Potential (NASDAQ:ASRT)

Intro

Seeking Alpha is all about long-term investing and compound interest. Short-term trading (especially day trading when using either stock or options) does not fall into their wheelhouse and for understandable reasons. Take a short-term options trader for example and his corresponding activity in a given year. If we take a worst-case scenario, this person could easily make 1000+ trades a year and still report a net loss for a year depending on trading conditions. The lesson to be learned here is two-fold and should never be disregarded.

For one, short-term options or speculators are trading their time for money or profit. This profit is not guaranteed and may even turn into a net loss at the end of the year. All things being equal though, the speculator is primarily working for money or currency, which would be a better term which is a big mistake (when one has an alternative) in my opinion in 2023.

Why? Because the reported inflation rate of 6 to 8% is well below the REAL inflation rate and this is key. Therefore, a typical speculator would most likely need to see an annual nominal gain of something like 12 to 15%+ nowadays to simply break even for the year. Furthermore, as you can imagine, the TIME which must be invested to achieve this return (As far more activity must be employed compared to a long-term investing strategy) would be significant, to say the least. Suffice it to say, the worst outcome here for the speculator would be a significant net loss not just from the negative return perspective but also from the TIME invested, which never can be recouped.

Focus On Assets And Not On Dollars

For the record, we do utilize short-term strategies within our portfolio, but we are 100% conscious of the end goal, which can be summed up in the following question. Why would we devote 100% of our time to work for something (currency) which is being debased (inflation) at what seems an accelerated clip every year? On the other hand, doesn’t it make more sense to invest in income-producing assets that keep up with inflation and provide regular income also for the investor? We think so which is why our end goal always has to be to work for asset accumulation and not for money.

How do we define an asset in a financial market? Well, what we look for is a company that has very strong profitability trends, a keen valuation, and bullish technicals. When these three areas stack up (As they presently are doing in Assertio Holdings, Inc. (NASDAQ:ASRT)), it stacks the odds in favor of a bullish trending move going forward and significantly minimised risk to the downside.

Technicals

As we see below on ASRT’s long-term technical chart, we have the combination of a trending share price along with the recent breakout above the stock’s multi-year downcycle trend line. Suffice it to say, from a technical standpoint, the recent breakout looks trustworthy as February thus far has been excellent (Share-price appreciation) for the stock. Remember, long-term charts give us a perspective on a stock that is impossible to achieve from shorter-term charts. Therefore, a trend in motion (Which is a result of far more information being studied) is always more noteworthy on long-term charts.

Profitability & Valuation

Then we have the relationship between the company’s valuation and its profitability. ASRT’s return on total capital now comes in at almost 18% over a trailing 12-month basis as operating margins (39%+) remain to the fore. In fact, when we tie in the company’s profitability with its very keen valuation (Forward GAAP earnings multiple of 7.74), it becomes quickly obvious why the above-mentioned technicals are behaving like they are. Furthermore, the preliminary results for Q4 and fiscal 2022, which were announced recently, came in ahead of expectations. Q4 sales are now expected to come in at a higher $49.5 million approx which will push the annual sales number close to the $155 million mark. Suffice it to say, working off a low valuation and sound profitability is one thing, but when consensus revisions continue to get dialed up, it makes the bull case even more encouraging.

Turning ASRT Into An Asset

Although the bull case in Assertio Holdings, Inc. looks compelling, the stock does not pay a dividend which means investors need to rely solely on capital appreciation of the share price. However, given the low dollar price of the shares ($5+) and plenty of liquidity in its options, one can use a covered call strategy here for income whilst also minimizing the risk of losing the asset (Stock) in hand. We achieve this by doing the following.

1. We sell out-of-the-money call options which have plenty of time to expiration.
2. We roll the options very aggressively (Out and Up if possible), especially when the call options go in the money.

The goal with this strategy is always to take in a credit on each roll and keep the call strikes above the price of the stock to the best of our ability. Doing this well (By selling enough time on each roll), we can substantially increase the odds of keeping out stock whilst also bringing in consistent options income over time. This options strategy for example complements an “asset gathering” setup as opposed to using options merely for speculation purposes. Furthermore, this options strategy reduces risk every time a roll is done for a credit which illustrates that options do at times have a place in long-term investing strategies.

Conclusion

Assertio Holdings’ technicals, profitability, and valuation trend all tie into a compelling bull case here. Furthermore, the low price of this stock along with its options liquidity enables investors to use ASRT as an income-generating asset while also taking part in rallies in the stock. We look forward to continued coverage.