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I understand that bringing up Bread Financial may trigger a few here in Shrewdland, but with that bit of warning...

I noticed that COF was up 10% on solid earnings. Its been on my watchlist, along with AXP and BFH. That led me to relook at Bread....

Here is the earnings press release from yesterday https://s28.q4cdn.com/645453783/files/doc_financia...
And the earning presentation https://s28.q4cdn.com/645453783/files/doc_financia...

The shares have fallen from a high of 41 in July to 27 now; down 35%

The compnay is trading at a PE of <3; P/B >47; P/Cash Flow of ??0.74??; Debt has been cut in half since 2020

I know that this company is unloved compared to COF or AXP or SYF...

Delinquencies are trending up. But still, revenue was up 5%; the company earned $3.46 this quarter alone.

Shouldnt this be one of those cases where you buy something really cheap and good things happen eventually? I realize that the long term chart would not really support this hypothesis, which I suppose is the market telling me that there is something wrong with my thinking.

It is clear that the market really truly hates this stock.
The simplest observation is that earnings are expected to be lower next year. Who wants falling earnings?
And, to be fair, it isn't a firm that screams "outstanding management" lately. And their communications are so mealy-mouthed that it makes you queasy.
It's as if they actively want to make sure that nobody understands what they actually do for a living.

I own quite a bit of it. Fat lot of good it has done me : )

But when a stock is ostensibly super cheap and unloved, there are often two kinds of surprises.
Unpleasant ones, to which the stock price reacts mildly.
And pleasant ones, to which the stock price reacts to strongly.

Shouldnt this be one of those cases where you buy something really cheap and good things happen eventually?

I think that counts as a definite "maybe". The future is uncertain. But the odds are good.
At this point, I think of position in a business like this, at this price, like a lottery ticket.
Heads I win a lot, tails I don't lose much.
A broad portfolio of uncorrelated positions like this would likely to extremely well over time. But don't bet the farm.

There is no point buying options, the usual way to achieve that situation...the stock is cheap enough that it's as cheap as an option now, and won't expire.

Jim

I like to look at what Wall St analysts say about such companies. What is the risk that I am not seeing? Apparently fear of new regulations on late fees is a big concern.

Bread Financial Holdings (NYSE:BFH) stock sank 3.9% in Monday midday trading after Goldman Sachs downgraded the consumer finance stock to Sell against a backdrop of rising credit losses and uncertainty over late fees.

The late fee uncertainty will overhang the stock until at least the middle of next year, said Goldman analyst Ryan Nash.

"When we put it together, we think BFH could have up to ~$9-10 in normalized earnings over the longer term (excluding any changes to late fees), but in the near-term, we see credit pressuring earnings down to $6.50 in 2024 (consensus of $9.84), and if late fee regulation is implemented at some point in 2024, earnings could be well below," he wrote in a note to clients.

https://seekingalpha.com/news/4017171-bread-financ...

Bread Financial Holdings (NYSE:BFH) stock slid 2.9% in Thursday morning trading after Bank of America analyst Mihir Bhatia downgraded the credit card issuer to Neutral from Buy as rising credit losses and pending late fee regulation pose "outsized risks."

The company "has the highest exposure to sub-prime consumers, which makes earnings particularly susceptible to credit and late fees," Bhatia pointed out in a note.

Looking at the wider consumer finance space, credit loss rates now are in line with pre-pandemic levels and are expected to keep rising over the next few quarters, the note said, in what could weigh on overall sentiment.

https://seekingalpha.com/news/4018636-bread-financ...

Here's an idea to mess with your head.

Still not cheap enough for ya at a forward P/E under 2?
Have a look at writing cash-backed puts.

e.g., you can get a premium of $4.30 for a June $27.50 put.
The stock is at $27 on the dot.


You have to put at risk $23.20 per share to the deal, your breakeven if assigned.

So, the two outcomes are:
(1) You get a cash income of $4.30 on $23.20 at risk = 18.5% return = 28.9%/year annualized rate (not compounded, just linear).
(2) You get the shares for $23.20 apiece. Earnings next year are estimated at $14, so you get a forward earnings yield of 60%.
Presumably that earnings figure could be off by a mile and the earnings yield would still look pretty good.

If one is happy with both those outcomes, the only remaining questions are tail risks (will the company go pop?) and whether this is the best allocation of funds you can spot today.

The problem here is that, given how cheap they are, there is a decent chance that the pessimism might end and the stock might really pop suddenly.
So you might have to close the position early and take most of the profit in a smaller period of time, then decide what the best position from there might be depending on the size of the pop.
The flip side is that you make an excellent rate of return so long as the pessimism lasts and the stock price stays in the dump.
I don't usually write puts just once...I pick a ticker and do it over and over for as long as I like the value proposition.

Jim

Thanks for this idea, Jim

As an options newbie, but with an inclination to sell puts on companies that I'd be interested in owning anyway, this seems like worth considering.

Here's a basic question - the bid ask spread listed on Schwab is 2.35/6.30 with last trade at 4.30; open interest 180.

Coming from standard equity trading this seems like an enormous spread. Is this typical for a small cap name? Or a function of the relatively small amount of open interest? BY comparison, the spread on June puts of Brk 340 are 14.0 / 14.85. Does it matter much or do the options usually end up trading hands in the middle regardless of the listed bid and ask prices...

Coming from standard equity trading this seems like an enormous spread. Is this typical for a small cap name?

A very wide bid/ask is pretty normal for a small cap, or even a large cap if the strike is far from the stock price.
The difference is that the bigger the stock is, the more of the bid/ask gap you can minimize by using limits.

On way-in-the-money calls on Berkshire, for example, you can normally shave off 1/4 of the bid/ask gap using limits.
e.g., if bid/ask if 40/44, you can generally count on being able to buy at 43 or sell at 41.

But for more obscure things like this, do all planning for put writing on the assumption that you won't do any better than hitting the bid when selling.
You should definitely try to improve this using a limit order, and you might get 5 or 10 cents more, but when deciding which position to open don't count on it.
If you want to sell a put, you need a contract with a bid that gives you enough to make it worthwhile. That's all that matters...the ask might be miles above that, but who cares?

It should be noted that BFH continues to fall in price, trading at $26.31 as I type.
About the only bullish thing you can say is that, having already fallen $222 per share so far, at least it can't fall another $27 : )

Of course, it's not even worth looking at any information if during your reading you decide there is a chance they will go bust.

Jim

Of course, it's not even worth looking at any information if during your reading you decide there is a chance they will go bust.

Maybe investors still have nightmares from the other spawn of Alliance Data System - Loyalty Holdings. Equity holders of LYLT lost all their money. At least Air Miles holders were rescued by BMO.

Of course, it's not even worth looking at any information if during your reading you decide there is a chance they will go bust.
...
Maybe investors still have nightmares from the other spawn of Alliance Data System - Loyalty Holdings. Equity holders of LYLT lost all their money

Indeed.
The pessimists take this as a warning not to trust the financial prudence of management.
The diehard optimists might consider that one reason the spinoff failed was that it was saddled with too much debt...to the relative benefit of the parent.

Jim

e.g., you can get a premium of $4.30 for a June $27.50 put.
The stock is at $27 on the dot.

Stock has jumped 7% today, now at $28.59, so those puts are now out of the money. (that's a good thing if you're short them)
With the bid/ask so large it's hard to say how much better things look today, but quite a bit.
Gosh, I wish the first day or two of all my notions worked that nicely : )

Jim

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