Get paid to wait: 8 stocks for a defensive income strategy

Key Concepts

• Cash-Secured Puts: An options strategy where an investor sells a put option on a stock they are willing to own, collecting a premium while waiting for the stock to reach a lower, desired entry price.
• Economic Moat: A term popularized by Warren Buffett, referring to a company's ability to maintain competitive advantages (brand, network, or high barriers to entry) to protect its long-term profits.
• Value Investing: An investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
• Option Premium: The income received by the seller of an option contract.
• Multiple Compression: A scenario where a company's stock price remains stagnant or falls while its earnings grow, leading to a lower Price-to-Earnings (P/E) ratio.

The "Get Paid to Wait" Strategy

Chris Tom of Moat Financial explains a methodology centered on selling out-of-the-money put options.

• The Process: The investor identifies a high-quality company they wish to own but believes is currently overpriced. Instead of buying at the current market price, they sell a put option at a lower "strike price."
• The Outcome:
  • If the stock price drops to the strike price, the investor is obligated to buy the shares at that lower price (which they wanted to do anyway).
  • If the stock price stays above the strike price, the option expires worthless, and the investor keeps the premium (income) generated from the sale.
• Strategic Advantage: This approach allows investors to generate consistent income while waiting for a more attractive entry point, effectively lowering the cost basis of the investment.

Criteria for Stock Selection

Chris emphasizes that this strategy is not for speculative assets. He looks for:

1. Sustainable Earnings: Companies that are consistently profitable.
2. Economic Moats: Businesses with strong competitive advantages that prevent rivals from easily entering their market.
3. Attractive Valuation: Companies trading at reasonable P/E ratios relative to their growth and stability.

The Eight Recommended Stocks

Chris Tom and his team identified eight companies that fit their value-oriented, "moat-focused" criteria:

1. Cameco (CCO): A major uranium producer based in Canada. The stock is favored for its role in the energy sector and high volatility, which results in higher option premiums for sellers.
2. Costco (COST): Valued for its massive economic moat and low volatility. It serves as a stable, defensive anchor for a diversified portfolio.
3. Dollarama (DOL): A Canadian retailer that has shown consistent same-store sales growth and dividend increases, making it a reliable long-term performer.
4. General Motors (GM): Selected for its strong profitability and "Buy American" tailwinds. Despite the growth hype surrounding EV competitors, GM is highlighted for its solid value metrics and consistent earnings.
5. Microsoft (MSFT): Viewed as an essential technology provider with a deep moat. Chris notes that recent "multiple compression" has made it an attractive entry point for long-term investors.
6. Pet Valu: A Canadian pet retailer with over 800 stores. Its business model is described as "sticky," as customers prefer in-store shopping for pet supplies over online alternatives.
7. Progressive (PGR): An insurance company noted for its stability and lack of exposure to catastrophic natural disasters compared to peers, combined with a strong brand presence.
8. Uber (UBER): Highlighted for its market-leading network and brand. The investment thesis focuses on its transition from "growth at all costs" to profitability, currently trading at a valuation of less than 15 times earnings.

Synthesis and Conclusion

The strategy presented by Chris Tom is a disciplined approach to value investing that utilizes options to enhance returns. By focusing on companies with strong economic moats, investors can mitigate risk while generating income through the sale of put options. The core takeaway is that patience, combined with a systematic approach to entry pricing, allows investors to capitalize on market volatility rather than being victimized by it. As Chris notes, the goal is to own high-quality businesses at prices that provide a margin of safety, ensuring that even if the stock price does not reach the target, the investor is compensated for their patience.