One Of The Cheapest Stocks In The Market Could Yield 33%

Any value investor will tell you there is a fine line between super deal and value trap. Just about everyone has their story of that seemingly cheap stock that got even cheaper and left them disappointed. 

That’s why you always need to look to the reasons for a stock’s value and management’s plan for the future. Some stocks seem cheap on an analysis of the business assets, but management has no real plan for growth, which is especially important since value stocks are often in mature industries. 

Other value stocks may be cheap relative to the market but still relatively expensive versus their peers. So even if investor sentiment for the industry turns for the better, the stock may not rise as much as others in the space. 

But every once in a while you can find that proverbial diamond in the rough. And I think I’ve found it in one of the cheapest stocks in the S&P 500.

#-ad_banner-#News Corporation (NASDAQ: NWSA) trades at just 0.67 times book value, making it the fourth cheapest stock in the S&P 500 based on Bloomberg data.

Of course, the big price-to-book (P/B) discount is not completely without rationale. The publishing industry is rapidly changing as tablets and smartphones accelerate the trend to digital information. The company still derives about 75%-80% of its earnings from print publishing and needs to put together a good strategy for how it will evolve. 

But there is a lot to like about News Corp., and management has been positioning the company in a segment that could start showing positive cash flows very soon.

News Corp. split with its entertainment division, 21st Century Fox, in June of last year. The company generates most of its sales from news and information services (67%), followed by book publishing (19%), cable network programming (6%) and digital real estate services (5%). Among its popular media brands, News Corp. owns the Fox Sports Network in Australia, The Wall Street Journal and HarperCollins publishing. 

The company has 30% of its market cap ($2.74 billion) in cash and no debt. Free cash flow increased to $552 million over the past 12 months even after $426 million in capital investing. 

Despite all this, NWSA trades at a significant discount to peers like Gannett (NYSE: GCI) with a P/B of 2.48 and New York Times Company (NYSE: NYT) with a 2.27 P/B multiple. 

Building a Powerhouse in Digital Real Estate Advertising

News Corp. is aggressively positioning itself in digital real estate advertising and expanding its geographic reach. It has a 61% stake in REA Group, a leading Australian digital real estate company with exposure to Europe and Asia.

REA Group announced a 17% interest in iProperty Group Limited in July for $100 million, boosting exposure to online property advertising in Malaysia, Indonesia, Hong Kong, Macau and Singapore. 

News Corp. also announced its acquisition of Move (NASDAQ: MOVE), a leading U.S. digital real estate company, for $950 million in September. The acquisition opens it up to the industry’s $14 billion annual ad spend market in the United States, and the company should be able to effectively integrate it into existing media properties. 

Move has an exclusive and perpetual right to operate, the official site of the National Association of Realtors (NAR), and has global alliances with realtor associations in 60 countries. 

Most recently, the company invested $30 million for a 25% stake of Indian online property company Elara Technologies, which runs

Analysts expect sales growth of 2.4% in fiscal 2015 (ending in June) and a 15% increase in earnings to $0.53 per share. Shares have a current book value of $22.14, and I think new digital real estate properties will boost cash flow significantly. Even a multiple of 1 times book value, still well below its peers, would represent a 41% increase in the shares.

Generate Cash From a Stock You Can Hold for a While

While most of my covered call strategies are set to book a quick profit and close the position, I think we can hold on to News Corp. for a while.

With NWSA trading near $15.65 at the time of this writing, we can buy 100 shares and simultaneously sell a NWSA Jan 16 Call, which is trading around $0.30 ($30 per contract). This gives us a net cost of $15.35 per share, which is 2% below current prices

If NWSA is above the $16 strike price at expiration on Jan. 17, our shares will be sold for that price. In this case, we will make a $0.65 per-share profit, or 4.2%, in just 47 days. If we were able to make a similar trade every 47 days, we could earn a 33% rate of return in a year.

If NWSA is below $16 on expiration, we keep the shares and the option premium. We’ll then have the opportunity to sell another call against the shares to generate more income and lower our cost basis further.

News Corp. trades at a significant discount even to peers in the industry, and the company has the financial flexibility to evolve. I doubt it will be long before its digital real estate properties really start to pay off, so I do not mind holding while continuing to sell calls against the position. 

Speaking of real estate, my colleague Amber Hestla likens a covered call strategy to collecting rent on a property you own. By “renting” out shares, stockholders can earn an extra 9%-plus monthly income. It’s some of the easiest income available. To learn more about how you can generate an additional $1,200 or more each month, click here.

This article originally appeared on One of the Cheapest Stocks in the Market Could Yield 33%