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I'm a firm believer in investing in what you know—and what you use. During a recent visit to my parents' New Hampshire property, my brother and I tackled overdue maintenance, and having the right equipment on hand was critical to finish the work in the limited time we had.
He and I rented both a compact track loader (CTL, not pictured) and a bulldozer (pictured above) from United Rentals (NYSE: URI) to push through some of the heavier work.
For those who may not be familiar with the company, United Rentals can quickly deploy heavy equipment to a remote site. Here's why I believe it sets up well for a defined-risk, moderately bullish options trade.
The good news is that United Rentals is currently trading at a below-market forward multiple — both on a Price-to-Earnings (P/E) basis, currently ~17.3x forward estimates of ~$61.10/share, and on an Enterprise Value-to-EBITDA (EV/EBITDA) basis at ~8.8x $9.25 billion in FYE2027 EBITDA. This despite the fact that the company is compounding revenues, earnings, and EBITDA at a noticeably faster clip than the cap-weighted S&P 500. Effectively, one can buy superior, market-beating growth at a discounted market multiple.
The recent third-quarter earnings confirmed this trajectory. URI delivered a beat and raise, pointing to robust underlying demand across its end markets, and the sell-side is scrambling to catch up, revising its forward estimates upward. Improving earnings estimates is one of the most reliable, time-tested short-term investment factors. Stocks with positive estimate revisions tend to meaningfully outperform those burdened with declining estimates in the short term.
The macro backdrop provides a sturdy foundation for this growth. We are in the midst of a broader nonresidential construction recovery, which has driven an environment of improving and resilient rental rates. Although admittedly a potential slowdown in data center construction could become a future headwind, broader infrastructure demand remains robust.
A balanced view requires acknowledging the risks. While URI looks cheap relative to the broader market, it is not exactly cheap relative to its own history. The stock is currently trading roughly 20% to 25% above its five-year average multiple. One could easily argue that the historical multiple was simply too cheap for a business of this quality, scale, and capital efficiency. Still, mean reversion back to historical levels of "cheapness" remains a downside risk.
This brings us to the options market. When you have a stock with solid momentum, fundamentals, and positive estimate revisions, but you're hesitant to pay a premium to its historical valuation, outright unhedged equity accumulation isn't always the optimal route. Instead, selling cash-covered puts offers a highly strategic entry mechanism.
With URI's implied volatility currently hovering in the 42% to 45% range, the options market is pricing in enough movement to offer a decent premium. By selling a cash-covered put, we acknowledge both the good and the bad. It respects the aggressive growth, market share capture, and the recent beat-and-raise quarter, while appropriately hedging against the risk of that elevated historical multiple.
If the stock continues its upward march, the puts expire worthless, and we pocket a high-probability yield that easily beats fixed income. If the stock pulls back—perhaps toward that 5-year average multiple—we are assigned the shares at a lower effective cost basis, which, if it happens, we could lower even further by writing upside covered calls against it. (This approach to entering a stock, then writing covered calls if assigned, is sometimes referred to as "the wheel strategy").
So either we acquire an attractive stock at a price we dictate (the short strike, less the premium collected for selling it) or we simply collect premium for assuming that risk if the stock does not decline. For a company that provides the literal heavy lifting for infrastructure growth, that's a structural advantage worth trading.
Disclosures: Tidal owns/holds all the securities mentioned in the article.
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