This beaten-down data center stock could be worth a look, says Mike Khouw
United Rentals (NYSE: URI) is currently positioned as a compelling opportunity for investors looking to capitalize on the ongoing recovery of the nonresidential construction sector. Despite being a major player in the heavy equipment rental market—providing essential machinery such as bulldozers and compact track loaders for remote job sites—the company is trading at a valuation that Mike Khouw suggests is below the broader market average. This assessment comes as the firm continues to outperform the cap-weighted S&P 500 in terms of revenue, earnings, and EBITDA growth. The company recently reported a third-quarter earnings beat and subsequently raised its guidance, signaling that demand for its equipment remains strong across various end markets.
Attractive Valuation and Earnings Growth
The financial metrics for United Rentals highlight a potential disconnect between its performance and its current price. The stock is trading at a forward price-to-earnings multiple of approximately 17.3x, based on forward estimates of about $61.10 per share. Furthermore, its enterprise value-to-EBITDA ratio stands at roughly 8.8x, calculated against a projected $9.25 billion in EBITDA for the fiscal year ending 2027. These figures suggest that investors can acquire a company with superior growth characteristics at a discount compared to the wider market. Analysts have been forced to adjust their models upward following the recent quarterly results, a factor that historically correlates with short-term stock outperformance as the sell-side attempts to catch up with positive estimate revisions.
While the macro environment supports United Rentals through a rebound in nonresidential construction and steady rental rates, some headwinds exist. Infrastructure demand is currently a primary driver of growth, but there are concerns regarding a possible deceleration in data center construction, which could impact future results. Additionally, while URI appears inexpensive relative to the S&P 500, it is trading between 20% and 25% higher than its own five-year average multiple. This elevated historical valuation presents a risk of mean reversion, where the stock price could pull back to align with its traditional trading ranges despite its current capital efficiency and scale.
Strategic Options and the Wheel
To manage these valuation risks while still participating in the upside, Khouw points toward the options market as a strategic alternative to unhedged equity accumulation. With implied volatility for URI sitting between 42% and 45%, the premiums available for selling options are significant. One suggested approach is the use of cash-covered puts, which allows an investor to set a specific entry price. If the stock continues to rise, the investor keeps the premium, generating a yield that exceeds typical fixed-income returns. If the stock price declines toward its historical average, the investor is assigned the shares at a lower effective cost basis. This can lead into the wheel strategy, where an investor then writes covered calls against the assigned shares to further reduce the cost of ownership while the company provides the literal heavy lifting for infrastructure growth.
Source: CNBC · 2026-11-09