Here is a preview of what I will be discussing on Options Action tonight on CNBC at 5pm:
A few weeks back, IBM reported Q1 earnings that was a bit of a mixed bag and resulted in a 3.5% sell off in the shares the next day. The company registered a solid beat on the earnings front, and even raised their full yr eps guidance by about 1%, but missed consensus revenue estimates which is somewhat surprising when some analysts speculated the qtr benefited by almost $300 million from currency benefits and completed acquisitions in the qtr. There were a few warning signs in the results as some analysts highlighted Services revenues that were light, Services signings light and Backlog growth that was flat year or year.
IBM trades at a slight premium to its eps growth rate, which is basically inconsequential to most investors, but in-light of the recent tepid results, and the fact that revenues are only expected to grow 1% this year and 3% next, investors could hit the pause button as we get deeper in what appears to be an increasingly murky economic environment in Q2.
Q1 is history, and prior to today, the stock has basically recaptured all of the loses post earnings and now sits about 2.8% away from the all time highs made early last month. Obviously I want to take another crack on the short side in this name, and the post yesterday from Bespoke Investment Group about multi-nationals with international exposure only reinforced my bearish view.
It was well documented that the stocks with heavy international exposure outperformed by quite a wide margin in the first quarter of this year. April was a different story, however. With Europe running into serious trouble early in the month, US companies that generate a large portion of their revenues outside of the country took a hit.
To highlight the underperformance, we broke the S&P 500 into deciles (10 groups of 50 stocks each) based on the percentage of revenues that each stock gets from outside of the US. We then calculated the average change in April of the stocks in each decile. As shown below, the decile of stocks with the largest percentage of international revenues declined an average of 4.2% in April. This was by far the worst performance of any decile. Conversely, the stocks that generate all of their revenues inside the US averaged a flat return (0.00%) during the month.
If Europe continues to wither, stocks with heavy European exposure will continue to have a tough go at it.
The Break Down or topping out Stocks like CAT, FDX and PG are only giving me confidence in the view that a fairly dark storm is coming for stocks, not to different than what we saw last year, but we are very likely to be down 5-7% from last months highs at some point in the next month or so.
IBM receives more than 50% of their sales from overseas and about 33% from Europe and the Middle East and about 20% from Asia. I think there is a good chance given IBM’s weak revenue results and red flags of continued weakness even without a meaningful slowdown in Europe, that this stock could be setting up as a great short heading into the company’s estimated mid July Q2 report.
TRADE; IBM ($205) Buy the July 200 / 185 Put Spread for 3.40
-Buy 1 July 200 Put for 5.10
-Sell 1 July 185 Put at 1.70
Break-Even on July Expiration:
Profits btwn 196.60 and 185, make up to 11.60, max gain 185 or lower make full 11.60 (~3.5x your money)
Losses of up to 3.40 btwn 196.60 and 200, and max loss of 3.40 above 200
TIMING OF THE TRADE:
With the SPX down about 2.25% in the last 2 days, it may make sense to wait to initiate this position on an up day in the market.
TECHNICALS: The chart is sitting right on a massive trend line dating back to last summer’s lows when the stock got below $160. Since then it has rallied 23% and it appears that another revenue miss, could send the stock back towards it’s 200 day moving average at about $187.