I laid out a long-term thesis on WHR back on Feb 1st, after WHR had reported strong earnings and moved to near all-time highs. In that post, I laid out several reasons to be concerned:
However, I see a few reasons to be concerned:
- The improvement in margins has in large part been due to pricing increases in the U.S., which has actually decreased unit sales. That’s been a boon to earnings, but might be a warning for future top-line growth.
- International outlook not so rosy. Europe is still in the doldrums. Latin America has been stronger, but the company is overly exposed to Brazil.
- The technicals look tired. The 1 year chart shows declining momentum (red arrow on RSI below) on each thrust higher in the stock (green arrow), and yesterday’s push to new highs puts the stock close to the 115-120 area that has acted as resistance twice in the last 6 years. Here is the 1 year chart:
1 year WHR chart of RSI, Courtesy of Bloomberg
In addition, valuation measured by the trailing P/E has moved to 7 year highs. Add it all up, and WHR above 110 seems stretched.
WHR has bounced in the past few days after selling off in a straight line after earnings. Nothing about my thesis has changed, so I’m going to get involved again:
TRADE: WHR ($110.75) Bought the Mar 110 / 100 Put Spread for $2.60
-Bought 1 Mar 110 Put for $3.15
-Sold 1 Mar 100 Put at $0.55
Break-Even on March Expiration:
-Profits between 107.40 and 100, max profit of 7.40 at 100 or below
-Losses up to 2.60 between 107.40 and 110, max loss of 2.60 at 110 or above
Trade Rationale: Implied vol looks fair in a market where implied vol generally looks rich, as WHR has actually continued to realize while most stocks are not moving as much as they did 3 months ago. I still think 100 is very strong support in the name, but will likely look to take the trade off on a move down to 105 in the short-term.