Fedex got off to a rapid start in 2013, zooming 20% higher in the first quarter, but it has since given up half of those gains, and is only up 10% on the year, underperforming the S&P 500.
I traded this name into its last earnings report in March, ending up with a small loss for my trouble after earnings turned out much worse than expected (I was playing for a rangebound move).
Heading into its June earnings report next month, FDX faces more headwinds today than it did 6 months ago:
- FDX gets 30% of its revenues from outside the U.S., but reduced trade with Asia has also crimped its share of high-margin express packages vs. normal post. FDX is more tied to international growth than its revenue share implies.
- Its valuation at 16.5x is hefty for a name with only a 0.5% dividend and expected 8% earnings growth. The real concern is that earnings does not in fact grow, in which case FDX has plenty of downside.
- Technically, FDX is now subject to ample overhead supply after its earnings drop:
This market is inducing everyone to chase stocks, but in lieu of succumbing to that allure right here, I’d rather enter the following trade on FDX with a broader market pullback in mind as well:
TRADE: FDX ($100.22) Bought the June 100 / 92.50 Put Spread for 2.25
-Bought 1 June 100 Put for 3.02
-Sold 1 June 92.50 Put at 0.77
Break-Even on June Expiration:
-Profits btwn 97.75 and 92.50, make up to 5.25 with max gain of 5.25 at 92.50 or below.
-Losses of up to 2.25 btwn 97.75 and 100 with max loss of 2.25 at 100 or higher.
Trade Rationale: FDX is a name that has shown both fundamental and technical weakness in a strong market. The dollar’s strength and Chinese and commodity weakness are sending price signals that are likely unfavorable for broader global trade and FDX earnings as a whole. Given that June captures earnings, the put spread should hold its value better in the case that the stock does not do much for the next few weeks.
Risk Chart:[caption id="attachment_25872" align="aligncenter" width="537"] from TradeMonster[/caption]