New Trade $FDX – Magic Number 100

by Enis May 14, 2013 1:55 pm • Commentary

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:

  1. 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.  
  2. 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.
  3. Technically, FDX is now subject to ample overhead supply after its earnings drop:
[caption id="attachment_25852" align="alignnone" width="628"]1 year daily chart of FDX, Courtesy of Bloomberg 1 year daily chart of FDX, Courtesy of Bloomberg[/caption]

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"]Screen Shot 2013-05-14 at 12.05.39 PM from TradeMonster[/caption]