New Trade – $T Party

by Enis May 30, 2013 10:02 am • Commentary

A few months ago, dividend stocks were all the rage.  Investors and traders were stumbling over themselves to buy 2-5% dividend yield names, every other metric be damned.  The best performing sectors in the 1st quarter were health care, staples, utilities, and telecom, a rare occurrence in a strong 10% run for the broader market.

How much a difference one month makes.  In the past month, those sectors have been thrown by the wayside, as cyclicals have re-asserted their leadership.  Sentiment towards defensives has rapidly swung from enamored to hated, just one more example of the fickle nature of market psychology.  

One name that has followed that ride up and down is T, the largest telecom name in the U.S. (at $193 billion market cap, vs. $141 billion for VZ).  The 1 year chart shows the run-up and smack down to start this year:

[caption id="attachment_26416" align="alignnone" width="643"]T 1 year chart, Courtesy of Bloomberg T 1 year chart, Courtesy of Bloomberg[/caption]


The stock ran from 33 to 39 to start the year, and has quickly fallen back to its 200 day ma (black) around 36 in the past month.  But on a fundamental basis, T looks much more attractive than the majority of “defensive” names in this market.  It’s a 5% dividend yield name, projected to grow earnings 9% per year over the next 2 years, priced at a 15 P/E, and in a secular growth area with very high barriers to entry.

A major reason for the selloff in T (and other defensives) has been the move higher in bond yields in the U.S. as bonds have sold off.  However, even the bond selloff looks like it might be overdone based on the price action this week.  Here is the chart of TLT showing the breakdown on strong bounce-back:

[caption id="attachment_26417" align="alignnone" width="635"]1 year daily chart of TLT, Courtesy of Bloomberg 1 year daily chart of TLT, Courtesy of Bloomberg[/caption]

The 114.62 level that was the March low was broken on Tuesday, but TLT has quickly rebounded and is holding above that level for the second straight day.  If TLT’s breakdown was a false breakdown, and bonds stabilize here, then high yielding stocks are likely to catch a bid once again.  Given that T is a 5% yielder, it would be at the top of that buy list.

TRADE: T ($36.00) Bought the July 36 Call for $0.73

-Bought 1 July 36 Call for $0.73

Break evens on July Expiration:

-Losses of up to 0.73 between 36 and 36.73, max loss of 0.73 at 36 or below

-Profits above 36.73

Trade Rationale:   AT&T has a low implied volatility of only 14.50, which makes buying outright options particularly attractive, especially since 30 day realized vol is around 20, and 100 day realized vol is around 16.  The 50 day moving average around 37.30 is obvious resistance, but a move to that level would be almost a double for the July 36 call that I’m buying, and my first target to exit the trade.