Name That Trade – $CL: Softening Hands

by Dan September 30, 2013 3:00 pm • Commentary

Earlier today Unilver (UN)  issued a statement suggesting that Q3 sales decelerated in emerging markets partially the result of the strengthening Euro.  As the Euro Zone recovers from the recessionary environment of the last few years, multi-nationals like UN who rely on emerging markets for much of their future growth, and area where they get more than 50% of their sales from.

Since the news came out a little before mid day, a few US consumer staple stocks have taken it on the chin with PG down 1.9% & KO down 1,6% .  I wan to take a quick look at CL, a stock that has under-performed the broad market ytd (up only 13.6%), and gets more than 80% of its sales from outside the U.S. and half coming from Latin America, Asia and Africa.  


CL is not a cheap stock relative to the market (at 19x next years expected earnings), which on a multiple basis is very close to a 6 year high on a trailing basis.   I would also add that 19x earnings that are supposed to grow only 10% for the next 2 years on sales that are expected to grow in the mid single digits.


From technical perspective the set up looks weak, the stock is sitting right on its 50 day moving average (purple line) with a test of the 200 day (yellow line) not too far off, and line in the sand sort of support at 56 (white line).

[caption id="attachment_30824" align="aligncenter" width="589"]CL 1 yr from Bloomberg CL 1 yr from Bloomberg[/caption]

My View: earnings won’t be out for another 3 weeks in CL, and to be frank the stock hangs in there despite the negative news from UN, but with hours before we get some sort of resolution on the Govt Shutdown, I see no real compelling reason to add a new directional position.  If I were inclined to press this short, I would look to an in the money put spread as the implied vol is not high enough yet to make short premium trades that attractive.

HYPOTHETICAL TRADE:  CL ($59.35) Buy Nov 60/55 Put Spread for 1.65

-Buy 1 Nov 60 Put for 2.10

-Sell 1 Nov 55 Put at .45

Break-Even on Nov Expiration:

Profits:  Btwn 58.35 and 55 make up to 3.35, max gain of 3,35 at 55 or lower.

Losses: Btwn 58.35 and 60 lose up to 1.65, max loss of 1.65 above 60

Trade Rationale:

This is about 40 short deltas with defined risk, so it’s essentially a press on the stock to break its 50 day moving average and drift down to 58 or lower. It’s in-the-money by about 75c so about half of the trade is intrinsic and half premium. Decay is a factor but not as much if it was entirely out of the money. It’s tough to initiate a trade today given the uncertainty in Washington so we’re simply keeping our eye on this one today.