New Trade – $PCLN: Earnings Play Negotiator

by Dan July 1, 2014 2:09 pm • Commentary

To look at internet stocks today, one would think that it’s safe to get back in the water.  Twitter is up 4% on a management shake-up, Netflix is up 6% on an upgrade from a long time neutral analyst, Baidu is making a new all time high just because.  Despite the fact that many internet related stocks have had very healthy bounces off of the May lows, many remain well off of their Q1 all time highs (Amazon, LinkedIn, Pandora, &  Yelp).  I am not going to say the words (shhhh it’s a stock pickers market), but I think it is safe to say that investors are being a bit choosier about what stocks to bid back up to the prior highs, and which ones they will show a tad more restraint about.

And then there is another category of internet stocks, mostly large cap like Google, Facebook and Priceline, that had dramatic sell offs from the April highs, but for the most part the sell offs were far shallower than their smaller cap brethren.  As one would expect, rallies off of the lows have been a bit more orderly.

I want to focus on PCLN as the stock has been basing for the last couple weeks, possibly a result of investors digesting their $2.6 billion takeover offer for OpenTable announced June 13th.  I can’t imagine that $2.6 billion is the right price in a rational market for a company with less than $200 million in trailing sales that is only expected to grow said sales in the mid to high teens.  But let’s be honest, we are not in a rational market, and I would expect that the combination of these two services will make a lot of sense from a strategic standpoint.

If the broad market is going to continue to make highs, I suspect (and this is not some sort of revelation) that some of the higher quality large cap internet stocks will make new highs, and with PCLN’s 3.5% gains today, breaking the recent range is a good start, despite being down 10.5% from the all time highs made on March 6th of $1378.96.

While PCLN is not exactly expensive from a PE/ Growth perspective, (trades 24x this year’s expected growth of 25%) , for a $65 billion market cap company, trading near 8x this year’s expected sales ain’t cheap.  So the stock is not in bizarro valuation land like AMZN, FB & TWTR, but it is borderline.

Technically the chart looks poised for a re-test of the uptrend line (green) up above $1300, but the $1200 support/resistance level (red line) that it just bounced off of is a crucial level:

Priceline 1yr chart from Bloomberg
Priceline 1yr chart from Bloomberg

Implied vol in the stock, despite the recent bounce, is still quite reasonable and should continue to move higher into the expected early August Q2 earnings:  

[caption id="attachment_42404" align="aligncenter" width="600"]PCLN 1yr chart of 30 day at  the money IV from Bloomberg PCLN 1yr chart of 30 day at the money IV from Bloomberg[/caption]

For those that think a re-test of 1300 is in the cards, and think that the Q2 earnings event is the catalyst to cause the stock to make a new high, then call calendars could be interesting to help finance the purchase of the calls that would capture earnings.

New Trade: PCLN ($1247) Buy Aug 1st weekly / Aug regular 1300 Call Spread for 17.00

-Sell to Open Aug 1st weekly 1300 call at 13.50

-Buy to Open Aug Regular 1300 call for 30.50

Break-Even on Aug 1st weekly Expiration:

-Profits are maximized at 1300 on Aug 1st expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is $17.00, or about 1.5% of the underlying stock.


Any big moves like a breakout above 1300 are unlikely to happen before the earnings report in early August but a drift higher towards that point is possible. The vol difference between July and August options is fairly steep (in the wrong way), so the sale side of the calendar needs to be as close to earnings as possible in order to get the most from that sale.