Chart of the Day – $PEP: Shaken Up, Ready to Burst?

by Dan February 10, 2015 3:21 pm • Chart of the Day• Commentary

A couple weeks ago a laid out my view on Pepsi’s (PEP) value proposition from an investment standpoint (read below), and frankly I see little reason to own a consumer staple trading at 21x expected eps growth of 5% (highly manufactured by share buybacks) with no expected sales growth, merely for its 2.7% dividend yield. That makes little sense to me. But this is also the guy who bought a put spread into Disney’s blowout earnings last week (read here).  This morning I put on a defined risk bearish trade (read here) in Coca-Cola (KO) which I would put very much in the PEP camp, yet they are less diversified and have greater exposure to a strong dollar.  In the example of KO, it made sense to wait for the results, as the stock is having a sort of relief rally as sentiment was obviously poor heading into the print, and the stock was near term oversold.

I also think it makes sense to wait for PEP to report results before making a trade, as it seems that investors are taking a slightly less pessimistic view at this stage of the earnings cycle as they were when JNJ and PG reported a few weeks ago.

As for tomorrow’s earnings, the options market is implying about a 2.3% one day move, the Feb13th weekly 98 straddle (stock ref $97.75) is offered at about $2.25, if you bought that you would need a move above $100.25 or below $95.75 by Friday’s close to break-even, or about 2.3%.  The avg one day move over the last 4 qtrs is only 1.25%.

The 6 month chart of PEP below shows the big ol triangle pattern the stock is making that is likely to resolve itself one way or the other, and soon:

PEP 6 month chart from Bloomberg
PEP 6 month chart from Bloomberg

If I were purely a vol trader, and agnostic on direction, and given KO’s move today and some of the moves in other staples, this set up has the potential for outsized movement.  If you agree and think the move is cheap, then those with a directional bias should like the directional set up with defined risk all the better. No strong conviction here, and not dying to make a sort of binary play, so I’ll wait and digest the news tomorrow.



Original Post January 20th, 2015:  Name That Trade – $PEP: Pepsi Growth Still Challenged

Earlier today there was some call activity in shares of Pepsi (PEP) that got me thinking about a poorly time bearish trade that I initiated in late September in the stock (New Trade – $PEP: Pepsi Challenged). It expired worthless on Friday’s close.  While my earlier trade was a bust, and to be frank we usually have very few where we lose all of the premium at risk, I stand behind the thesis and it is one I plan to be revisiting very soon.

Earlier when the stock was $97 a trader sold 6,000 Feb 101 calls at .54 to open. This was likely a long holder overwriting 600,000 shares. If the stock is below 101 on Feb expiration the investor will receive $324,000.  Seems like a fairly paltry potential added yield to stock that already yields 2.7%. The call sale is less than the quarterly dividend of 65 cents.

But here is the thing. If I owned PEP, I would be looking to do as much nipping and tucking as possible.  This is a stock that makes little sense to me on a valuation basis. It’s trading at 20x expected eps growth of 5% on expected sales growth of only 1% (after no growth in 2014).  This is a clear example of the company’s nearly $5 billion in share buybacks manufacturing earnings growth.

But why in the world would investors pay 21x for that sort of growth??  P/E is reaching 7 year highs, per Bloomberg:


One reason for the call sale could be the rise in implied volatility of late, with 30 day at the money IV near 52 week highs:

[caption id="attachment_50078" align="aligncenter" width="600"]PEP 1yr chart of 30 day at the money IV from Bloomberg PEP 1yr chart of 30 day at the money IV from Bloomberg[/caption]

Technically the stock has made a very nice base over the last few months, and frankly looks poised to take another shot at the highs from early December:

[caption id="attachment_50079" align="aligncenter" width="600"]PEP 1yr chart from Bloomberg PEP 1yr chart from Bloomberg[/caption]

On the downside, targeting $90, the October low, from an entry closer to $100 seems like the trade set up of choice for this guy who got burned in both timing and and price entry on my last go around.

But for those who are long, and riding the stock’s defensive bid, call sales at or near the prior highs make a lot of sense to me.