$F Tough

by Dan May 19, 2016 2:05 pm • Commentary• Trade Ideas

You know the drill about stock charts. You can draw the lines anyway you like. And sometimes they even fit your narrative.  After scribbling on the one year chart of Ford (F), a less than constructive technical set up, emerges. That’s despite what was the highest April sales in 10 years, up 4% year over year (but missed expectations).

Let’s go to the chart. I see a failure in late April at the downtrend from the 52 week high, a failure below the uptrend from the February lows, and now a test of the an important support level which was the double low from August/September and massive breakdown level in January:

From Bloomberg
From Bloomberg

My Take: 

There has been lots of calls of peak auto sales, with some analysts highlighting weak lending standards focused on subprime consumers fueling much of the recent activity. Wall Street analysts are mixed at best on F, with 7 Buy ratings, 12 Holds and 1 Sell.  But the stock is dirt cheap, trades 6.2x their expected $2.11 in 2016 eps, and has a current dividend yield of 4.6%.  It’s not an easy or intuitive task to make too bearish of a case for a stock like F, but on a break of near term support, the stock could easily see $12 in the coming weeks, into a possible rate increase by the U.S. Fed in June.

While short dated options prices appear cheap on a volatility basis, they look kind of expensive from a dollar standpoint. For instance, the August 13 puts (Aug expy will catch May, June & July monthly sales, plus Q2 results) are offered at 73 cents vs $13.05, or about 5.6% of the stock price. That’s kind of hefty for a stock that has traded in a 10% range for almost 3 months.

If I were to take a near term bearish view, largely playing for a breakdown at $13, with a $12 target. I’d merely target May auto sales in early June and play for a miss, and look at June regular expiration that will also catch the next FOMC meeting on June 15th.  With the stock at 13.05, the June 12.75 puts are 0.25. Those can be partially financed by selling next week’s May 27th 12.5 puts at .06, making the entire trade .19. If we get through next week with the stock above 12.50 the short put can then be rolled to June expiration, perhaps to the June 11.75’s creating a very cheap 1 dollar wide put spread capturing both the auto sales release the first week of June as well as the Fed meeting later in the month.