The $JOY of Stocks

by Dan June 1, 2016 2:57 pm • Commentary• Trade Ideas

Event: Joy Global (JOY) the manufacturer of mining equipment reports fiscal Q2 results tomorrow before the open. The options market is implying a one day post earnings move of about 12.5%.

With the stock at $16.57 the June 3rd weekly 16.50 straddle (the call premium plus the put premium) is offered at about $1.60, if you bought that, and thus the implied earnings move, you would need a rally above $18.10, or below $14.90 by Friday’s close to just break-even.

When the company reported their Q1 results on March 3rd the stock rallied 20%.

Price Action / Technicals:  JOY is up a whopping 32% on the year, up 93% from its 52 week lows made in January, but is still down about 60% from its 52 week highs, and down 84% from its all time highs made in 2011.

JOY has clearly lost a little momentum of late, down about 25% from its ytd highs made about a month ago. The stock recently broke its uptrend off of the 52 week lows and sits just above 3 month support at $16:

[caption id="attachment_64056" align="aligncenter" width="600"]JOY ytd from Bloomberg JOY ytd from Bloomberg[/caption]

Earnings Trough?  In 2012 JOY’s eps peaked at $7.61 a share, this year consensus expects a gain of only 18 cents a share, while sales have been more than cut in half from their 2012 peak of $5.67 billion to this year’s expected $2.5 billion.  Its been a tough go since the end of the commodity super-cycle, but given guidance for other heavy equipment manufacturers from the recent period suggest that despite the bounce in commodity prices since JOY last guided, miners continue to cut capex.

My View into the Print: I am hard-pressed to see the company able to guide higher when you consider the commentary from industrial peers CAT, DE & NAV. But despite the stock’s gains off of the lows, sentiment remains poor with 16% short interest, and Wall Street analysts generally on the sidelines with 7 Buy ratings, 11 Holds and 3 Sells with an avg 12 month price target of $18.28.

So What’s the Trade?

Vol is very elevated historically but that’s a direct result of the stock being down from the $60’s to below $10 and some large percentage moves while the stock has been in the teens. Therefore options are either a great sale at a high vol or simply dollar cheap if the stock continues to have big swings. For those that are long the stock that elevated vol allows for some cheap or free leverage to the upside. For instance, the July 18/20 1×2 call spread costs just a few pennies and can add almost 2 dollars in leverage if the stock is between 18 and 20 on July expiration. That’s a good trade for those that bought the stock here or slightly lower and would be willing to be called away at an effective sale price near $22. It also works for those that may be trapped in the stock above $20 and would love to leverage and be out on the first move back above.

As far as hedges or outright bearish positioning the premium is rich to the downside. Calendars don’t make a ton of sense because if a large move comes it’s likely on this event itself. Therefore it’s best to concentrate on the weeklies for the least dollar amount spent to isolate earnings. The June3rd weekly 16.50/14.50 put spread is about .55 and offers up to 1.45 of potential profits or protection if the stock is below 14.50 on Friday.

For those looking for stock alternatives, premium also is tough, but a June regular 16.50/19.50/22.50 call butterfly costs about .80. That’s defining risk to less than 5% of the underlying and targeting a move back towards 20 with potential of up to 2.20 in profits. Of course, above 19.50 and the profits begin to trail off.