Back on August 8th following Priceline’s (PCLN) disappointing fiscal Q3 guidance, the stock declined 7%. What’s significant in my mind about the gap lower is that it came from an all-time closing high the day of earnings, marking the stock’s second consecutive post-earnings gap, and the stock has yet to make back any of the losses. From purely a technical standpoint the stock is a bit of a mess, with the Aug earnings gap piercing the stock’s one-year uptrend, and the stock now hovering above what appears to be an obvious neckline of a head and shoulders top formation:
Despite all of that, the stock is still up 23% year to date. There are a couple things worth keeping an eye on. First, despite the two disappointing guides in a row, Wall Street analyst sentiment remains very positive with 29 Buy ratings, 7 Holds and no Sells with an average 12-month price target of $2100, or about 22% above the stock’s current price. Also the two guides lower have caused eps growth rates, despite in the low teens for fiscal 2017, to appear high relative to its P/E of 24, marking a meaningful deceleration from last year’s 34% yoy of eps growth, despite sales growth expected to remain flat at 16%.
The stock is probably a hard press on the short side, but when you consider how poorly the stock acts, another miss and guide down when the company reports in early November and I suspect you have the stock back near 1700.
So What’s the Trade?
Trying to limit overall cost in a stock like this is important. Therefore a put fly targeting 1700 makes sense over a put spread:
PCLN (1811) Buy the Nov 1800/1700/1600 put fly for 20
- Buy 1 Nov 1800 put for 62
- Sell 2 Nov 1700 puts at 26 (52 total)
- Buy 1 Nov 1600 for 10
Breakeven on Nov exp: Losses of up to 20 above 1780, gains of up to 80 with max gain at 1700. Gains lessen below 1700 and it can actually lose money below 1620.
Rationale – The chart looks like a break below the current levels could mean 1700 is the next stop. But limiting losses in case the stock goes higher is important. The fly lessens that risk but gives up a home run if the stock goes below 1700.