Profit From the Dip in ZIP, Ride Ryder to Profits

by Ken Trester | August 29, 2012 9:20 am

Talk about upgrading to a luxury sedan! While there are arguments for and against owning [1]this car rental giant, shares of Hertz Global Holdings (NYSE:HTZ[2]) climbed 11% in the past week on news that it finalized its bid to buy out competitor Dollar Thrifty Automotive Group (NYSE:DTG[3]), which shot up nearly 14% in the same time frame.

This consolidation of big-name Hertz with relative small-fry Dollar Thrifty is a defensive play against the smaller, regional rental companies that are chipping away at the stronghold of companies like Hertz and the two-headed Avis Budget Group (NASDAQ:CAR[4]).

Also vying for a piece of the pie are car-sharing firms like Zipcar (NASDAQ:ZIP[5]), which is a great concept for consumers who only need a vehicle for a matter of hours, not days. Pre-qualified members receive a universal entry card to gain access to any vehicle at Zipcar locations worldwide — no lines to stand in, forms to fill out or surly desk clerks to deal with.

The problem for firms like Zipcar is that its larger competitors have swiftly followed suit to adopt shorter-term rentals. Hertz unveiled its Hertz On Demand hourly car rental, and with self-service kiosks standard at just about any location, they’ve also been able to remove some of the hassle.

Despite Zipcar’s novel approach, it’s clear ZIP is quickly losing its edge. While the industry is projected to see 22% growth this quarter and 105% growth for the sector, ZIP’s estimates call for a 50% reduction. Next quarter looks to fall flat, too, with no growth expected for the company. The next earnings report is Oct. 30, but I anticipate the market to take ZIP stock down before then.

My scans revealed that the ZIP Oct 7.50 Put options are vastly undervalued and are a great bearish bet for 60 cents or less.

I look for ZIP to dip to the $6.60 level, which is your cue to “park” the trade and take profits. Of course, a stop-loss is a must, but use the underlying stock for that. Exit if the stock price closes above $8.40.

A bearish bet in ZIP isn’t to say there aren’t upside opportunities in the rental and leasing space. My scans revealed Ryder Systems (NYSE:R[6]) could be setting up for a quick pop.

Ryder offers a more diversified vehicle rental service than Hertz or Zipcar. It provides full-service leasing, contract maintenance, and commercial rental of trucks, tractors and trailers, as well as supply chain solutions including distribution and transportation services. Its customer base varies in size and location, but the company claims that automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishings are the most significant areas. Quarterly annual revenue has stayed steady, but annual revenues grew 17% year over year.

R shares currently are trading in the mid-$40s. I foresee a short-term jump to $43.50, and the best way to take advantage of that is a call option. No need to pay for the extra time premium, as I expect this to play out in less than two months’ time.

I think the R Oct 42.50 Calls are a good buy at $1.05 or lower, but, as I tell my Maximum Options members, don’t get greedy — book your profits in the calls if R hits my $43.50 target.

Use a protective stop to exit the trade if R trades down to $39.10.

Bonus Trade

Though not in the personal vehicle renting or leasing space, Navistar International (NYSE:NAV[7]) does manufacture and sell commercial and military trucks, buses, diesel engines, recreational vehicles (RVs) and chassis, as well as related parts. However, business is taking a hit, as analysts have sharply cut estimates, projecting a loss of $1.22. Navistar also has a history of brutal earnings surprises to the downside.

Navistar reports next on Sept. 12, and a way to get ahead of another nasty surprise is with a short-term put option. Buy the NAV Oct 20 Puts for $1.50 or less.

NAV is currently trading near $23. A $3 drop to correlate with the $20 strike price on the puts might seem like a stretch, but remember that a lot of factors affect an options price,[8] and a stock doesn’t have to trade at the strike price for the option to turn a profit.

I expect the put to nearly double at my target of $2.90 but, as always, set your stop loss to close the trade if NAV stock closes above $25.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973.

Endnotes:
  1. arguments for and against owning : http://investorplace.com/2012/08/should-i-buy-hertz-3-pros-3-cons/
  2. HTZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTZ
  3. DTG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTG
  4. CAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAR
  5. ZIP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZIP
  6. R: http://studio-5.financialcontent.com/investplace/quote?Symbol=R
  7. NAV: http://studio-5.financialcontent.com/investplace/quote?Symbol=NAV
  8. a lot of factors affect an options price,: http://investorplace.com/2008/05/the-option-price-is-right/

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