A profit warning at Garmin (GRMN) sent shares south in Thursday’s session. But rather than keeping the company at arm’s length or even farther away, it looks like an even better time to play GRMN stock.
Here’s one strategy we like right now.
GRMN stock slid lower yesterday by a bit more than 7% and possibly to a fitter price of $43.10, as we’ll explain shortly. The news responsible for the assault on Garmin shares was word from corporate that it will miss Street views when it reports on July 29.
Management at Garmin also lowered its earnings outlook for 2015 to $2.65 per share for GRMN stock and below forecasts of $3.10. Profit margins were also trimmed to 20% to 21% versus 23% as competition within the market niche is requiring “more aggressive pricing with higher advertising expenses” according to the company’s CEO.
Competition from FitBit (FIT) and to a lesser extent Apple (AAPL) and its wearable Apple Watch, as well as a rising U.S. dollar hurting overseas sales, were cited as primary drivers behind the warning on GRMN stock.
Despite the announcement, sell-side analysts were quite supportive in defending GRMN stock. From Barron’s, a quick review of supports for Garmin shares include management being proactive by managing wearables as a growth business, viewing the recent dividend hike yielding 4.7% (third-highest in the Nasdaq-100) as unequivocally safe, a solid cash position and healthy balance sheet.
Garmin Stock Chart
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On the monthly and also attractive, GRMN stock’s stochastics are very close to establishing a crossover in oversold territory. Lastly, a doji candle is developing, but more importantly (as there still are a couple weeks left in the month), shares rallied strongly off session lows Thursday to establish a very powerful-looking daily and engulfing weekly candle that could point towards a longer-term low.
For the record, I wrote bullishly about GRMN stock back on June 9 using a married put to help capture the dividend in Garmin shares. The discussed Fibonacci levels and weekly chart symmetry were taken out by Thursday’s lows, but ultimately and as we’ve addressed today, there’s mounting evidence GRMN can recover technically.
Garmin Stock Collar Strategy
In lieu of what’s been addressed, but the realization GRMN stock is unlikely to simply beeline it higher, if in fact the stock is bottoming — a collar strategy is attractive for longer-term commitments.
A collar takes a married put and combines it with the sale of a call to finance the protected stock position. Always protected, this position can be adjusted over time to reduce risk and to grow profits if an uptrend in GRMN stock does take hold.
Checking GRMN stock’s options board, a collar using a long Aug $40 put, short Aug $45 call and purchasing the same ratio of shares fetches $42.85 with the stock at $43.10.
Initially and prior to adjustments, this means the trader has $2.85 in GRMN stock risk, at which time the $40 strike acts as a guaranteed stop-loss. As that’s a couple percent below Thursday’s lows and our described chart, which we’re fond of technically, the positioning is very approachable.
And on the upside, the initial cap at $45 translates into a maximum profit of $2.15 per spread at expiration. However, if an uptrend in GRMN stock does begin to materialize, the trader can and should look to roll up the collar to both reduce risk and continue to profit from that trend.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
