Trade of the Day: FedEx (FDX)

Advertisement

The Dow Jones Transports are showing strength, which could be a major development in the bulls’ attempt to clear the next layers of resistance. The Dow Jones Transportation Average ($TRAN) is starting to show signs of life and is close to clearing its 50-day moving average, which is also starting to level out. A move above 8,150 would likely lead to a test to 8,300 and the still-downward-sloping 100-day moving average. The 200-day moving average is above 8,600 and appears to be flattening out.

A recovery in the Dow Jones transports would be a major help for the bulls, as the Dow Jones Industrial Average usually follows suit, according to Dow Theory.

dow jones

One company that is likely to either help or hinder Dow Jones transports this week is FedEx (FDX). The company will announce earnings on Wednesday, Sept. 16, before the opening bell.

The suits-and-ties are expecting a profit of $2.45 a share on revenue of $12.30 billion from FedEx. This is down from a previous estimate of $2.66 a share, as analysts have been lowering their numbers since June.

Although FedEx beat fourth-quarter estimates of $2.43 a share by $0.23, it missed on revenues by $200 million, coming in at $12.1 billion versus expectations for $12.3 billion. To make matters worse, the company forecasted 2016 earnings between $10.60-$11.10 a share.

Wall Street was looking for $10.88, and the midpoint of the aforementioned range is $10.85. Shares fell from $182.13 to $176.73 following the earnings news in mid-June.

The chart below shows FDX’s 52-week peak north of $185 and the tumble afterwards that reached a 52-week low of $130.13 in late August. FedEx shares are slightly below their midpoint from the recent 52-week high/low and could be setting up for a major move during Wednesday’s session and afterwards.

dow jones

The 50-day moving average is still sloping slightly lower but seems to be leveling out. An earnings beat on the top and bottom lines could send shares towards $155-$160, but $162 and an $11 surge might be asking a bit much.

The FDX October 155 calls (FDX151016C00155000, $3.55, up $0.30) could be used by bullish traders to play a possible push to $160. Shares would need to be north of $158.50, technically, by mid-October for the trade to break even and would double if shares trade past $162. This would give the trade more than four weeks to reach this level.

Bearish traders expecting a drop toward $140 could target the FDX October 145 puts (FDX151016P00145000). FDX shares would need to be below $142 for the trade to break even, technically, by mid-October, and would double if shares fell below $139.

FedEx also beat third-quarter earnings estimates in March by $0.14 a share but missed revenue estimates by $900 million. In December 2014, the company missed second-quarter earnings estimates by $0.08 a share, along with a revenue miss of $800 million. And, finally, in the year-ago quarter, it beat first-quarter estimates by $0.14, with revenues topping estimates by over $200 million.

Following earnings announcements, shares fell $2.41, or 1%, in March, sank over $6, or 4%, in December 2014, and rallied $5, or 3%, last September.

With shares near $150, the FDX September 150 straddle option trade is pricing in a possible 3% move in the stock.

The FDX September 150 calls (FDX150918C00150000) and the FDX September 150 puts (FDX150918P00150000) were going for about $6.50-$6.75 as of this morning’s open. This shows that options traders are factoring in a possible 3%-4% move, up or down, during Wednesday’s session.

This move might be enough to break even on the aforementioned straddle option trade, but these options expire this Friday. This makes going long or short, or playing a straddle option trade, very risky, as the time premium will deflate rapidly on one or both of the September 150 strikes if shares stay near $150.

Given the company’s choppy history of earnings and revenue misses over the past year, it is a little risky to go long or short on FedEx ahead of earnings, so I’ll be watching out the Dow Jones transports move from here, as overall I’m staying light and defensive in this market.

InvestorPlace advisor Rick Rouse is offering a special free report, “The 5 Golden Rules of Options Investing,” that reveals his rules for options trading success that will help you make double- and triple-digit profits in the months ahead no matter what the market has in store. Just click here to read it right now. 

Whether you’re new to options or have years of experience, the trading advice Rick will share can help you lock in bigger gains, find new winning ideas, wring the risk out of your trades and become a more confident and successful options investor. Click here now to download your FREE copy of The 5 Golden Rules of Options Investing.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/dowjonestransports-fdx/.

©2024 InvestorPlace Media, LLC