Trade of the Day: iRobot (IRBT)

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As earnings get into full swing, I’ve been watching the transports carefully. The group got a scare as Ryder System (R) issued an earnings warning last week. The company cut its earnings for the recently ended quarter to $1.72-$1.74 a share from $1.82-$1.87 a share. R reports earnings Thursday, and analysts are looking for $1.86 a share.

Ryder shares were punished following the warning, dropping from $75.65 to $68.73 last Tuesday. While Ryder did the right thing by warning Wall Street, I’m looking ahead to the numbers from United Parcel Service (UPS) next week to get a better snapshot of the sector.

The Dow Jones Transportation Average ($TRAN) is holding its 50-day moving average following Friday’s drop back below the 100-day moving average. A close below the 8,000 level for the transports could be an early warning sign with the major moving averages still in a downward trend. A move above 8,300 should lead to continued market strength, but I’m still cautious on the transports until they clear this level.

transports

One possible earnings trade I like for this week is iRobot (IRBT). The company reports earnings today after the close, and shares have been volatile ahead of the announcement.

The chart below shows the move from $28.50 earlier this month to north of $32 to clear the major moving averages. Shares traded lower throughout last week and are hovering just above the $30 level. The major moving averages are trying to level out following a sloping downtrend since mid-July. The action last Thursday along with Friday’s backtest stretched but held the 50-day moving average.

transports

However, the earnings beats have been solid, as the company has topped estimates by $0.18, $0.06, $0.01 and $0.15 during the past four quarters. Revenues have topped expectations in three of the past four quarters.

On July 22, IRBT stock slipped $0.28 and, in April, shares fell $1 following the earnings release. On Feb. 5, shares fell from $31.96 to $29.15 and, on Oct. 22, 2014, shares jumped from $31.61 to close at $36.04 following the earnings announcement.

Given the choppy and slightly volatile history, I believe that IRBT shares are setting up for an 8%-10% move. I’m usually bullish on the stock, and analysts are looking for earnings of $0.23 a share on revenue of $145.34 million.

I have followed iRobot for years and have found it to be a fascinating company with takeover potential. The current market cap is just over $900 million, and Apple (AAPL) or Google (GOOGL) could sneeze at offering a 33% premium for shares of IRBT with a takeover price north of $40. This is wishful thinking, of course, but I do like the IRBT January (2016) 33 calls (IRBT160115C00033000) for a speculative trade. Aside from my personal takeover rumors, I like these options based on a breakout to higher highs on technical strength along with continually improving fundamentals.

As a safer trade, traders can buy both the IRBT November 32 calls (IRBT151120C00032000) and the IRBT November 28 puts (IRBT151120P00028000) together create a “strangle” option position.

The cost for both aforementioned options would be $1.50, with the breakeven points at $33.50 and $26.50. A double would occur if shares trade to $35 or test $25 by late November. If shares stay between $32 and $28 during this time period, the options will expire worthless. However, traders could exit the position the day after earnings to take advantage of the short-term move. The gains in the call or put should offset the losses in the other to reduce losses or perhaps make a quick profit.

Before I go, I want to update my thoughts on gold briefly.  The SPDR Gold Shares ETF (GLD) came into the week just below $111 and tested $114 last Wednesday and Thursday. The GLD November 115 calls (GLD151120C00115000) I mentioned last Monday came into the week under $1 and traded to a high of $1.99. The trade is still up more than 25%, but, if you decided to take the trade and didn’t lock in profits on the move mid-week, I would suggest setting a stop to protect profits.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/irbt-transports/.

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