Following Friday’s post-Brexit massacre in stocks, it may be an opportune time to sift through the rubble to locate stocks that can provide solid fundamentals, good technicals and above-average dividend yields.
A big-cap name that came up on this screen was Amgen, Inc. (AMGN).
From a technical viewpoint, Amgen stock has major support at the $145, with further support at the $140 level.
AMGN stock is also getting deeply oversold on a nine-day RSI basis, with a reading below 30.
Previous instances when AMGN was this oversold marked intermediate-term lows in the price of Amgen stock. Implied volatility (IV), a normally reliable contrarian indicator, is also at the highest level since the stock made a significant bottom in mid March.
Fundamentally, AMGN is now trading at the lowest price-to-earnings ratio since 2012. With a P/E of just 15.4, it trades at a significant discount to the S&P 500 P/E multiple of 24.
Amgen stock also provides a solid dividend yield of about 2.7%, far surpassing the 10-year U.S. Treasury yield of 1.5% and also comparable to the 30-year U.S. bond yield of 2.3%. With a payout ratio of only 36%, AMGN can certainly maintain or increase its dividend over the coming years.
Over the past five years, Amgen has increased the dividend by nearly 30% annually.
With the recent market turmoil created by the Brexit vote now likely putting any U.S. interest rate hikes on hold for the foreseeable future, I think low-multiple, higher-yielding quality-name stocks like AMGN should likely find some solid buying on any further weakness.
With IV now at heightened levels, option selling strategies are favored, so an out-of-the-money bull put spread makes sense.
AMGN Stock Trade Idea
Buy July $137 put and sell the July $140 put for a 50-cent net credit. These are the regular monthly July options that expire July 15.
The short $140 strike price is positioned below the $145 major support and right at the secondary support level of $140. The $140 strike also provides a 4.4% downside cushion to the $146.45 Friday closing price of AMGN stock.
The maximum gain on the trade is $50 per spread, with a maximum risk of $250 per spread. Return on risk is 20%.
I would look to close out the position on a meaningful break of the $140 in Amgen stock, while letting the position expire and keep the initial $50 net credit per spread if AMGN remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.