Stock buybacks are usually considered a bullish sign for investors. They can increase earnings per share because now the same amount of earnings are divided between a smaller amount of outstanding shares which returns capital back to the shareholders. Of course, there is no guarantee that the stock will move higher. Here is a trade idea on Precision Castparts (NYSE:PCP) that counts on more than just a buyback to profit.
Precision Castparts (PCP) Put Credit Spread
The trade: Open the PCP Feb 175/180 Put Credit Spread (by selling to open the PCP Feb180 put and buying to open the PCP Feb 175 put) for a credit of 75 cents or more.
The strategy: The maximum potential profit for this trade is 75 cents if PCP is trading above $180 at February expiration. The maximum loss is $4.25 (the $5 spread between the two strike prices – 75 cents) if PCP is trading below $175 at February expiration. Breakeven is $179.25 at expiration based on a 75 cent credit.
The rationale: Precision Castparts sells metal components and products worldwide. The company recently announced earnings and fell just short of expectations with revenue rising 13% from a year ago. The company benefited immensely from growth in their commercial aircraft division. The company also recently approved a $750 million stock repurchase program that runs into 2015.
The stock has stayed above $180 since late November and it needs to continue to do that for this credit spread to expire worthless and hit its maximum profit potential. Through the month of January, the stock has traded in a channel from just above $180 to about $192. The stock has been in a slide for the last several days but on Wednesday, the stock was able to form a bottoming tail or hammer candle which is a potential bullish reversal sign close to the bottom of the channel. A bullish sign would be if the stock trades above the previous days high which in this case is $184.50.
If you are interested in more trade ideas from John Kmiecik, please visit us at MarketTaker.com.