Carefully Construct Your Position on Fastenal

by Joseph Hargett | July 11, 2012 8:48 am

Construction supply firm Fastenal (NASDAQ:FAST[1]) will join the rising tide of companies releasing their quarterly earnings reports this week. Wall Street analysts are looking for a modest year-over-year improvement, with second-quarter earnings seen rising from 32 cents per share last year to 37 cents in fiscal 2012.

The whisper number offers little insight, arriving at 37 cents per share, according to

Historically, Fastenal has held its ground in the earnings confessional. Specifically, the company has matched or beaten Wall Street’s expectations in three of the prior four reporting periods, with an average upside surprise of about 6.7%.

Judging from their ratings, the analyst community is firmly bearish on Fastenal’s prospects. Specifically, all eight analysts following FAST rate the shares a hold or worse, with nary a buy rating to be found. There also is room for potential price-target increases, as the average 12-month price target for FAST rests at $45 — a modest premium of 13% to the stock’s current perch at $39.81.

Speculative investors in the options pits also are betting heavily against FAST. For instance, the stock’s front-month put/call open interest ratio of 2.28 reveals that puts are more than twice as popular as calls in the July series of options. This negativity also extends into the August series, which sports a put/call ratio of 1.16.

Peak July call open interest totals a mere 2,600 contracts at the overhead 50 strike, while another 1,800 and 1,400 calls reside at the 45 and 40 strikes, respectively. On the put side, nearly 10,000 contracts are open at the July 40 strike, followed distantly by 2,700 puts at the July 35 strike.

Turning to FAST’s price action, the stock has fallen more than 27% since peaking near $55 in March. Recently, the shares have found support in the $35-$40 region, with FAST breaking above its 10-day and 25-day moving averages last week. However, before any meaningful rally can get under way, FAST must first contend with overhead resistance from its 50-day trendline, which currently is perched near $42.

For those looking to trade FAST ahead of earnings, the stock’s trading range and implied volatility might present an interesting opportunity for options traders. Currently, option implieds are predicting a post-earnings move of about 4.7%, representing a decline to about $37.94 or a rise to about $41.68. Depending on your overall position, this opens up the possibility of entering an August 40/45 bull call spread, or a July 35 put sell.

The August 40/45 call spread was last asked at $1.15, or $115 per pair of contracts, placing breakeven at $41.15. The maximum loss on this spread rests at $1.15, while a maximum profit of $3.85 is possible if FAST closes at or above $45 when August options expire.

Finally, the July 35 put sell was last bid at 30 cents, or $30 per pair of contracts. The initial debit received represents the maximum profit, while losses could be steep if FAST plunges below $35 before July options expire at the end of this week.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

  1. FAST:

Source URL:
Short URL: