Ford Motor Company (F) will roll another quarter off the earnings assembly line on Tuesday, June 28, and investor sentiment is thick with pessimism.
But traders still might best be served with an optimistic strategy on F stock.
By the numbers, Wall Street sees Ford second-quarter earnings falling 7.5% from year-ago levels to 37 cents per share. Revenue is expected to arrive essentially flat at $35.44 billion.
Historically, Ford has had success meeting the Street’s targets, besting the consensus three times and missing only once in the past four quarters. The company could be on track to once again rise above the crowd, if recent auto sales data is any indication. In June, Ford announced that U.S. vehicle sales were up 1.5%. While this target lagged the overall U.S. auto sales, the industry wide 3.9% jump shows strong growth in the market.
Market growth is important for Ford, as the company is finally getting on track with production of its new aluminum-bodied F-150 pickup. While ramping up production and inventory levels won’t help Ford’s second-quarter figures, it could factor heavily into the second-half of 2015, and strong guidance could certainly provide lift for F’s stock price.
Still, turning to the sentiment picture for Ford stock, we find few rooting for the Detroit darling.
In the brokerage community, Thomson/First Call reports that 12 of the 20 analysts following Ford shares rate them a “hold” or worse, with only eight “buy” ratings on the docket. Furthermore, the 12-month consensus price target of $16 could use an upward revision or two, representing a premium of only about 9% to F’s current perch.
Options traders, meanwhile, appear to be considerably more bearish. In fact, Ford stock’s July/August put/call open interest ratio currently rests at 1.17, with puts easily outnumbering calls among short-term contracts. What’s more, this ratio spikes to a reading of 1.82 for the weekly July 31 series, with puts nearly doubling their call counterparts.
As I noted in this morning’s Vital Data report, the July $14 strike is home to peak put open interest of 17,157 contracts, compared to peak call open interest of 6,138 contracts at the $15 strike.
Click to Enlarge Overall, Ford stock weekly July 31 series implieds are pricing in a potential post-earnings move of about 4%. This places the upper bound near $15.30, while the lower bound lies at about $14.15. These levels roughly correspond with current support (F’s year-to-date low) and resistance (F’s 50-day moving average) levels for Ford stock.
2 Trades for F Stock
Call Spread: Yes, I’m going out on a limb here with a call spread suggestion for F. The stock has been beaten down, and Wall Street is pretty dour, but the potential reward for even a brief tick higher is considerable. Ford has a winning long-term track record with its F-150, and any indications of a turnaround in sales could send the shares sharply higher.
Those looking to buck the trend and side with the bulls might want to consider an Aug $15/$15.50 bull call spread. At last check, this spread was offered at low price of 9 cents, or $9 per pair of contracts, on the CBOE (your results will likely vary, especially with F stock up in Thursday trading). Breakeven lies at $15.09, while a maximum profit of 41 cents, or $44 per pair of contracts, is possible if Ford stock closes at or above $15.50 when August options expire.
Put Sell: If you’re not feeling the love for F stock, but believe the worst is likely already priced into the shares, then a weekly Jul 31 series $14 put sell may be what you are looking for. At last check, the July 31 $14 put was bid at 14 cents, or $14 per contract.
The upside to this put sell strategy is that you keep the premium as long as F stock closes above $14 when July options expire at the end of next week. The downside is that should F trade below $14 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $14 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
