Comerica Incorporated (CMA) — I mentioned CMA stock in Monday’s Daily Market Outlook, noting The Wall Street Journal said Comerica was one of the major banks that could see more than half of its energy loans in danger of default this year.
The Dallas-based bank with about 500 branches located primarily in Arizona, California, Florida and Michigan beat Q4 earnings estimates when it reported on Jan. 19. However, following the announcement, S&P Capital IQ Equity Research lowered its 12-month price target for CMA stock by $5 to $40. Its analysts cited the bank’s above-average lending exposure to energy.
Additionally, Comerica’s loans are often benchmarked to floating interest rates, primarily LIBOR. This means postponements in interest rate increases, as the Federal Reserve appeared to signal on Tuesday, will hurt Comerica more than its peers.
After hitting a high of $53.45 on June 24, CMA stock fell sharply as energy prices declined.
Shares appeared to stabilize from August to December, but the formation turned into a ragged head-and-shoulders with a neckline at slightly over $40 and a head at about $48. The pattern provided a downside target of $32, which was achieved on Feb. 9.
A recovery rally started the next day in the form of a bull channel. But the rebound failed Tuesday as CMA stock broke below the channel’s support line on higher-than-average volume. Also note that the channel’s high is at roughly $40 — the trigger of the head-and-shoulders breakdown that preceded the recent decline.
CMA stock is a solid short sale candidate at $38 with a downside target of $32 for a potential return of 16%.
As with all short sales, place a stop-loss order at $41 to protect against the possibility of theoretically unlimited losses in the event of a rally. Also keep in mind that if you hold CMA stock short though its ex-dividend date, expected on June 11, you will be responsible for covering the dividend. The company pays a quarterly dividend of 21 cents per share for a current forward annual yield of 2.2%.