Whirlpool Corporation (NYSE:WHR) reported earnings last night and Wall Street hated what it saw. Today, the stock is falling over 10% on the headline. When markets are all-time highs, companies cannot afford to deliver imperfect results.
WHR missed on top and bottom lines. To make matters worse, other high-profile companies like Caterpillar Inc. (NYSE:CAT) and 3M Co (NYSE:MMM) delivered gems and are rallying. Luckily, coming into the earnings report, WHR stock had been up 10% in the past twelve months. But the year-to-date trend had been already deteriorating.
Management said they were pleased with the report. Clearly investors disagreed. Forward guidance usually is the hot button. They also noted foreign competition.
In theory, Whirlpool stock should be booming in this uber-bullish market, especially as residential real estate is healthy. Yet here it is with a disappointing report card.
My guess is that expectations were too lofty. Only one analyst had a “sell” rating on WHR. Furthermore, the stock was trading near the high end of the range of its analyst price targets, so there was a big void between current price and the low end of the range.
This is not the same as saying that WHR’s valuation is bloated. Fundamentally, it’s priced favorably compared to the sector, with a 16 price-to-earnings ratio and a 2.5 price to book value. It also pays a dividend. So this is not the case where valuation went too far too fast. It’s more like it that the expectations got a little too zealous — and herein lies my opportunity.
While WHR stock is out of favor, I want to set a bullish trade into the market fears. This does not mean that I expect an immediate bounce. I am not that optimistic. So I will leave room for error with a nice buffer from the current price just in case the malaise lingers.
I can only do this using Whirlpool options. I don’t risk $165 per share to buy the shares and hope for a rebound without any room for error. Instead, I have more faith in picking downside support that will hold into year end. This way I can profit even if WHR stock continues to fall from here.
Click to Enlarge Today and although this is not an obvious bullish entry point, I am catching this falling knife. The difference is that I do it while wearing metal gloves.
WHR Stock Trade Idea
The Trade: Sell WHR Mar 2018 $120 put and collect $1.20 per contract to open. Here I have an 85% theoretical chance that I will retain maximum gains. Otherwise, I will suffer losses below $124.80.
Selling naked puts carries big risk, especially for a triple-digit stock price that is falling off a cliff. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the WHR Mar 2018 $125/$120 credit put spread where I have the same odds of winning. If so, the spread will yield 10% on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
