Last November, the stock markets had a mega spike and this ongoing correction priced all of it out already. So I could argue that we are close to work this volatility out of the system. In the ensuing market carnage, we find a few gems that got taken out to no fault of their own.
This morning we see downside pressure on Priceline Group Inc (NASDAQ:PCLN) mostly due to the extremely negative reaction to Expedia Inc (NASDAQ:EXPE)’s earnings report. PCLN stock is down 3% simply because EXPE is collapsing 17%. I learned a while back that more often than not it is wrong to extrapolate one bad report from one company to its competitors. A problem in EXPE’s marketing expense line is likely a company-specific hiccup not surely to translate into the sector. Sometimes managements make bad bets.
So in this case and under the assumption that the markets in general will find footing soon, I want to cautiously go long PCLN. This is a quality company that will deliver on its promises in the long run. So it’s worth the risk now.
I have to recognize that PCLN stock is the mother of all momentum stocks. It moves extremely fast in either direction, which can be scary. On pullbacks it appears headed into an abyss. But I believe that its fundamentals will eventually prevail.
Priceline stock price tag is expensive but fundamentally PCLN is cheap! From a price-to-earnings perspective it’s half as cheap as EXPE, so there is definitely less froth to shake out of the stock price. A P/E of 26 is half that of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and quite a bit lower than Facebook Inc (NASDAQ:FB), so there is value already in the stock. This dip will make that argument even more attractive.
Technically, as of yesterday PCLN stock was near the middle of its 12-month pivot point. This morning it will be near a prior neckline from which it rallied this year. Just below that and around $1,640 per share there is another neckline. These tend to become supportive on the way down. Neither bulls or bears would be willing to give them up without a fight so they create congestion or in this case support.
PCLN reports earnings soon and I bet they tell us a good story. If the stock dips again on the headline I will likely add to my position then. Else, I expect that the combination of this market-wide correction and the EXPE reaction make for a good entry point into a bullish PCLN trade.
The Trade: Sell the CLN SEP $1020 put and collect $8 per contract to open. Here I have a 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $1012.
Selling naked puts carries big risk especially for a four-digit stock and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the PCLN SEP $1040/$1020 credit put spread which would deliver over 8% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
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.