In 2018, the stock markets got tested hard — first off on the Feb. 2 fundamentally based correction from fears of rising rates. Then the fears have of global trade wars. Newell Brands (NYSE:NWL) stock has suffered especially hard, but it now may have a better path ahead. And therein lies the opportunity.
This morning, management reported earnings and the company missed on sales but beat the bottom line. What’s worse is that management cut the forward guidance. So the knee-jerk reaction from traders is to sell the stock down hard.
Moreover, the core data was not that great and they continue on the path of asset divestiture. So in all, the earnings report is more bad news than good and the stock is justified to fall.
NWL stock has been on a long-term descending path to where it has shed a lot of froth already. Coming into the earnings, the stock has fallen 50% in the past 12 months. But amazingly, the experts on Wall Street have not given up on it yet. Most of them still rate it as a buy while it trades well below their average price range on the street. So eventually they expect price to stabilize and start the recovery.
The June price action suggests that the bottoming process had started. This earnings report reaction will test that fact. In early June Newell stock bottomed and since been on a higher-low trend which makes for a good base for the bulls to break the lower-high trend. When that happens, often enough it invites more bulls to buy into the stock.
Above $28 per share, the stock should attract even more buyers for another $2 or more. But this is 2018, the year of unexpected headlines, and we are far away from that this morning. So instead of risking $23 per share without any room for error, I write today’s trade setup using options. There I can build a buffer between the current price and my level of risk.
Click to Enlarge In other words, I believe more in the downside support holding than the upside promise coming to fruition.
After all, we still have too many other external looming headlines for me to risk it all without any protection.
Fundamentally, NWL stock is not bloated, with a price-to-earnings ratio under 20. So if the higher-low trend noted here fails then I own shares of NWL at a discount from here and that won’t be a major financial mistake. In the long run, I am confident that I can manage out of the worst case scenario for a profit with the stock in hand.
NWL Stock Trade Idea
The Trade: Sell the NWL JAN 2019 $20 naked put. This is a bullish trade where I collect 80 cents to open. Here I have a 80% theoretical chance of success, but if the price falls below my strike then I accrue losses below $19.20.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell an NWL JAN 2019 $20/$18 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade requires a rally to profit.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need NWL stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking too far.
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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.
