This morning, I am recommending a bearish trade on Hancock Whitney Corporation (NASDAQ:HWC), the regional bank that operates in Mississippi, Alabama, Florida, Louisiana, Tennessee and Texas.
HWC has been in the news because its acquisition of MidSouth Bancorp, Inc. (NYSE:MSL), a regional bank based in Lafayette, LA, was just approved by the Federal Reserve, the Federal Deposit Insurance Company (FDIC), and the Mississippi Department of Banking and Consumer Finance.
This all happened amid further cuts to the target overnight rate from the Federal Open Market Committee (FOMC) last week. All of this points to short-term weakness for HWC, and a long put option is the perfect way to play the situation.
Low Long-Term Rates
As mentioned last week, the FOMC cut the federal funds target range by 25 basis points (0.25%) to a new range of 1.75%-2.00%.
Generally speaking, lower interest rates are bad for banks. Most of their profits are earned by borrowing money at a lower short-term rate and loaning it out at higher long-term rates. As short-term rates decline, long term rates generally fall too. That decreases the amount a bank can make off long-term loans.
Long-term interest rates, here represented by the CBOE 10-year Treasury Note Yield (INDEXCBOE:TNX), have been in a long-term downward trend for the past year.
Daily Chart of CBOE 10-Year Treasury Note Yield (TNX) — Chart Source: TradingView
As you can see in the chart above, the TNX was starting to recover two weeks ago, but it continued dropping both in the run up to and after the FOMC’s rate cut announcement.
In August, U.S. long-term mortgage rates fell to historically low levels, with the average on the benchmark 30-year loan dropping to its lowest level since November 2016.
Rates have started to recover, and I personally don’t think rates can fall much further if banks want to keep turning a profit. It’s possible they will start to push higher.
Regardless, there’s no denying that even this relatively short period of lower long-term rates will impact the profits and performance of companies like HWC.
Struggling Despite a Bright Outlook
If we look at the daily chart for HWC, we can see that last week, it struggled to stay above its 50-day moving average (MA). Its performance was mixed, but it ended the week by pushing lower.
Daily Chart of Hancock Whitney Corporation (HWC) — Chart Source: TradingView
We could attribute the ups and downs to the FOMC’s rate cut, however, I think HWC’s acquisition of MSL is also a factor. While the deal is expected to lead to cost savings, it will also result in one-time pre-tax expenses of $38 million, which is going to affect the company’s performance in the short term.
It’s also worth remembering that, no matter how beneficial an acquisition of another company is, the acquirer almost always trades lower after the initial announcement. With the potential negative effects of the FOMC’s rate cuts to contend with, this may be enough to push HWC to retest support at $34. That makes this a great opportunity to profit with a put option.
Buy to open the Hancock Whitney Corporation (HWC) Nov. 15th $35 Puts (HWC191115P00035000) at $0.60 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.