Shares of Procter and Gamble (NYSE:PG) have suffered after an initial coronavirus-fueled rally. PG stock was one of the few bright spots in a gloomy market until it too came crashing back down.
Market volatility, however, begets opportunity. The recent pullback in P&G is an opportunity to get into a solid company at the lowest level since last January. Time to take a gamble on Procter and Gamble.
P&G is one of the few American businesses that has been deemed essential and can remain open. The Pennsylvania factory was told to stay up and running to continue to produce paper products and diapers. California issued a similar edict. Demand for paper products produced by P&G is so great that the company reopened an idle Georgia plant to meet the insatiable demand.
So while businesses overall are cratering worldwide, PG stock will actually benefit from a major uptick.
Valuation View
Procter and Gamble is now trading at its lowest P/E multiple of the past year as it nears 20. Other valuation metrics, such as Price/Sales and Price/Free Cash Flow, have come down sharply as well.
The consumer products line up, especially family care and home care, should be relatively unscathed during these uncertain times. Now that interest rates are near zero, multiples should begin to expand, not contract. This is especially true for companies like PG who have a relatively sound balance sheet and income stream. Look for a valuation floor somehwere near current levels for PG stock.
Technical Take
PG stock is reaching oversold levels once again. MACD is back under negative 1 while RSI is approaching 30. Shares are trading at a big discount to the 20 day moving average, another sign the selling has gotten extreme. RSI readings continue to make higher lows which signals that the sellers may be close to getting exhausted. There is major long term support at $94. This support held nicely a few days ago.
PG stock also sports a dividend yield above 3% with a payout ratio of only 60%. The company’s dividend has grown for 63 consecutive years, another sign they will be safe for the foreseeable future. This makes Procter and Gamble look comparatively attractive to income investors given that the 10-year Treasury yield is under 1%. At some point bond holders will likely look to grab more yield which should help put a floor under solid dividend payers like PG.
Implied volatility (IV) is still extremely high in PG options. This means option prices are comparatively expensive which favors option selling strategies when constructing trades. So to position to be a buyer of PG stock on further weakness, an out of the money put spread is the favored lower risk way to play.
Trade Idea
Buy PG April $80 puts and sell PG April $85 puts for a $1.00 net credit
Maximum gain on the trade is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. Ideally PG stock closes above $85 at expiration on April 17 to realize the maximum gain. The short $85 strike price provides a 15% downside cushion to the $100.92 closing price of PG stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
