There was a time when FedEx (NYSE:FDX) stock was a sure thing. It only had one serious competitor in United Parcel Service (NYSE:UPS), and there was plenty of business to go around for both to thrive. The pair traded in unison — and alongside the major indices. But this is no longer true. FDX stock has been in trouble for years.
What do I mean? Well, FDX stock sits 42% below its all-time highs. Compare that to UPS and the S&P 500, which are both within an earshot of theirs.
The problems started for FedEx a while back, but they became much bigger after Amazon (NASDAQ:AMZN) entered the shipping business. Under the leadership of Jeff Bezos, Amazon is a beast. It disrupts every vertical it enters. After the 2018 market correction, FDX stock never regained footing, but therein lies the good news and today’s opportunity.
FDX Stock Passed the Toughest Test Ever
The whole world recently went through the harshest test ever. The novel coronavirus forced us to adapt to a global quarantine and kill all business activity. This caused a crash in the market so big that it created an absolute bottom in stocks. That’s especially true for names like FDX stock which are still viable.
Under today’s macroeconomic conditions, the worst case for FedEx is near $89 per share. This is not to say that things look good. However, the bullish thesis here is that the situation could not be worse than in early March. Investors can profit from this concept using options.
Fundamentally, FDX stock is not expensive. Even though it carries a high price-earnings ratio of 31, its stock price is almost half of its yearly sales. In other words, it’s down to the bare bones. Profitability is a misleading measurement these days because of what the coronavirus did to all profit and loss statements on the planet. This means I’m willing to give it a pass from the P/E perspective and trust in the floor that was just set. Furthermore, this recent bottom has been in contention since 2003.
Expectations Matter, Especially with FedEx
The strategy here is not to chase the upside potential because FDX stock has disappointed us before. The method is to rather bet on proven downside support to generate income out of thin air. It will take exogenous circumstances to breach the March bottom by a lot. FDX is rallying fast, but it’s headed into a prior failure zone near $169 per share. There will be resistance there, so the onus is on the bulls to take that level out. This was the neckline zone that caused the technical breakdown in the middle of 2019, and these tend to be sticky. Bulls have their work cut out for them.
The trade today is to sell the FDX October $100 put and collect $1 for it. This has a 90% theoretical chance of success and does not need a rally to win. If it stays above $100, there will be no losses and the break-even level is below $99 per share. Selling puts below proven support is a viable method of getting long a stock — provided the investor is looking to own the shares.
Otherwise the safe thing to do is to sell a bull put spread instead. This limits the risk in a worst-case scenario.
FedEx just reported earnings and the stock spiked 20% on the news. This hasn’t happened in a while, and what was even more impressive is that it beat on all metrics and raised guidance. There’s a good chance it is very confident of its outlook. And therefore, I am confident in the support on the charts.
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.
