Palm (PALM) is on deck for earnings today, and expectations are not very high. After all, the company issued a dire earnings and sales warning at the end of February, about two weeks after a factory shut down for a week, presumably for a holiday and maintenance.
The problem Palm faces is that it’s just not selling enough Pre and Pixi phones despite adding more cellular carriers. The smartphone trend continue to favor Apple’s (AAPL) iPhone, Google’s (GOOG) Droid and Nexus One, and Research In Motion’s (RIMM) BlackBerry.
New Thomson Reuters estimates are for a loss of 42 cents and $316.19 million in revenues. If the company dares to offer guidance, those figures are a loss of 43 cents and $305.77 million in revenues.
With the stock currently at $5.59, we are seeing some short covering going into the earnings event. The markets have been strong over the past two weeks, yet just yesterday, PALM put in a new 52-week low of $5.29. It seems not even a strong market can help this company.
At the end of February, Palm’s short interest was a little more than 72 million shares. It sounds hard to believe, but that was the lowest short interest since the end of December. And it coincided with the earnings warning when you consider trade date versus settlement date.
Traders continue to bet against Palm. It is the new most-hated company, and there is a trader rule that stocks that keep hitting new lows when markets are strong are doomed to see much lower lows.
Still, nothing lasts forever. And hedging your bet is easy and cheap.
Those wanting to short the stock can hedge this transaction with the PALM March 6 Calls (UPY 100320C00006000) for 18 cents ($18 per contract). This leaves close to a max downside of 10%, but it is a bet only to tomorrow’s close, because the March options expire Friday in a quadruple witching day. The trade can be hedged out to April, but it starts to get more expensive as the PALM April 6 Calls (UPY 100417C00006000) cost 50 cents ($50 per contract).
If you want to bet on a longer-term drop using put options rather than shorting, the PALM April 5 Puts (UPY 100417P00005000) cost 40 cents ($40 per contract). For intrinsic value, the stock has to go below $4.60 for a pay-off, but the time value will keep that from being an absolute.
The “Hail Mary” trade is the PALM March 5 Puts (UPY 100320P00005000) at 16 cents ($16 per contract).
Two weeks ago, I noted that the PALM May 5 Puts (UPY 100522P00005000) offered the biggest leverage bet while optimizing the time value and the expected news flow. The puts traded around 40 cents then, but they are closer to 65 cents today.
That trade has come and gone, though, because the breakeven to any real return outside of time value is $4.35, and the price erosion will begin to start next week now that the earnings event premium risk will be behind us.
Ultimately, Palm is probably going to be acquired. The problem is that it is a sinking ship on its own, and a buyout will almost certainly not come at a high premium. Barron’s threw out a $3 target.
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