Tag Team Options Trade: PG
By Jill Malandrino 12/18/12 - 08:22 AM EST
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Jill: Shares of Procter & Gamble (PG) came under pressure last week but I think that was a great opportunity for investors to get involved (as did Cramer and Stephanie, adding to the position in TheStreet's Action Alerts Plus portfolio). Fundamental, longer-term investors should be pleased with PG's aggressive restructuring announcement as it is aimed at saving $10 billion in savings by 2016, it is continuing to expand into emerging markets, and potential for further cash distribution in dividend increases and buy backs. Even though PG has lagged its peer group, the stock trading 8% discount to its historical average represents excellent value as the fundamentals play out.
That is why I like owning blue chips in a core portfolio. Even if they are facing troubled circumstances, the earnings and dividends are still growing just about every year. (Just think of of our JNJ play). PG has at least a dozen $1 billion brands. Here is a brief profile of its multiple business lines: Together with its subsidiaries, engages in the manufacture and sale of a range of branded consumer packaged goods. The company operates in five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care.
I, for one, have been a fan of the Olay line since mom gave the green light on make up. Think about it, and this is coming from someone in media where "putting on your face" is part of the job description, there are high-profile, high-priced luxury brands that don't have the billions of dollars behind it for research like PG has. Why not go with a line like Olay that has proven its worth as a cosmetic staple for multiple generations? The same principle applies to all of its other proven business segments.
When you own a company of that scale with diversified revenue streams, you can withstand a lot of abuse and still come out okay. (one of the reasons I will forever love IBM (IBM)). That said, let's turn to Skip and get a read on the technicals and our options trade to play PG.
Skip: PG was below $60 and hated in late June of this year. While I have to think that the stock is looked upon favorably now, I still have a serious respect for PG's ability to test any strength, elongated in time and price. In addition, PG when overbought, has a trading history that shows it can quickly slip and slide in price. Thus, that potential has to be respected.
I have PG overbought short-term now. It has a large float totaling 2.73 billion shares (!). PG tends to be a slow mover until a trend begins in earnest. Once that trend takes hold it is generally formidable in time as well as price.
Fundamentally, I have to conclude that PG is improving things best described as slowly, but surely. According to the average of the 21 analysts found on Yahoo! Finance PG should have flat earnings quarterly comparisons for this quarter and for the next quarter as well. Then by summer things should begin to improve for PG's bottom line. That is data and projections I prefer to time spread.
PG has not traded above the $70 level since the fall of 2008. In addition, consider that PG is currently one point below its 52-week high of $71. PG has a miniscule beta of 23, which tends to keep a stock off most traders radar as for possibly having upside potential. However, I do think that PG is now worthy of calendar spread.
Trades: Sell to open 3 PG April 70 calls at $1.70 and buy to open 3 PG July 70 calls for $2.30.
That total risk for the spread is $0.60 per spread.
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