Name a firm with a negative three-year sales growth rate that has also posted an ugly looking levered free cash flow position of $-12 billion for the past 12 months. This firm trades at just 5x next year's projected earnings, and still pays you 4.5% just to own the shares.
Do I know that this name will respond well to hurricane season? No. I only know that the stock responded well last autumn and that the stock appears from a technical perspective to be poisonous. Since that October 2017 peak, GM has experienced a 100% retracement to the downside, followed by a nearly 100% retracement to the upside, and then this summer, another 100% retracement to the downside. You really cannot make this stuff up.
You may have noticed that while the current situation regarding trade conditions has put extra pressure on the vehicle manufacturers. Morgan Stanley just last Thursday reiterated its overweight rating on this stock -- and the firm's $46 target price. Think that's high? The fact is that over the past three months, nine ranked analysts have placed a target price averaging $51.89 on GM, making Morgan Stanley below the rest of the industry in their optimism.
Simply put, this name may be right, or getting close to right for a trade. I do not want to invest in the manufacture of automobiles long term. I do think that from a risk managed perspective, the potential for reward here is now worth some risk. Keep in mind, the firm will report third-quarter earnings on October 24, and also reports sales numbers monthly.
Trade Idea (minimal lots)
-- Purchase 100 shares of GM at or close to the last sale of $33.87.
-- Sell (write) one $30 December put option (last: $0.54).
-- Sell (write) one $38 December call option (last: $0.55).
This strategy, at these last sales, will reduce net basis to $32.78.
The Risk: If the shares sink below the $30 strike price by December, the trader could end up long 200 shares at an adjusted net basis of $31.39.
Best Case: The shares trade above $38 by December expiration. In that case, profit is maxed at $5.22, or a gain of 15.9%.
(A longer version of this column appeared at 7:28 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)