(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Some options traders see shares of AT&T Inc. (T) plunging by the start of early next year by as much as 14%, pushing shares below $30. A technical analysis of the stock chart also shows that shares are at risk of falling below a critical technical support level.
Shares of AT&T have struggled over the past year, declining by nearly 17.5%, while the S&P 500 has jumped by over 11.6%. AT&T shares have been plagued by its attempted acquisition of Time Warner Inc. (TWX), which has been held up in federal court, leaving investors wondering about the future direction of the telecom giant. Analysts are on the fence when it comes to the stock, as well, with nearly 61% of them, rating shares a with a hold.
The $30 strike price shows the puts have an open interest of 41,400 contracts, and with the puts costing about $1.14 per contract, it implies a break-even price of $28.85, a decline of 13.7% from its current price around $33.45 and carries a dollar value of about $4.7 million. It is a sizable bet to make in AT&T, especially given the length of time till expiration and considering just how much shares have fallen over the past year.
The long straddle options strategy set to expire on Jan. 18, 2019, implies a rise or fall in AT&T shares of 13.7% from the $33 strike price. It places shares of AT&T in a trading range of $30.62 to $36.26 by expiration. There are nearly 35,000 open puts contracts at that strike price, with only 27,700 open call contracts. It would suggest that traders are betting shares of AT&T will fall over the coming nine months.
The stock, from a technical standpoint, is weak as well and is nearing a potentially critical support level at $32, a level that has held steady on many occasions in the past. Additionally, the pattern in the chart appears to be a descending triangle, a bearish trend, and one that indicates shares could fall further. Should the stock drop below $32, the next technical level of support comes around $27.50.
Analysts on Hold
Analysts are lukewarm on AT&T, as well, with only 35% of the 31 analysts covering the stock rating it a buy or outperform, while 61% rate it a hold. Growth is seen as being anemic as well, with revenue expected to grow at rates of less than 1% over the next two years.
AT&T still has plenty of questions marks around its future, and for now, the stock and the options market are indicating shares will continue to slide.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.