(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
AT&T Inc. (T) may have won its fight for Time Warner Inc. (TWX) against the Department of Justice in court, but investors are not cheering, with the stock trading lower Wednesday by over 4% to $32.90 around noon. Based on an analysis of the technical charts, shares could still have even further to fall, perhaps by an additional 15%. It would bring a total loss to the stock of nearly 20% from its closing price of $32.68 on Tuesday.
It adds to what has already been a painful year for AT&T, with shares already down by about 12.1% through Tuesday, and over 13% off the highs last seen in October 2017. Even options traders are betting the decline continues through the start of next year.
Mounting debt and a declining wireline business will continue to be an ongoing concern while maintaining a dividend yield that has soared to over 6%. It is estimated that AT&T's debt may rise to $250 billion after the completion of the deal.
Shares of AT&T have been trending lower since March 2017 and have shown no ability to reverse that trend. Over this period, every time the price has risen, shares have been greeted with a wave of more selling, driving the price even lower. The stock is trading right above a critical technical support level at $32, which has held steady since 2011. If shares fell below that support, the stock would fall to $27.50, a drop of over 15% to its next support level.
Another negative indication is the relative strength index (RSI), which reached nearly overbought levels of near 70 on June 12 but quickly reversed on June 13, on very high levels of trading volume. If momentum is coming out of the stock, then it serves as another bearish indication.
Options Traders Bearish
Options traders see shares of AT&T falling in both the short and long term, based on the expiration on Aug. 17 and Jan. 18. The August $33 puts outweigh the calls by nearly 4 to 1 with 5,700 open put contracts to only 1,500 open call contracts. Meanwhile, the January $33 puts exceed the calls by about 1.5 to 1, with approximately 35,000 open put contracts to roughly 24,000 open call contracts. But with a price of $2.50 per contract, a buyer of the puts would need shares to fall to $30.50, a drop of about 7%, to breakeven if held until expiration.
Some traders are betting shares fall to about $29 using the $30 puts set to expire on Jan. 18, with almost 45,500 open contracts. With a cost of $1.15 per contract, a buyer of the puts would need the stock to fall by 12.2% to $28.85 to break even.
AT&T may have won its battle in court to acquire Time Warner, but it may be a case of being careful what one wishes for, leaving investors with more worries and concerns.
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.