(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Procter & Gamble Co.'s (PG) stock has been in rally mode since the beginning of May, climbing 25% while the broader market has moved in a downward trajectory. Now, some options traders are betting the stock will rise another 9%. This bullish sentiment comes after the company reported better than expected quarterly results, and as investors move into more defensive positions amid broader stock market volatility.
Technical charts also indicate the stock will post sizable gains.
The options set to expire on January 18 heavily favor a gain in the stock, with the bullish calls outweighing bearish puts by a ratio of nearly 4 to 1 at the $90 strike price. The calls imply the stock may rise to about $92.50, an increase of 4%.
But even more bullish are the options set to expire on April 18 which have seen increasing levels of open interest at the $95 strike price. The number of open calls rose to 21,000 open contracts from just 1,000 contracts. The calls suggest the stock will rise to roughly $97, an increase of 9% from the current stock price.
The chart shows the stock has been trending higher in a trading channel since May. Additionally, the stock broke out, rising above a multi-year downtrend, which suggests that stock can rise to the next level of resistance of around $93.
Upping Price Targets
As indicated, one factor driving the stock is the company's better than expected fiscal first-quarter results. Earnings topped estimates by 3 cents a share while revenue beat by 1.5%. Despite the strong results, analysts have not increased earnings or revenue estimates for the second quarter while full-year estimates have dropped slightly.
Low expectations for P&G position it well for even modest surprises. Analysts have increased their price targets on the stock, raising them on average by 5% since the end of September to $88.50, which is still lower than the current price.
One problem facing P&G is its valuation. It's now at a fiscal 2020 PE Ratio of 19, which makes shares expensive compared to the broader S&P 500. It is also overvalued considering that earnings in 2020 are only expected to rise by 3%, giving the stock an adjusted PEG ratio of 2.8.
Right now, P&G's gains are being driven by solid earnings and by investors seeking more defensive positions. But given its valuation, the stock could pull back sharply if the market returns to growth stocks, or if P&G's earnings disappoint in the coming quarters.
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.