(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The Procter & Gamble Co.'s (PG) stock has been walloped in 2018 with shares tanking by over 20%, badly trailing the S&P 500's gain of 1.6%. But now some options traders see shares of the consumer staple company rebounding about 10% by the start of 2019.
The stock has tumbled to levels not seen since 2015, after reporting two straight quarters of disappointing results, driven by slower organic growth and disappointing revenue guidance for the balance of fiscal 2018. But amid the optimism of the traders, analysts do not feel the same, sharply cutting their price targets on the stock and reducing their ratings.
The $77.5 strike price for the options expiring on Jan. 18 has an open interest of nearly 41,000 open call contracts. The options trade at the cost of roughly $2.30 per contract, and that means the stock needs to rise to approximately $80 just for the contracts to break even, a rise of about 10% from the stock's price of $73 on May 15. The calls have a total value of approximately $9.5 million, a sizable bet in the consumer staple stock, given the length of time and given the company’s disappointing results.
Analysts are looking for P&G to rise to around $82, a jump of about 12%, but that outlook has been cut considerably since the start of March. Since that time, analysts have cut their price target on the stock by over 12% from roughly $93. Analysts have also been reducing their rating on the company. Of the 26 analysts covering the stock, only 31% rate shares as a buy or outperform, down from 46% at the end of 2017. Meanwhile, 62% rate shares a hold, up from 46% at the end of 2017.
Positive Technical Setup
The technical chart suggests shares of P&G may be nearing a bottom, after hitting an area of technical support and a long-term uptrend line around $71. The chart also has a gap in it from $76 to $78 that may get refilled. The relative strength index (RSI) has also hit oversold levels below 30 on two occasions already in 2018. The positive takeaway is that the RSI is now starting to trend higher, despite the stocks continuing to fall, a bullish divergence.
The options traders’ willingness to step up and place bets that shares of P&G will rise comes at a potentially appropriate time, based on the technical charts. But it seems unlikely that the analysts will change their stance until the company starts delivering better results.
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.