(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of VZ.)
- Verizon Communications Inc.'s (VZ) stock has lagged the broader S&P 500 for the past three years. However, the middle of May shares has been on a roll, rising by about 10% and outpacing the S&P gain of just 4%. Now options traders are betting shares will increase by another 10% from its current price of approximately $51. Should that happen, the shares of the mobile phone company would have risen by over 20% since its lows in May. (For more, see also: Verizon's Stock May Rise More Than 15% in 2018.)
A technical analysis of the trading chart also suggests the stock will surge. One reason for the surge of optimism may stem from a rise in earnings growth. Still, the stock is trading at its lowest earnings multiple since the fall of 2015.
The call options at the $55 strike price for expiration on January 18 have an open interest of about 52,000 open call contracts. The number of open contracts at that strike price has nearly tripled since early July. For the buyer of those calls to break even, shares of Verizon need to rise by about 10% to $55.90, because it costs about $0.90 to buy a call contract. The dollar value of those call options is about $5 million.
The technical chart also suggests shares are on the rise and have been steadily trending higher over the past year. The price recently rose above a technical downtrend that had been in place since the middle of January. That may clear the way for the stock to rise to its next level of resistance at $54.80. (For more, see also: Verizon's Stock Breakout May Lead to 12% Gain.)
VZ Annual EPS Estimates data by YCharts
One reason for the optimism is the forecasts for significant earnings growth. The company is expected to say earnings grew by 19% when it reports second-quarter results on July 24. Growth for the full year is expected to accelerate and is forecast to rise by about 22%.
Fundamental Chart data by YCharts
The strong earnings growth has given the stock its lowest one-year forward earnings multiple since the fall of 2015. The stock currently trades at just 10.9 times 2019 forecast of $4.66 per share.
The options market and the technical chart appear to be reflecting an improving earnings outlook, and the companies discounted price-to-earnings ratio. But it also means that Verizon will need to deliver strong quarter results next week to keep the bullish momentum going.
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.