(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of VZ.)
Could 2018 be the year that Verizon Communications Inc. (VZ) breaks out of its nearly five-year period of going nowhere? The options market is suggesting that shares of Verizon could rise almost 18% in 2018, while the technical setup would indicate that an increase over $50.50 would trigger a technical breakout. Should a technical breakout occur, the stock could rise towards $56.00 in 2018, an increase of just over 18% from the current stock price around $47.35. (For more, see also: Verizon Stock Is Ready to Break Out of Its Slump.)
Over the past five years, even with the dividend, Verizon has delivered a total return of only 38%, versus an S&P 500 that has risen by nearly 86% and the S&P 500 Total Return Index, including dividends, of almost 106%. Surely the poor performance of Verizon shares have been disappointing and not worth owning over the past five years.
Some traders are making a bet that the outlook will start improving in 2018 for the telecom giant using the call options set to expire on January 18, 2019. The strike prices ranging from $45 to $55 have a notional value of roughly $15.5 million in total open interest. This is no small bet, especially considering the time decay of the options due to the length of time. The $55 call options trade at a price of approximately $0.86, implying the price of Verizon's stock needs to rise to $55.86 just to break even.
Due to the length of time until expiration, the options carry an expensive premium. This is because as time moves forward, the value in the options will decline, meaning the premium for the options will decrease due to time decay. It makes betting on a stock that has gone nowhere in nearly five years a risky bet to a buyer of the calls. (For related reading, see: Why Verizon May Need to Buy CBS and Viacom.)
Should shares of Verizon rise above $50.50, it would trigger a technical breakout in the stock. The stock has traded in a range between $44 and $54 since 2012. However, shares have been trending lower since June of 2016. A rise above $50.50, taking the stock above that downtrend, will lead to the breakout. This would send shares higher up towards $54.50—an old resistance level. But this time around it would seem possible for shares to rise above resistance on towards the previous highs of $56.
Perhaps things are looking up for Verizon in 2018, but there is a long way to go. At least for now, the technicals and the traders are suggesting shares will rise.
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.