Courtesy of Paul Price of Market Shadows
In the latest Best Game in Town, MarketShadows, March 10, 2013
Note: The Air Products Put has not been sold yet, the price of it did not hit our limit (3/4).
Tough market days like Monday, when the DJIA dropped more than 216 points, provide second chances. Stocks that seemed like they would never come back to earth get hit in sympathy with most other shares.
Air Products & Chemicals (APD, $84.34) is a high-quality name that has pulled back from a 2011 peak of $98.00 to close yesterday at $84.34. APD’s stock price stability and earnings predictability each rate in the top 10% – 20% of all companies. The $0.64 quarterly dividend provides a 3% current yield. That may increase soon as management typically raises the payout during the June quarter.
Zacks carries 2013 – 2014 estimates of $5.77 and $6.41 respectively putting APD at 14.6x this year’s and less than 13.2x 2014’s expectations. That compares with APD’s 10-year median multiple of 18x.
There has been solid technical support around $77-$78 over the past two-and-a-half years. APD touched prices that low only during periods of extreme market turmoil. It bounced back quickly each time to $90 or better.
A return to just 15.5 times 2013 earnings would bring APD right back towards $90 once again. That suggests a low-risk opportunity for either buying the stock directly or selling (writing) one January 2014 put with a $85 and $90 strike. Here is the pricing of those puts as of 4 pm on Tuesday.
If APD closes above the strike price ($85 or $90) on January 17, 2014, the put will expire worthless. This would be good for us as put writers (sellers) because we would keep the money collected from selling the put.
If we are forced to buy the stock because it is trading below the strike price at expiration, our net cost would be strike price minus the amount we collected for selling the put (i.e. $77.50 with the $85 put, and $79.40 with the $90 put). In either case, our net price for the stock would be close to the best prices of the past 36 months.
Both scenarios look good – selling a put that expires worthless, or selling a put and buying APD at a discount. In the first case, we keep the premium. In the second case, we buy shares at a discount. The $90 strike provides more upside than the $85 strike price, with a small sacrifice in downside protection (lower margin of safety). Even the $90 target price does not look overly aggressive. APD shares hit a peak of $90 or above during six of the past seven calendar years, including this year.
Writing puts, as opposed to simply buying shares, lets us invest in APD without needing to call the end of the market’s selloff. For those who do not sell options, I like the stock around $84.
We are going to sell one APD Jan. 2014 $90 put in our Virtual Put Selling Portfolio with a limit price of $10.60 when the market opens on Wednesday, February 27th.
Source: TradeStation Feb. 26, 2013
Disclosure: Long APD shares