Avis/Budget a Lemon? Make Lemonade! (CAR)

Some things are just too outrageous to cope with.

Take the Batflu, for instance…

What the…?

Another is the Avis Budget Group (NASDAQ:CAR), master of the vehicle rental sphere, whose stock is now due for an I-405 pile-up.

Fundamentals

Get this –

• CAR carries an airbag P/E of 46.22,
• A bumper-bending BUPKUS dividend yield,
• Revs a Price to Book ratio of 89.39 (!),
• An unbelievable Debt to Equity ratio of 159.85, and
• Earnings per Share for the coming year are expected to DECLINE by 38.49% (after declining by 343.20% already this year).

So what’s driving the stock price?

Of late, it’s all short covering.

And there’s still a huge short position out there – over 20% of the float!

Which means a short bet on CAR could be a dangerous endeavor.

Unless we carefully craft the trade as a defined-risk proposition.

And so we shall.

But first, let’s have a look at the daily chart for the last six months –

Technically, we have a number of extraordinary phenomena at play…

1. To begin, price advanced almost 100% in just the last ten weeks (in red).  Why?  Because Bank of America adjusted their price target higher.  Whoopee!
2. Pull it together, gang.
3. Along the way, a gap opened at 90 that needs filling (in blue), and
4. A bearish engulfing pattern was logged yesterday (enlarged, in black). This could be a sell trigger for many technical investors.
5. While not overbought, RSI is dangerously close to her panic-inducing 80 line (in green), while
6. MACD is stretched implausibly and has now, apparently, begun its roll lower.

Now the weekly –

Here, we see –

1. Both RSI and MACD diverging lower against price since spring (in green), and
2. Price action that has strayed like Mae West from her longer term moving averages (boxed, in red).  This creates a tension that is always resolved by a snap-back meeting of the two.  By our reckoning, that rendez-vous should take place rather soon.
3. But first, we’ll likely see a drop to the 100 range, and possibly 90 thereafter, where simple Fibonacci retracement lines emerge (in purple). The 90 level, remember, is also where a gap on the daily chart requires filling.

And it’s with all the foregoing in mind that we offer the following –

A Jew and His Gold recommends you consider selling the CAR November 19^th 115/120 CALL spread* for a credit of $2.00 (13.40/11.40) and buying the CAR November 19^th 105/95 PUT spread** for $3.00 (6.80/3.80).  Total debit is a buck.

[*Sell the 115 CALL and buy the 120 CALL.  **Buy the 105 PUT and sell the 95 PUT.]

Rationale: we like the price of entry here, and the potential reward – pay a dollar, win back nine (maximum gain).

Maximum loss is $6.00 (difference between the CALL strikes plus the initial debit).

The likelihood of taking that loss is diminished by the steepness of the gains of late – the straight move higher of the last five sessions speaks to a buying spasm that appears now to be exhausted.

We could see new highs in another month or two – yes.

But the short term trend is far less likely to be northward.

G-tt in Himmel will decide.

Praise Him all through the day.

And many happy returns!

Matt McAbby

Follow @HughLOHaynew