בס״ד

Norfolk Southern: Train Wreck Dead Ahead! (NSC)

Posted on June 10, 2021

Norfolk Southern (NYSE:NSC) comes under the microscope today, after a rise of 163% from her Batflu lows.

That’s not as big a jump as we’ve seen from other sectors, to be sure, but from a railroad it represents quite a surge.

That said, there’s now reason to worry.

The entire transport sector is presenting weakness against the Dow Industrials on a relative basis, and that tells a tale of a cooling economy – and market.

As for NSC, from a fundamental perspective, she’s posting as follows –

  • P/E is at an historical extreme of 30.46,
  • Dividend Yield is 1.44%,
  • Price to Book is also high at 4.73,
  • Earnings for the year are down 23.50%,
  • And insiders, whose understanding of the company’s workings is always sharpest, have offloaded 27.59% of their holdings ($34 million) in just the last six months.

Do they smell a wreck…?

Likely.

The daily chart offers ‘we the people’ ample reason to unload, as well.

We say this despite the post-Batflu pick-up in business, despite significant cost-cutting efforts (across the industry), despite the company’s adoption of a ‘Precision Scheduled Railroading’ (PSR) model, and despite dividend and buyback initiatives.

In our eyes, the chart speaks a container full.

Have a look –

Technically –

  1. We have an RSI indicator that’s sub-waterline for several weeks (in green), and
  2. A MACD indicator submerging TODAY.  Together, that should mean increased technical selling in the days ahead.
  3. Those indications come on the heels of a completed rising wedge pattern (in blue), and
  4. Three waves up running their full course as of yesterday (in red).
  5. The enlarged black box shows the break below the last (longest) trendline.

And with that, we believe the deal is sealed.

Support arrives at 258 – though a break lower is always possible.

We’re playing it like this –

A Jew and His Gold recommends you consider purchasing the NSC July 16th 270/250 PUT spread** for a debit of $4.80 (6.10/1.30).

[**Buy the 270 Put and sell the 250 PUT.]

Rationale: with the trestles starting to buckle, we’ve got downside exposure aplenty, but it comes with a small price tag.

We pay $4.80 for a maximum return of $15.20.

Our maximum loss is capped at $4.80 – our initial debit.

Breakeven on the trade arrives at $265.20 – just 3% below the current share price of $273.76.

The trade is considered SPECULATIVE, due to the relatively short time frame involved (seven weeks).

Pay close attention to expiries and strikes.

The G-d of Israel is pure kindness, friends.

Know Him always.

Many happy returns,

Matt McAbby

 

Leave a Reply

Your email address will not be published.