Profits of 1100% and 172%! and… Corporate Insecurity: The Smash & Grab Future of ADT (ADT, GDX, XLU, TGT)

ADT Inc. (NYSE:ADT) has suffered from years of relative underperformance.

Just this last twelve months, for instance, the S&P 500 put on 27%, while ADT holders lost 5%.

Sure, they got a 1.74% dividend, but does that palliate the gravity of the offense?

Katie, Bar the Door!

Today, the security and alarm specialists look on the verge of a steep decline, and we’re planning to profit from it.  But before we pick that lock, we’ve got three trades to deal with – and a good load of money to pocket!

Get out a pen…

First up is our GDX trade from ten days ago.

The letter was called Gold is Officially Circling the Drain, and it urged you to sell the GDX March 18^th 34 CALL for $0.94 and buy GDX March 18^th 27 PUT for $0.96.  Total debit on the trade was $0.02.

And today…?

Shiver me timbers, Yokel, but the CALL can be repurchased for $0.59 and the PUT sold for $0.83.  Get it done and you take home $0.22 on two cents spent.

That’s 1100% in under two weeks.

And that’s Nutella with a spoon.

Congrats to David and Connie W. and to that famous blackbird fellow for getting in on multiple units of the trade.

NEXT!

We have an XLU/XLF pairing that arrived at your inbox August 5^th.  The directive was called How to Profit From Utility/Financial Extremitudes and it recommended you buy the XLU December 17^th 70 CALL for $1.25 and buy the XLF December 17^th 37/33 PUT spread for $1.40.  Total debit on the affair was $2.65.

Today, we’re acting on the XLU CALL only, selling it for $0.78, while we wait-and-see on the open XLF spread.

That reduces our debit to $1.87.

More news tomorrow.

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And finally, out TGT initiative, whose details can be found HERE, has us holding the January 21^st 240 synthetic short and a credit of $0.03.

With TGT now trading at $236.65 – and potentially ready to bump higher – we’re closing her down.

Buy back the short 240 CALL for $6.00 and sell the long 240 PUT for $8.75 and you walk with $2.78 NET.

And that’s a very fine 172% (the original cost of the trade was $3.87).

Time for ALL the chickens to come home to roost!

Today’s Trade

ADT’s in bad shape.  Their earnings are shrinking, they couldn’t turn a profit last year (nor even the last five years, on average), yet they’re borrowing money to make acquisitions and continually raising their dividend.

Doesn’t make sense.

Have a look at some raw fundamentals –

• There’s no P/E because there’s no profit.
• Dividend Yield is 1.74% – with all the questions about sustainability suggested above.
• Price/Book is 2.41.
• Debt/Equity is a ginormous 3.51.
• EPS this last year were DOWN 43.50%, were DOWN over the last five years by 53.20% and are projected to move LOWER by 7.00% for the NEXT five years.

How’s that for confidence?

And how’s this for a chart? –

This is the daily for the last six months, and it shows all-round weakness.

1. ADT shares lost 30% of their value over the period in question, while the S&P rose by 12%.  Bad sign.
2. That’s reflected also in the RSI and MACD indicators, which are again showing sub-waterline weakness for the last nine sessions (in green).
3. A descending triangle with support at $7.85 also spells trouble (in red).  This is a bearish formation, and with price just above $8.00, we could see a cascade of selling should price move lower by less than two percent.
4. All moving averages are unfurled and trending lower (in blue), effectively putting a roof over price at $9.25 (and declining).
5. And finally, we have an island reversal pattern (in black, enlarged) at the last retracement high, a week ago.  The pattern speaks to a sustained move lower, which is precisely what our trade is banking on.

And it goes like this –

A Jew and His Gold recommends you consider setting the ADT February 18^th synthetic short* using the 9.00 strike.  Total debit on the trade is $1.10 (0.20/1.30).  Set a STOP buy on the shares at $9.50 to cap any losses.

[*Sell the CALL and buy the PUT.]

Rationale: our breakeven on the trade arrives at $7.90, and with price now at $8.04, we need a decline of just $0.14 (1.7%) to start seeing profits.

Maximum gain is $7.90, in the unlikely event of an ADT bankruptcy.

Maximum loss with proper STOPS in place is $1.60 (difference between the short CALL and the STOP plus the initial debit).

Multiple units of the trade will, of course, yield greater profits (and losses).

May Hashem see us through the dark days of winter and bring us an abundant spring.

Many happy returns!

Matt McAbby

Follow @HughLOHaynew