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Tobacco, Anyone? Philip Morris Spurts Carcinomic Geyser. (PM)

Posted on January 20, 2022

We’re smoking the murderers at Philip Morris today (NYSE:PM) with a trade that’s near perfectly crafted.

PM has all the makings of a stock that’s topped.

But don’t take our word for it.

Look at the evidence.

Fundamentals

Fundamentally, she’s not so hot –

  • P/E is 17.70 (relatively low for this market, but considering her historical average, she’s too expensive by at least half),
  • Dividend Yield is a very powerful 4.91% – hard to make any bones about that, and
  • P/B is non-existent, meaning the firm’s break-up value is NIL.

Fine.

  • As for Earnings, the last five years has seen unimpressive 3.10% growth,
  • While Sales growth over the last half decade has been even worse, running at 1.40% per annum.
  • Return on Equity is a dismal NEGATIVE 78.40%.

In short, there’s little to commend the stock fundamentally, outside of a tremendous dividend, to which more and more of the company’s earnings have been directed over time.

Great for shareholders.  In the short term.

But bad for growth.

Additionally, we note that the shares have been rising as the dollar has strengthened, bucking both logic and historical precedent.

How’s That?

PM shares climb when the dollar declines in value, and lose altitude when the dollar rises.

That’s because the company reports earnings in dollars, but sells only in foreign markets.

And…

Of late the dollar has been climbing as a Fed tightening cycle is expected to commence – which should put pressure on PM shares.

But it hasn’t.

Yet.

The company refers to it as “unfavorable currency impact.”

And today we’re emphasizing that ‘impact’.

‘Cause it’s a’coming.

Take a look at the chart –

 

Technically, Philip Morris presents –

  1. An overbought RSI indicator (in green) – an unequivocal sign we’re near a top, and
  2. A MACD indicator in the process of rolling lower.
  3. An eight week trend channel, against the top of which price just banged its head (in red).
  4. A very unlikely 21% YTD parabolic gain (in blue) – as the dollar was rising!
  5. There was a great deal of volume on the rise as well (in black), which could have been a buyback program or retail investor interest, it’s not clear.  But it wasn’t very smart, that’s for sure.
  6. We see an initial pullback to the 137 DMA (in purple), first support, as there was no real test of that line as price sliced higher some ten sessions back.

And our trade is structured accordingly.

To wit –

A Jew and His Gold recommends you consider selling the PM June 17th 100/105 CALL spread* for $2.00 (5.85/3.85) and buying the PM June 17th 100/95 PUT spread** for $2.05 (5.60/3.55).  Total debit on the trade is $0.05.

[*Sell the 100 CALL and buy the 105 CALL.  **Buy the 100 PUT and sell the 95 PUT.]

Rationale: for just a nickel we get a chance to make a max $4.95 (9900%).

Our max downside is $5.05 (difference between the CALL strikes plus the initial debit).

Our breakeven hits at $99.95, just 1.5% below the current stock price.

And full-bore profits of 9900% are achieved with a decline of just 6.4%.

And best yet, we have five months to get there.

So let it be written!

May the G-d of Abraham, Isaac and Jacob crush the evildoers, return holiness to the earth and bring peace to the land.

Many happy returns!

Matt McAbby

 

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