Fire in a Spray Can – Downside Travels on Lubed-up Loser (WDFC,GNRC)

We’ve got one to close before this week’s offering.

It was opened last Thursday in a communiqué entitled “It’s not the people who vote that count. It’s the people who count the votes.”

There, you’ll recall, we urged you to sell the GNRC November 20th 220/230 CALL spread for $4.70 and buy the GNRC November 20th 230/220 PUT spread for $5.30.  Total debit on the trade was $0.60.

And now?

The short CALL spread is worth $2.45 (3.00/0.55) and the long PUT spread is fetching $6.50 (14.00/7.50).

Buy back the first* and sell off the second**, and you pull in $4.05 on $0.60 laid out.

And that’s a very quaint 575% in just four days!

* Buy back the short 220 CALL and sell the long 230 CALL.

** Sell the long 230 PUT and buy back the short 220 PUT.

And Retire to Baja!

You’re welcome to try your luck by waiting until the end of the week – it’s possible you’ll see the stock cheaper.  And that would definitely increase your winnings.

But then again, it might not happen…

______________________________

And now for this week’s effort.

We’re getting slippery with a trade on the WD40 Company (NASDAQ:WDFC), whose lubricated rise of late appears to be losing its grip.

WDFC shares popped nearly 20% in a single session in late October, after an earnings beat that, in retrospect, may have been more grease than meat.

Do-it-yourself fix-ups during the Batflu (and a lot of kids’ bike chains, apparently) were said to be the reason for the boost in sales.

But that’s a bit hard to swallow.

Fundamentally, too, the stock looks rusty.

To wit –

• Current P/E is a squeaky 59.0 and
• Price to Book is all smeared-up at 22.1 (!).
• The stock offers a 1% yield.  But even with the earnings beat, TTM earnings are down five percent from the prior year and are expected to grow by just 10% in the year ahead (even though the company has never hit that growth target over the last five years).

In short, this is not a growth story, nor can the “isolation renovation” trend – as their CEO calls it – be expected to continue.

It was a one-off.  The follow through is over.  And the shpritz is about to spittle.

Take a look at WDFC’s daily chart since March –

It’s clear that October’s earnings surprise led to a bidding derangement that compromised the company’s technicals.

1. Specifically, we’re now retreating from an overbought 80+ RSI read (in green),
2. MACD is rolling over (green circle),
3. While a bearish engulfing pattern from the beginning of last week (in black) is likely to prove the proverbial straw the breaks the cat’s curiosity.
4. We’ve blocked (in red) the company’s long term growth trend, as represented by the mid- and long-term moving averages, and highlighted the latest month’s vector (in blue).  And you can see just how ludicrous it appears.

Now look at the weekly –

• Daily RSI overbought indications coupled with Weekly occurrences sound a bell in stock market gehinnom heralding the arrival of a new visitor (green box).
• See also the weekly MACD trajectory, so angled to induce in the viewer an immediate and giddy sense of dread.
• And lastly, we’ve boxed (in blue) the distance price is removed from her long term weekly MAs. As you can see, we’re now at an unprecedented divide – one not seen in either percentage or raw dollar terms at any point in the last decade.  The last tme price got so disconnected, the sideways drift exceeded fifteen months.

And it’s with all the foregoing in mind that we offer the following unique, long-short spread play on a WDFC decline –

A Jew and His Money recommends you sell the WDFC December 18^th 260/270 CALL spread for $2.40 (8.40/6.00) and buy the WDFC December 18^th 270/250 PUT spread for $12.20 (16.80/4.60).  Total debit on the trade is $9.80.

Rationale:  We want downside exposure to WDFC for as cheap a price as possible.

Selling the CALL spread helps us offset the cost of the PUT spread.

And with WDFC now trading at $260.03, we can partake in any immediate decline for no cost at all.  That is, our debit of $9.80 offers us nearly $10.00 worth of intrinsic value even as we set the trade (the long 270 PUT is precisely $9.97 in-the-money).

Maximum loss on the trade occurs if WDFC closes above 270 at expiration (and equals $19.80 – the spread between the short CALL strikes plus the initial debit).

Maximum gain on the trade is $10.20 (the spread between the long PUT strikes less the initial debit).

Because the spreads are overlapping, we have muted gains and losses between 260 and 270.

Breakeven is 260.20 (again, current price is $260.03).

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew