בס״ד

Overbought Equity Mistaken for UFO! (TXT)

Posted on May 10, 2021

Note to Subscribers – due to the holy convocation of Shavuot, next week’s A Jew and His Money will not be published (May 17th).

A Jew and His Gold will arrive as usual on Thursday the 20th, and publication of A Jew and His Money will resume the following week, on 24 May.

Should there be any trade closures necessary in the days prior to or following Shavuot, we will send a Trade Bulletin with all due swiftness.  But we will not be available for communications between sundown on Sunday the 16th and sundown Monday the 17th.

On that day, you’re on your own.

Chag Sameach to all!

And now we move on to this week’s trade.

We’re taking on the aeronautics sector today with a flak-based takedown of Textron Inc. (NYSE:TXT), makers of flying vehicles and the parts that keep them operable.

Unfortunately, the company doesn’t offer much in the way of fundamental incentives.

  • It trades with an unreasonable P/E of 36.29 (TTM),
  • Pays a barely visible annual dividend of 0.12%,
  • Possesses a Price to Book ratio of 2.58,
  • Carries too much debt for our liking, and
  • Saw a 61.50% drop in earnings this last year.
  • In the last six months, too, insiders lightened up on their holdings by 28.8%!

Is it because they expect others to take profits, too?

Textron has ongoing troubles with its Cessna airplane unit, while its Bell Helicopter unit needs desperately to win at least one of two government contracts for which it’s now bidding.

Its automobile plastics division, Kautex, is also struggling through a rough cycle in the global auto market.

It’s our belief that TXT shares have already priced in everything good that’s happened over the last year, as well as anything that might happen in the next.

Earnings were reported some ten days ago, and since then the stock went overbought on average volume (see chart, below).

That is, from here on out, we say the bulls are engaged in speculation exclusively.

Now have a look at the chart –

Technically, we’ve got –

  1. An egregious RSI overbought signal on the daily chart (in green),
  2. ANOTHER one on the weekly chart (directly below that), which, taken together, speak to a perilous future for the stock.
  3. We have several gaps that need filling (in blue), after
  4. A super-sized rise of 240% (in red – following one of the company’s worst earnings years on record), and
  5. A near parabolic rise over the last three weeks of nearly 20%.
  6. Simple Fibonacci calculations suggest a decline to roughly $50 (in purple), where the rising 137 day moving average is now situated.

And it’s for all the foregoing that we’re now recommending the following highly levered trade –

A Jew and His Money recommends you consider selling the TXT July 16th 65/70 CALL spread for $2.35 (5.10/2.75) and using the funds to purchase FIVE (5) TXT July 55 PUTs for $0.45 each.  Total credit on the trade is $0.10

Rationale: The trade essentially offers us a free opportunity to leverage a downside move on TXT, and still maintain a known and limited worst case scenario.

Maximum gain on the trade is unlimited.

Maximum loss is $4.90.

We’ll very likely close the trade before expiration, as the PUTs come into-the-money and the CALL spread approaches worthless.

The only danger here is the time we’ve afforded the trade.  At roughly ten weeks, it’s a relatively short time horizon, but we’re comfortable with it, all the same.

A dip on the major indices will likely produce a strong pullback on TXT.

And that’s all we need.

May the G-d of Israel guide you.

With kind regards,

Hugh L. O’Haynew

 

 

 

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