A Freiliche Chanuka to all you good Jews and Noahides!

May the light always triumph over darkness.

Today’s trade is embedded in the realm of “cloud-based human capital management” providers – specifically, Automatic Data Processing, Inc. (NYSE:ADP), or ADP, as they’re more commonly referred.

Glad you asked…

It means they provide tools for management teams and HR departments to turn you into a byte-sized package of digital abstraction.

Clear…?

Bottom line: we don’t like ADP stock at this stage.  And we’re preparing to make money as she trips lower.

But first, come have a look at the fundamentals –

• To begin, P/E is 36.32.  For a legacy business that’s experiencing standard-order growth, this a tad porcine.
• The stock’s Dividend Yield is 1.62% (not bad…),
• But Price to Book is a rotund 18.62.  Yes, she’s essentially a well-run computer outfit with salespeople attached, but numbers like this have to ring warning bells.
• EPS this year grew by 6.80%, while the stock appreciated by 50%!  Another bell?
• And lastly, insiders offloaded 29.07% of their shares in the last half year for an atomic ka-ching of $30 million (23 of those 30 million were pocketed after Labor Day).

Is there something there…?

Only the shadow knows…

The company upped its dividend recently, yes, making for 47 consecutive years of raises, and that’s impressive.

It also added a number of new businesses to its stable, in keeping with its acquisition strategy.

And exactly one month ago, ADP beat quarterly analyst estimates – marginally…

But it appears the stock is now struggling.

Take a peek –

Technically, we have –

1. An overbought RSI condition from two weeks ago (in green) that’s now headed sub-waterline.  When she ultimately splashes down, either tomorrow or Wednesday, we should see increased selling.
2. MACD has also rolled over, adding to the bearish case for the stock and testifying to a clear loss of bullish momentum.
3. Two gaps need filling (in blue), the lower of which resides at $205 (toward which we ultimately see the stock slipping), and
4. A broken rising wedge (in red) is an additional bearish omen, leading us to surmise that the next move will be lower to AT LEAST initial support at the rising 137 day moving average – now at $208 (light blue line).

And it’s for all the foregoing that we now offer the following scrumptious plate of latkes and sufganiot –

A Jew and his Money recommends you consider selling the ADP December 31^st 225/230 CALL spread* for a credit of $1.60 (8.50/6.90) and buying the ADP December 31^st 235/215 PUT spread** for $8.55 (10.90/2.35).  Total debit is $6.95.

[*Sell the 225 CALL and buy the 230 CALL.  **Buy the 235 PUT and sell the 215 PUT.]

Rationale: we have a Maccabean opportunity to profit in one month to the tune of $13.05 (max gain) on an initial layout of $6.95.

Max loss is $11.95 (difference between the short CALL strikes plus the initial debit).

Because of the structure of the trade, our breakeven arrives at $223.05, just 2.8% below the current share price.

Additionally, our max loss will only be tallied if the stock rises above $235 by expiry, an eventuality we deem a longshot, considering the stock’s current downside momentum and general market fragility.

A look at the stock’s options chain provides ample evidence that the shares’ upside is now limited.  Traders are offering pennies for most short CALL spreads (save the shorter dated ones, like ours), while charging comparatively huge premiums for long PUT spreads.  That skew is clearly tilted toward a negative short- to intermediate-term outcome.

The greatest danger to the trade is that we run out of time.  A month to see the results we desire is, admittedly, something of a gamble.

And we’re taking it.

These are the days we let the Hellenizers have it.  May the Al-mighty G-d be with you.

!מי לה’ אליי

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew