NEW BEARISH Plays
Eaton Corp. - ETN - close: 49.17 change: -0.56
Stop Loss: 51.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 3.9 million
New Positions: Yes, see below
Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.
ETN is in the industrial goods sector. According to the company,
"Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."
Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.
ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.
The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.
With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.
Trigger @ $48.85
- Suggested Positions -
Short ETN stock @ $48.85
- (or for more adventurous traders, try this option) -
Buy the FEB $47.50 PUT (ETN160219P47.5) current ask $1.50
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike