NEW DIRECTIONAL PUT PLAYS
Norfolk Southern Corp. - NSC - close: 95.53 change: -1.58
Stop Loss: 100.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.2 million
Entry on May -- at $---.--
Listed on May 23, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below
Why We Like It:
The combination of weak fuel prices, lower global demand for fuel, and rising exports from other countries has been hurting U.S. coal exports. The U.S. Energy Information Administration expects U.S. coal exports to fall throughout 2015 before leveling off in 2016. Less exports means less coal that needs to be moved by railroad.
NSC is in the services sector. They're a major player in the railroad industry. According to the company, "Norfolk Southern Corporation (NSC) is one of the nation's premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 20,000 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern operates the most extensive intermodal network in the East and is a major transporter of coal, automotive, and industrial products."
Falling coal shipments is not the only problem for the railroads. Crude oil's decline from last year's highs and the massive slowdown in the amount of fracking in the U.S. has also hurt the railroad business. Less drilling means fewer rail cars of oil pipe and drilling equipment to be shipped. Less fracking means less fracking sand and other proppants to be shipped. Less drilling also means less oil produced and thus less oil to be transported by rails.
It's not just NSC that's suffering. In March 2015 railroad company Kansas City Southern (KSU) dramatically reduced their guidance. Two months later (about May 14th) KSU actually revoked its guidance altogether. Management sees no visibility due to so much uncertainty surrounding the energy market. KSU's energy-related business is down -50% from a year ago and carloads are down -38% in Q2 2015. Their utility coal shipments are down -68%.
Another company, Union Pacific (UNP), painted a similar picture of lower shipments and falling demand. The industry is facing difficult year over year comparisons. They have seen 11 weeks of negative rail volume. Industry wide coal shipments are down -15% from a year ago (UNP's was down -25%). Shipments of crude oil are down. Shipments of agriculture products are down.
It could be months before the oil industry in the U.S. recovers. Coal isn't expected to recover this year. That doesn't paint a very rosy picture for the railroads.
On April 13, 2015 NSC issued an earnings warning. They guided their Q1 results to $1.00 per share on revenues of $2.6 billion. That's a -15% drop in earnings from a year ago. Wall Street was expecting $1.29 per share on revenues of $2.68 billion. Shares of NSC crashed on this news and then rebounded but the bounce failed at technical resistance and shares have accelerated lower. NSC has broke down under major support near the $100 level.
Technical traders could argue that NSC has created a giant head-and-shoulders pattern (with two right shoulders) over the last nine months. This H&S pattern would suggest a downside target in the $80-85 region.
Tonight we are suggesting a trigger to buy puts at $94.85.
We will start this trade with a stop loss at $100.25. More conservative traders may want to use a stop around $98.30 as an alternative.
Trigger @ $94.85
- Suggested Positions -
Buy the SEP $90 PUT (NSC150918P90) current ask $2.50
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