NEW DIRECTIONAL PUT PLAYS
Canadian Pacific Railway - CP - close: 140.50 change: -3.33
Stop Loss: 146.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on November -- at $---.--
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings in January
New Positions: Yes, see below
Transportation stocks have been significant underperformers this year in spite of lower fuel costs. The Dow Jones Transportation Average peaked in late 2014-early 2015 and has fallen -11% year to date. Railroad stocks have fared even worse. The DJUSRR railroad index is down -26% for the year.
Shares of CP are down -27% this year and look poised to extend their losses.
CP is in the services sector. According to the company,
"Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise."
One of the challenges for the railroad companies has been falling coal demand. The White House has been pressure the coal industry. Meanwhile falling natural gas prices have made it a more attractive alternative to coal. One estimate suggest coal demand in the U.S. could fall by 100 million st this year and 2016 will be even lower. A lot of that coal gets moved by train but falling demand means less carloads to transport.
Another challenge for the railroad industry has been falling capex spending from the energy companies across North America. Depressed oil prices make it less profitable to invest in new wells and that means less demand to move that equipment and fracking supplies by rail. Wall Street analysts have been reducing their earnings estimates on the railroad companies and cutting their price targets.
A U.S. economy stuck near 2% growth doesn't help either. GDP growth fell from +3.9% in Q2 to +1.5% in Q3. Last week the latest durable goods orders (from September) were another disappointment and suggest the economy is slowing.
The stock market's plunge in August pushed shares of CP from $160 to $130. The stock almost made it back to $160 by early October but the rebound has reversed. Disappointing earnings news in the transportation industry this past week sparked another sell-off. Now the trading in CP over the last two months looks like a bear-flag consolidation pattern (see chart). The point & figure chart has turned bearish and is currently forecasting a $128 target but it could get worse. Tonight we are suggesting a trigger to buy puts at $139.75.
Trigger @ $139.75
- Suggested Positions -
Buy the 2016 JAN $130 PUT (CP160115P130) current ask $0.00
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