The truth matters and there’s little point in attempting to windowdress a catastrophe. Near the end of last week, global courier FedEx (FDX) — which had previously been on a solid run this year — suffered a devastating blow. Simply put, its results for the fiscal first quarter failed to live up to expectations, sending FDX stock into the abyss. Nevertheless, for the daring, a comeback wager could be enticing.
We’ll get into the positive stuff later. For now, let’s address the giant pink elephant in the room — FedEx really stunk up the field. As Barchart content partner StockStory mentioned, the company missed on both the top and bottom lines. Additionally, the outlook disappointed observing experts, with projected earnings per share a particular low point. Fundamentally, management cited weaker-than-expected demand in the domestic package market.
By the numbers, EPS in fiscal Q1 landed at $3.60, well below the consensus view of $4.82. Worryingly, this figure represented a freefall of 20.8% against the year-ago quarter. Sales reached only $21.6 billion, again noticeably short of the target of $22.1 billion. In terms of the year-over-year comparison, the damage wasn’t as bad as the profitability segment. Nevertheless, there was a dip of half-a-percent.
Naturally, management’s comments about reduced demand raise concerns about the broader health of the economy. FDX stock could represent the canary in the coalmine. If so, a bullish stance obviously wouldn’t be helpful.
If there is something to consider, it’s that per Zacks Investment Research, “FedEx Ground and FedEx Services merged into Federal Express, becoming a a fully integrated- more -air-ground express network.” Certainly, significant challenges exist in this integration directive. However, if the company is able to consistently extract greater efficiencies moving forward, that could help FDX stock in the long run.
In the near term, the anticipation of this efficiency improvement could be enough to attract profit scalpers.
Negative Unusual Options for FDX Stock is Only Part of the Story
Another ugly truth about FDX stock is that it pinged in Barchart’s screener for unusual stock options volume because, well, of course it did! When a publicly traded business loses over 15% of its equity value in a single day, it’s going to attract attention — and generally not the good kind.
Let’s look at the numbers. Last Friday, total options volume for FDX stock hit 290,975 contracts, climbing above the open interest reading of 239,503 contracts. Further, the volume level soared 986.39% above its trailing one-month average. Call volume reached 138,570 contracts, conspicuously lower than put volume of 152,225. This pairing yielded a put/call volume ratio of 1.1, suggesting bearish sentiment.
That’s not surprising in the least. Here’s the thing, though. Barchart’s put/call ratio history shows that over the past three months, the ratio is even. If anything, FDX stock may favor the optimists. While the ratio has been above 1.0 in 31 sessions, it’s been below 1.0 in 34 business days.
To be fair, Barchart’s options flow screener — which filters for big block transactions likely placed by institutional or professional investors — shows that net trade sentiment on Friday sat at $-1.27 million, favoring the bears. Overall, premiums associated with bearish sentiment trades landed at $-3.87 million, while bullish sentiment only hit $2.6 million.
I’m not going to sit here and say that’s a good look. However, it’s also possible that the negativity has been priced in. Right now, shares trade hands at 0.83X trailing-year sales. Assuming a low-side revenue of $88.05 billion for the current fiscal year, FDX stock is currently trading at only 0.71X projected sales. That’s lower than the trailing-year average of 0.76X.
In terms of technical analysis, FDX stock has been trading in a defined, ascending trend channel since March of this year. Given the projected undervaluation — combined with anticipation of cost efficiencies — the next move for the equity could very well be higher.
Market Winds Call for a Bull Call Spread
For those interested in a bit of smart speculation, attempting a bull call spread in FDX stock could be the ticket for near-term success. This net debit vertical options spread involves selling a higher-strike-price call to defray some of the costs of buying a lower-strike call of the same expiration date.
One idea to consider involves options expiring on Oct. 18 (a little less than one month from now). Specifically, the key details are as follows:
- Buy the $250 call at an ask of $9.90 per contract.
- Sell the $260 call at a bid of $4.25 per contract.
- The maximum that one can lose in this trade is the cost to enter it or $5.65.
- Enticingly, the maximum reward clocks in at $4.35.
- Breakeven sits at $255.65.
What makes this trade pop? FDX stock closed last Friday at $254.64. By expiration, if FDX stock simply manages to rise by 0.4%, the trade will break even — no gains but no losses. At $260, which is only 2.1% up, traders can receive the full reward of $4.25 per contract or $425 after multiplying by 100 shares.
Yes, the reward is capped at $425. However, if you were to buy the $250 call straight up, you would be paying $990. And that entire amount could be at risk should FDX stock suffer another catastrophe. With the bull call spread, you received defined rewards and risks for 43% off the straight call price.
That’s quite compelling if you were considering speculating on FDX stock but wanted some insurance.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
