EOT Trade Alert – April 1, 2009

| April 1, 2009

April 1, 2009

Trade Alert:

   Buy REG July 2009 $20 PUTS at $2.90 or better (REGSD)

Company Background:

Regency (REG) is a national owner, operator, and developer of shopping centers.  The company owns 440 retail properties with more than 58.4 million square feet of space.  Regency is a qualified real estate investment trust (REIT).

Short-Term Catalyst:

Here it is, short and sweet.  We all know the real estate market is in the toilet.  Home sales are at decade low levels, consumer confidence is shot, and you can’t get a mortgage to save your life.

People are spending less.  They’re eating out less.  They’re cutting back… and that hurts retailers.  We witnessed the damage all through the holiday shopping season, and even profited from falling prices in companies like JC Penny and Kohl’s.

Now the problems are heading to the next level.

Look at companies like Circuit City and Bennegans.  These firms are drastic examples, but they’re shutting down and closing stores.  That means less revenue for the REITs that own the shopping center real estate.

But the real problem isn’t retailers going bankrupt.  Nope, it’s the overall slowdown in new store expansion and the closing of unprofitable stores.  Think about it for a moment.  Retailers are shuttering stores left and right… who takes the hit, the landlord who not only loses revenue but has to go through the hassle and expense of trying to get a commercial space re-rented.  (something that could take years)

Regency is a perfect example.  They have a huge real estate portfolio focused on the commercial retail market.  A huge number of their centers are located in California and Florida… areas that have been hard hit this recession.

The company even points out their occupancy and renewal rates are falling when comparing 2007 to 2008.  Definitely not a good sign.

The company is set to announce earnings on May 6th.  I believe as we go through earnings season, we’ll see the REIT industry hard hit, and Regency won’t be able to avoid the pain.

The option I selected looks underpriced to me.  This option’s strike price is set just below the low prices the stock hit in early March.  If we fall at all, and retest those lows, I’d expect the option value to jump.

On a technical basis, the view is just ugly.  The stock’s well below the 50-day moving average (which is in a down trend).  Today we had a 5- and 20-day moving averages crossover to the downside… a negative indicator for the stock.  I see this stock moving lower in the next few weeks.

Trade Details:

Option Ticker Symbol: REGSD
Underlying Stock Symbol: REG
Current Bid-Ask Price: $2.50 – $2.75
Option “Buy Up To” Price: $2.90
Break-Even On Stock At Expiration: $17.10
Maximum Risk Per Contract: $290

Exit Strategy:

REG is trading at $26.43 per share.  Resistance levels will be at $29.50 and again at $31.  Remember we want this stock to move lower.  Support levels will be at $24 and $22.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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