EOT Trade Alert – March 5, 2009
March 5, 2009
Trade Alert:
Buy BDK May 2009 $17.50 Puts at $1.35 or better (BDKQW)
Company Background:
Black & Decker (BDK) makes power tools and accessories, hardware and home improvement products, and fastening systems. The company’s products are sold in more than 100 countries and they have manufacturing in eleven countries. When I think of Black & Decker I think of cheap tools!
Short-Term Catalyst:
As you may know, one of my brothers works in the homebuilding industry. He specializes in multimillion dollar building projects. Some of the houses he’s built are absolutely stunning. A few of them have been photographed for magazine covers.
As a general contractor he works closely with all of his subcontractors. To say times are tough is a huge understatement. It seems like every day a few more go out of business. Things are so bad the smaller contractors are struggling to find work, any work, for their employees.
My brother even suggested some of his contractors were working BELOW cost on a few projects… they needed the cash flow badly.
Other contracting firms, and their employees are now pawning their tools… just to make ends meet.
So I’m sure you see where I’m going with this.
If you can’t find work and you’re pawning tools to make ends meet, you’re not exactly jumping up to buy new equipment. As a matter of fact, why buy new when you can buy used at 25% to 50% of the cost.
All of this points to continued problems at Black & Decker.
One more point to make… just look at their dividend. It’s not sustainable. In my opinion, management might be looking to cut the dividend soon.
Earnings are falling, and paying out $0.42 per share can get expensive very quickly. (Last year dividend payments were over $101 million.)
It makes sense as the management team has missed analyst expectations not only for the last few quarters but for the year as well. It’s never good when guidance on 2009 is substantially below analyst expectations.
I’m not the only one who thinks more trouble is on the horizon… S&P just cut the company’s short-term ratings. If that’s not a kick to the head, I don’t know what is.
On a technical basis, the view is just ugly. The 50-day moving average is in a long downtrend. As are the 5- and 20-day moving averages. The stock is falling through support levels without even a pause. I’m expecting the trend to continue for awhile longer.
Trade Details:
| Option Ticker Symbol: | BDKQW |
| Underlying Stock Symbol: | BDK |
| Current Bid-Ask Price: | $1.05 – $1.15 |
| Option “Buy Up To” Price: | $1.35 |
| Break-Even On Stock At Expiration: | $16.15 |
| Maximum Risk Per Contract: | $135 |
Exit Strategy:
BDK is trading at $21.43 per share. Resistance levels will be at $25 and again at $28. Remember we want this stock to move lower. Support levels will be at $17 and $15. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.
Chart:
Category: EOT Trade Alert
