Coles – Take Profit

Earlier this month we recommended buying Coles Group at $11.25. With the stock now trading $12.00 + we consider this an opportunity to lock-in profit.

Coles offers limited earnings growth and the rally in the stock price has been supported by lower global interest rates, rather than company specific news.

Alternatively, investors who wish to hold the stock, may consider selling at the money call options to enhance the income return.

 

 

Treasury Wines – Valuation Review

Treasury Wine Estates is under Algo Engine sell conditions following a lower high formation at $17.50.

Earnings continue to grow at 15 – 20%, although there is evidence that the growth rate is slowing.  If we assume total revenue in FY20 of $3bn on EBIT of $765mn, 15% earnings per share growth, we can support a 3% dividend yield.

On the above basis, we consider TWE fair value, but see little in the way of a catalyst to drive the share price higher. We therefore, recommend selling a covered call option to enhance the income return.

 

US Markets – Watch the NASDAQ

All major equity indices are now showing Algo Engine sell conditions. The NASDAQ has led the charge higher and the FANG stocks in particular, have outperformed.

Overnight the Dow fell 460 points and the NASDAQ was down 2.5%.

Bank stocks have been trending lower this week, as an inversion of the yield curve, (the spread between the 3-month treasury bill yield and the 10-year note rate), turned negative for the first time since 2007.

Fears of a recession are building as we see a continuation of weak economic data from around the world.

Technically, we suggest investors overlay the 10 day average on the NASDAQ and remain defensive, as long as the index trades below the average.

Coles – 10% Cash Flow

Following the earnings miss in the February result, we feel Coles share price now reflects fair value. At 15x earnings and 5% yield there’s an opportunity to buy the stock and sell covered call options, to deliver 10% annualized cash flow.

We question the earnings outlook next year, mainly due to increased capital spending requirements. However, for the balance of 2019 we expect the share price to remain within the $11 to $11.75 price range.

For more detail on the derivative strategy, please call our office on 1300 614 002.