P&G’s History Set to Repeat

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Next week, Procter & Gamble (PG) will host its 2019 shareholders’ meeting and present its strategy to continue its excellent performance over the last year.

If you haven’t been paying attention (and who can blame you?), P&G has been one of the hottest stocks in the market this year:

Screen Shot 2019-10-03 at 2.48.39 PM.png

As you can see, it has more than doubled the rest of the market, shown here comparing P&G’s 32.9% year-to-date gains to the S&P 500’s 15.7%. And while most investors don’t expect those kinds of big gains from this historically slow-moving consumer staple often, this particular gain shouldn’t be too much of a surprise.

For the first time since the financial crisis a decade ago, the Fed has lowered interest rates… not once, but twice. The global economy – including in key areas like Europe and Asia – has slowed significantly. Trade wars only seem to be increasing in veracity, rather than slowing down.

Then, more recently, we’ve seen the worst manufacturing outlook in the U.S. in more than a decade and an impeachment inquiry started on President Trump to boot.

None of these things spur investors into a greater risk-taking mindset. Instead, these worries and economic pressures are sending investors into safer plays. And you can’t get safer than P&G.

The maker of the Gillette, Crest and Tide brands – not to mention literally thousands of other products – is justifiably a staple… not just in the U.S. but in more than 100 countries around the world. In fact, no one market makes up more than 45% of its sales. Meaning it is as diversified – product-wise and geographically – as you can get.

And all of its products are in businesses that see far less consumer budgeting during economic downturns that most other companies can say.

But, with such a strong performance, many are beginning to question if the company has grown too fast, even for its recession resistant appeal and strong product offerings.

After all, right now, P&G trades for 23.4 times its future earnings. Historically, at least over the previous ten years, it has typically traded for around 17.5 times its earnings. This recent rally has really – seemingly – overpriced its shares.

And that may be true. But in the short term, there’s more room to run.

Consider this. One of the best performing periods for PG comes just after its annual shareholder meeting. These events let old investors see just how stable and steady the company is. They offer straightforward and typically successful projections on earnings and sales. The offer investors a good window to double down on P&G’s safety aspect.

Just look what last year’s did for the stock:

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While the rest of the market was still falling during the fourth quarter of 2018, P&G turning things around following its November 8th shareholder meeting. The S&P 500 ended the few months following that event flat. But P&G shares ended 9.1% higher.

We can expect a similar, possibly even larger move this year. With even more economic worries than just a potential government shutdown – if you’ll recall the end of 2018’s list of worries – 2019’s fourth quarter could present even more flooding into safety plays like P&G.

Of course, simply buying shares of PG might make for a solid 9% or 10%, plus dividends over the next few months. But if you’re looking for larger gains, there is a way to do that too…

A Strategy For Short Term Bulls

A bull call spread is a type of options trade that involves buying a call option on a stock set to go up, while simultaneously selling a second call with a higher strike price.

The option premium received from the sold call helps offset some of the cost of the first. As shares gain in price through the difference between the two strike prices, the trader’s profits grow.

Of course, in exchange for this cost offset, the maximum profit potential is capped. But for a stock like Procter & Gamble, only a fool would expect a massive explosion in share price. Instead, a repeat of last year’s 9% or so price movement is far likelier. That makes this strategy superior to – and more cost effective – than simply buying calls outright… or shares.

You can see how this bull call spread strategy works:


Source: The Options Industry Council

Obviously, it does make a big difference in both cost and profit potential depending on which strike prices and expiration date the trader uses. For P&G, we’ll use last year’s 9.1% post-shareholders-meeting performance as our guideline. Let’s look at a specific example using those parameters.

A Specific Trade on P&G

Right now, a trader can buy a November 15 $120 call for $4.70 per share and sell a November 15 $130 call for $0.82 per share for a net debit of $3.88 per share. Since each call contract represents 100 shares of PG, that’s a total entry cost of $388.

That’s the total amount at risk of this trade. However, shares would have to actually fall below the $120 price point for the trader to actually be at risk of losing it. Right now, they rest above $122. And like we noted, a post-shareholders-meeting rally is more likely than any kind of investor reversal in the short term.

To find the profit potential, take the difference in strike prices ($130 – $120 = $10), and subtract the cost ($10 – $3.88 = $6.12). In other words, this trader is looking at a $612 return on the $388 he has invested. That’s a return on risk of 158%!

Now, shares would have to climb all the way to $130 for that to happen. But if this year is a repeat of last year’s similar period – and it might even be better than that – $130 is easily achievable. $130 marks just a 6.6% price movement, compared to the 9.1% jump seen last year.

Almost nowhere else are you able to get a chance at more than double your money on such a safe stock like P&G. Opportunities like this one are extremely rare.

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