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Verizon Communications (NYSE: VZ) appeared on my bearish scan last night and after delving deeper into the charts, I see two different outlooks for the stock. The daily chart does project a small downturn and then the potential to bounce. There is a trendline that connects the lows from the last few months that could act as support after the pullback. We see that the slow stochastic readings just did a bearish crossover out of overbought territory.
When we pull back and look at the weekly chart, we see a downward sloped trendline that connects all the highs from the past year and the stock has just hit it. This suggests that the bearish signal is valid. We also see a trend for the weekly stochastic readings that shows the peaks and reversals have not reached as high as the previous peak.
Looking at the potential support on the daily chart, the limited downside would not make it worth a bearish trade. However, should the stock get a reversal from the weekly stochastic readings and a bearish crossover, we could see a little more downside movement. The last two reversals and crossovers have produced declines of 16.1% and 10.8%, respectively. That is the kind of decline that is worth playing by selling the stock short or by buying put options.
Looking at the sentiment toward Verizon Communications stock, I see another reason to expect the downside to be more pronounced than just a few points. The sentiment composite is only 5.56 and that is due to a short interest ratio of only 1.7 and a put/call ratio that is among the lowest % of readings for the past year. The analyst rating show 23 “buys” and nine “holds” meaning that 72% of analyst have it rated as a buy.
VZ hasn’t really been knocking the cover off the ball when it comes to the fundamentals lately. The sales percentage change for the last quarter was only five percent and that is the average sales growth rate for the last three years as well. The company is heavily laden with debt as well with a debt to equity ratio of 251%.
Another concern is that despite the mediocre fundamental performance, analysts have been ratcheting up their estimates for the next earnings report. In the last 30 days, 14 analysts have raised their earnings estimate for the current quarter. The next earnings report isn’t until July 18, but when that many analysts are in agreement, I get worried.
I think the best way to play Verizon Communications stock right now is with a put option that has at least four or five months before it expires. Because the volatility for VZ is so low, you can get the October 50 puts for only $3.85 and the options are $2.15 in the money right now. Should the stock drop 10% from here, these options would have an intrinsic value of $6.94 for a gain of 80%.
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