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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

April 25, 2015 - Colgate Palmolive Reports Earnings April 28

What's happening with CL: Consumer goods maker Colgate Palmolive (CL) is scheduled to release its first-quarter results before the market open on April 28. Analysts forecast earnings of $0.63 per share, down from $0.66 during the same period last year. The stock is up 3.0% on the year.

Technical analysis: CL was recently trading at $68.60, down $3.19 from its 12-month high and $17.76 above its 12-month low. Technical indicators for CL are bullish and the stock is showing signs of a possible trend reversal. The stock has fallen below recent support and has recent resistance below $71.80. Of the 16 analysts who cover the stock, one rates it a ” buy”, and 15 rate it a “hold”. The stock receives S&P Capital IQ’s 3 STARS “Hold” ranking.

Analysts' thoughts: The entire consumer staples group is showing signs of fatigue, and after a strong rally between September and mid-April, CL shares have started to turn lower. The stock’s valuation has become a concern, with shares trading with a P/E of 45.2. The P/E is even more troubling when considering analysts forecast earnings to fall 1.4% this year before rising 9.0% next year. Like all multi-national companies, the strong U.S. dollar is having an impact on the company’s bottom line, and that is likely to continue through the remainder of the year. Given the stock’s high valuation, I would caution against setting up a new stock-only trade at this time. Wall Street has proven a willingness to pay up for the stock, so the valuation should not lead to any major selling pressure, but it is likely to keep a ceiling on the stock until the company is able to begin growing earnings again. The street has a slightly higher whisper number for the quarter, calling for $0.33, so that is the number Wall Street will really need to see in order for the stock to make a meaningful post-earnings move to the upside.

Stock-only trade: I would not consider a stock-only trade on CL at the current time.

Bullish trade on CL: If you want a bullish hedged trade on the stock, consider an August 55/60 bull-put credit spread for a 25-cent credit. That's a potential 5.3% return (16.1% annualized*) and the stock would have to fall 12.2% to cause a problem.

Bearish trade on CL: For traders that expect currency headwinds to result in a disappointing report and the stock to move lower, consider an August 75/80 bear-call credit spread for a $0.30 credit. That's a potential 6.4% return (19.6% annualized*) and the stock would have to rise 9.8% to cause a problem.

Covered Call Trade: If you like the stock, but are concerned about the current valuation, you may want to consider lowering your cost basis with an August $70.00 covered call. Buy CL shares (typically 100 shares, scale as appropriate), while selling the August $70.00 call for a debit of $66.90 per share. The trade has a target assigned return of 4.5%, and a target annualized return of 14.1% (for comparison purposes only).

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