Hello everyone, as I traversed my scans this morning I uncovered a potential trade idea I’m considering as the week begins here in early February 2024. Colgate-Palmolive or ticker symbol (CL), is at an interesting level as I write this and I think now could be a good time to have a closer look. As always, this isn’t a recommendation to place any trade. Make sure you know the risks and proceed accordingly.
Before we begin, here is a recent article from Yahoo Finance titled, “CL hits fresh high: Is there still room to run?” which may offer additional insight into what lies ahead.
A Closer Look at Colgate-Palmolive’s Fundamentals
First, you’ll likely recognize the company for one or both of the products in the companies name. Either you’ve used their toothpaste or you’re doing the dishes with their soap. In either case, the two products are staples of virtually every household and for that reason alone the stock could be an attractive holding long-term. However, as options traders we care little about the long term outlook and more about what’s happening right now.
Taking a look at their fundamentals a few noticeable items jump out right away.
First, their Free cash flow per share is in decline over the past 2 years. And while that could just be a temporary hiccup, it could also signal a difficult period incoming for dividend focused investors. They’ll have to decide if their investment dollars could be better utilized elsewhere. Should the FCF/share continue lower this year I’ll take the stance that Colgate-Palmolive will see an intermediate term decline.
Next, their net profit margins have waned rather significantly post covid. Considering the recent surge in stock price a trader may build confidence that the recent uptick in net profit margins have already been priced in to the assets price. Only furthering the bearish tone immediately.
Finally, and on a brighter note, the company is experiencing steady but significant sales per share growth. Moving from $18 dollars/share in 2018 to about $23.50 in 2023. That’s an increase over the 5 year period of about 22%. Not astronomical of course but all things considered, steady growth is steady growth.
To conclude, based on what we can see currently I’d feel confident owning these shares longer term. However, against the backdrop of a strong rise in price and the declining free cash flow per share I think many may be considering taking some profits or risk off the table.
A Closer Look at Colgate-Palmolive’s Chart’s
The first thing you’ll notice is the move above the 2 standard deviation level just a few days ago. That move was supported by above average volume but not excessively so. Meaning, CL could be a bit exhausted and due for the pullback we’ll need. That said, the trend has been strongly bullish since late last year and without the market moving lower as well, the pullback may not materialize.
Essentially, I’m guessing, at this level, we have about a 70% chance the stock will continue pulling back. To what level, I’m not entirely sure but I’ll contend the probability favors the pullback.
Colgate-Palmolive’s Weekly Chart
Further supporting the argument in favor of a Colgate-Palmolive bearish put spread is we’re in an important prior resistance zone. Admittedly though, it does appear investors want this higher given the continual return to it’s current level. Only time will tell if this long term range will hold but from a purely technical perspective I’ll assume the resistance level can hold.
Colgate-Palmolive Bearish Put Spread
Considering the potential weaknesses described I’m confident in my bearish stance. By taking the long side with a Colgate-Palmolive bearish put spread, I’ll be able to capitalize on an increase in volatility and on any price decline. I’ll temper my thought the stock will return to $70 for now, and assume we can reach $80 this week.
Should that happen, I’ll collect around $50 in profit for the $75 dollars of risk. A 67% return on risk for the trading week.
We’ll see soon enough…
God bless,
Jeff
