I'm looking at PCG as a bear play because the price broke below its low of the last 20 trading days. Under the Turtle Trading method, that's a bear signal. (Click here for a discussion of Turtle Trading.)
Frankly, the chart could just as easily prompt a bull call since the price is at a support level and can be seen as primed for a bounce.
PCG began an uptrend from $37.92 in late November 2011 that carried the price up to $47.03 on Aug. 1. From that point, the price reversed sharply in the run-up to the most recent earnings announcement, falling to $44.28 on Aug. 16.
Since then it has traded below that day's high in a generally sideways direction. Today's low of $44.16 (so far) is the first trade below the July 24 $44.17 low that kicked off the most recent leg up.
A penny down is within the normal jitterbugging of a stock chart, so I don't set much store by it. A move above $45.40, a significant pause-point in the decline, would suggest that a bounce was underway. Further downside progress would suggest a continuing decline.
Analysts are showing 47% negative enthusiasm for PCG. The metric gives positive weight to strong-buy recommendations, and ignores hold and lower. Buys are ignored.
(There has to be a better word than "negative enthusiasm" -- "fear and loathing", perhaps?)
On the books, Pacific Gas & Electric looks like a reasonably well-run company. Return on equity is 12%. Debt stands at 93% of equity, higher than I like to see for a bull play but not a killer level.
Annual earnings took a dive in 2010 as the recession took hold and continued to tumble in 2011, using earnings that include non-recurring items. If non-recurring items are removed, then annual earnings have risen steadily from at least 2009 onward.
Quarterly earnings consistently peak in the 2nd and 3rd quarters, which include the summer months. Those quarters rose consistently in 2011 and 2012.
Institutions own 74% of shares. The price is slightly above sales parity. It takes $1.25 in shares to control a dollar in sales.
PCG on average trades 2.3 million shares a day.
That liquidity ought to support a better options selection, which is pretty abysmal. The front months offers only nine strike prices at $5 intervals. Only one call strike shows three-figure or better open interest, although three of the put strikes are in the triple digits.
The front-month at-the-money put has a 21% bid/ask spread, which is high.
The options are tradeable -- barely -- but lack sufficient breadth of liquidity for spreads.
Implied volatility stands at 10%, near the six-month low set Aug. 20. It began a sharp decline on Aug. 1. Options are pricing in confidence that 68.2% of trades will fall between $42.99 and $45.57 over the next month.
Options are trading at only 12% of their five-day average volume, with a huge discrepancy between calls, at 7%, and puts at 42%. I wrote above that the chart could called either bull or bear. Options traders, obviously, are coming down heavily on the bear side.
Today's fair-trade zone runs from $44.17 to $44.28, encompassing 68.2% of trades surrounding the most-traded price, $44.23. The five-day zone runs from $44.19 to $44.81, with the most-traded price at $44.49.
Pacific Gas & Electric next publishes earnings on Nov. 11. The stock goes ex-dividend in September for a quarterly payout yielding 4.1% annualized.
Decision for my account: If I were to follow the bull case for trading PCG, I would wait for a bounce above $45.40. I've chosen to follow the bear case because of the Turtle Trading signal. Also, the options volume skew to the put side buttresses the bearish case.
I've bought put contracts expiring in December with a $45 strike price and a stop/loss (under Turtle rules) of $45.37.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.