Clorox Stock (CLX) Downgrade Gives Selling Options Profits

Clorox Stock has been a surprisingly good performer for my portfolio. When I started trading Clorox Stock in March 2009 it was trading around $49.90 with a price to earnings of 15.5 times. Today the stock is trading around $87 with a price to earnings of 20.5 times so Clorox Stock is not cheap. While many analysts are quick to point out that the entire household products industry is trading at 22.2 times price to earnings, and Clorox Stock is at just 20.5, and therefore considered cheap, this is a poor way to judge individual stocks. The household products industry often trades on average around 18.5 times earnings but with the rise in stocks earnings have not kept pace which is why the industry is now at 22.2 times earnings. Clorox Stock meanwhile should be trading around 18.5 times earnings which means with earnings of $4.27, Clorox Stock could be down around $79 to $80.

Clorox Stock Third Quarter Small Profits

In the past quarter the profit picture was poor if you can read between the lines. Overall most of the gains were due to price increases and not a general growth in product sales which is what sustains and grows a company’s market share.

Clorox Stock Downgraded

The rise in Clorox Stock and the sales outlook brought out a number of downgrades with the most influential comes from Credit Suisse. They downgraded Clorox Stock to neutral from buy noting that while Clorox Stock has done well thanks in part to its 3.2 % dividend, they are of the opinion that upside for the rest of the year is limited. They believe EPS will come in around $4.32 on the low side and $4.63 on the high for the next year which is a drop of a few pennies from earlier estimates. They then note that the 10 year PE average for Clorox Stock has been around 16.6 X which means the stock is definitely overvalued. A lot of this has been caused by investor enthusiasm for dividend paying stocks.

While Credit Suisse sees limited upside potential, they do not see a lot of downside either. This makes Clorox Stock perfect for Put Selling and the odd Bollinger Bands Strategy Trade here and there.

Clorox Stock One Year Chart

The one year chart below shows the climb in the stock this year. If we look for support in the stock it is actually below $80. There is limited support at $82.50 and then support falls a long way down below that.

Clorox Stock one year chart

One Year Daily Chart of Clorox Stock

This is not to say that the stock will fall rapidly lower if it breaks $82.50. The dividend is good and was increased again this year and has been every year since I started investing in it decades ago. Instead Put Selling against Clorox Stock needs to be done on a smaller scale such as the 3 or 6 month chart. Let’s look at the 3 month chart.

Clorox Stock 3 Month Daily Chart

You can see in this chart why I have been Put Selling the $80 and $82.50 strikes.

A. May 1 was the earnings which really hurt the stock but you can see in the chart that the stock was already double topping and had started the decline 6 trading sessions earlier. Analysts had expected $1.05 in earnings but instead Clorox Stock provided $1.00 in earnings. Meanwhile last year for the same quarter Clorox Stock produced $1.02, so not only did the company not meet expectations but came in with lower earnings per share despite raising prices on most products. This tells us that they are not growing their market share.

B. B points to the 10 period moving average and you can see how in the last run-up after the low of May 1 the 10 period simple moving average (SMA) did not cross up and over the 20 or 30 period exponential moving averages (EMA) to indicate that the stock was recovering.

C. Indeed the stock already has pulled back. Therefore someone holding Clorox Stock as a core holding for their portfolio who is looking for dividends only, should be considering an aggressive strategy of selling covered calls.

Clorox Stock 3 month daily chart

Clorox Stock and Covered Calls

Covered calls on Clorox Stock makes a huge amount of sense now. There is very limited upside potential but every move higher is a chance to bring in additional income off the stock. A strategy such as my Hide and Seek Covered Calls would work wonders on this stock as that strategy sells covered calls on rises and then buys them back on declines augmenting the dividend. The dividend is 3% and selling covered calls effectively through timing when to sell and when to buy back could easily earn anywhere from 7 to 10 percent in income which would provide a return of as high as 13%.

Put Selling Clorox Stock

Put Selling looking at the 3 month chart would be simple as well by reversing the covered call strategy. When the stock falls and then looks ready to turn higher I will be selling puts. I will buy back any naked puts when the stock turns back down.

I am not expecting any major downturn in the stock. Clorox Stock is widely held by institutions and continues to be a great company and it is small enough that a company like Procter and Gamble for example, could easily buy it up. I doubt that will happen but you just never know. Clorox needs to get its products out to the world a lot more than it is doing. It must grow its market share or it will see a steady erosion in the stock valuation.

If I sell puts and the stock turns lower I will immediately buy back those puts and roll lower because you never know what emotion investors are in should the next quarter earnings also surprise to the downside.

After $80.00 there is little support until the stock gets down to $75.00. There is a lot of support at that level and owning this stock at $75.00 would be a good spot for trading the stock.

Clorox Stock Volatility

I am expecting more volatility with Clorox Stock and look forward to more opportunities ahead as I am sure option premiums will be moving higher as the stock remains under pressure until the next quarterly earnings come out. Once they are released we should get a clear picture as to whether Clorox Stock is in a serious decline or whether they are able to get back to growing their market share and their revenue.

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