I have used the Walk That Profit Home To Momma Strategy on Clorox Stock since January. I started with selling in the money puts at the $75.00 strike on January 7. I followed up on January 18 selling the $77.50 put strike and then on January 31 I sold the Clorox Stock $80 naked puts. All of these were in the money at the times and all were for February. Clorox Stock meanwhile has risen steadily and on Friday it closed at $81.70.
Clorox Stock and Momma
The Momma Strategy is designed to assist put sellers in earning the income against a rising stock by selling in the money naked puts for large profits. Clorox Stock and Johnson and Johnson Stock have been my two Momma Strategy trades so far in 2013. The Clorox Stock trade has been ideal but I believe it is time for the Momma Strategy to be closed for now.
In another Clorox Stock article I wrote on Feb 2, I looked at whether Clorox Stock was creating a new trading range. You can read that article on CLX Stock through this link.
Clorox Stock 3 Year Daily Chart
If we look at the 3 year daily stock chart on Clorox Stock you can see that the last rise was in 2011 when the stock peaked at $74.00. A lot of that rise was caused by Carl Icahn who purchased a large volume of shares and pushed for Clorox to be sold.
The recent rise in Clorox Stock is actually unusual and could be caused by anything from a belief that earnings are going to improve, to a possible buy-out of Clorox to the chance for a split in the shares. It is difficult to know what is causing the unrelenting rise in the stock, but with the stock at $82.53 today, another new 52 week high, I am retiring the Momma Strategy from Clorox Stock and turning now to put selling.
Clorox Stock Trading Range
To try to figure out what trading range I should be considering for Put Selling as the stock continues to rise, let’s go back to December 2012 and look at the daily chart. I have marked the key aspects on the Clorox Stock daily chart below.
A. This shows the most support in the stock. In December the stock was trading within the $76.00 range and then pulled back in late December to $73.00. After the fiscal cliff mess was dealt with and Clorox Stock moved right back to support at $76.00. This means there is strong support at that level.
B. Marks the rise in stock following the delay of the US budget debate which ended at $80.00.
C. Clorox Stock has traded within the $80.00 range for 7 trading days. There is a small amount of support at this strike.
D. This marks the recent rise in Clorox Stock as each day has seen new all-time highs in the stock. I will be looking for a new support level in Clorox Stock, possibly at $82.50. If none develops then the chance of a pullback to $80 is high.
Put Selling The $80 Put Strike
It appears obvious to me that the best put strikes would be the $80 and $77.50. The problem is with Clorox Stock rising continuously now, the put premiums are very poor for the $77.50 strike. This leaves only the $80 put strike. On Friday then I sold 10 naked put contracts at the $80 put strike for April for $1.05.
Financial Fundamentals on Clorox Stock
The Financial Fundamentals on Clorox Stock are not the best. Earnings have improved to $4.28 a share but book value is still a negative $1.04. Cash Flow is very good at $5.64 and in line with other companies in the Household Products Industry. Price to Earnings is in line at 19.1 X but price to book is at 191 X whereas normal valuation among the industry peers is 11.7 X. Price to cash flow is in line at 14.4 X.
Profit margin is lower at Clorox, running at 10.06 % versus the industry average of 13.32%. Gross margin is also lower at 42.6% versus the industry average of 48.75%. Clorox Stock pays the highest dividend of all Household Products Companies, with a payout of $2.56 annually. The payout ratio is at 58.2 X which is higher than the industry average of 52.8 X but it is well within range and supportable.
The debt ratio though is at 97.95% which is far too high to remain sustainable in my opinion. Market cap is just 10.7 billion which is small in relation to many within the Household products group and their market share is continuing to decline as their main focus is on North America and to a lesser extent Europe. They are not growing in other markets such as Asia, Australia or Africa.
Summary of Put Selling Clorox Stock
While I like Clorox Stock as far as the charting goes, there are problems within the fundamentals of the company itself. With the stock now up above $82.00, I believe it can move higher but I would prefer to return to Put Selling out of the money strikes one and two months out and close them early when profits are decent. A return of 75% of the premiums earned would certainly be a nice buy back point.
The Walk That Profit Home To Momma strategy relies on earning substantial returns through Put Selling in the money puts against a stock that is rising. As the stock rises the in the money puts eventually end up out of the money allowing me to earn income through selling options without ever owning the shares. It is a strategy that provides a degree of protection in the event that the rise in the stock ends and I have earned enough to be able to close the in the money puts with the balance of the put premium earned still intact.
I believe though using the Momma Strategy must include confidence that the rising stock will continue rising. In the case of Clorox Stock I believe it is moving ahead of itself now and reaching into overvalued prices which will not be sustainable unless something dramatic happens to Clorox Stock, such as a buy-out or a significant acquisition or large earnings jump. Aside from these I do not see any other reasons Clorox Stock can push a lot higher which is why I have ended the Momma Strategy and returned to Put Selling out of the money put strikes against Clorox Stock.