As investors flock to SpaceX, one trader eyes a sleepy ‘stealth’ play
Beechcraft King Air turboprop aircraft take off at Textron Aviation Inc. in Wichita, Kansas, on Thursday, June 7, 2018. seen on the assembly line at the manufacturing facility.
Luke Sharett | Bloomberg | Getty Images
Is there anything more ostentatious than this? SpaceX IPO?
Of course, who doesn’t love going to the moon and beyond? But if you’re looking for something a little more terrestrial, there’s one stock investors may be overlooking. textron that’s exactly what it is: a stealth game that involves solid techniques, fundamentals, and trading at a significant discount to its defensive peers.
Despite broader economic headwinds, Textron’s revenues and earnings have grown steadily. The maker of Bell Helicopters, Cessna jets and even golf carts released a report that beat consensus by more than 11% in the first quarter, and shares rallied on that pressure — but even as the S&P rose, shares are now trading slightly cheaper than before the report. Despite demonstrable operational momentum, the street continues to price TXT like a broken business. It trades at just 13.7 times forward earnings, which is well below the five-year historical average of 18 times.
Why deep discount? The market is suffering from a bad case of risk-mispricing. Yes, Congress is facing mounting debt pressures that are contributing to perceived risks to aviation fleet programs at Textron, Embraer, and Bombardier. But the geopolitical reasons for demand for defense spending have not diminished. Textron is actively divesting its low-margin Industrial segment to become a pure aerospace and defense powerhouse, unlocking a $19 billion backlog in the process.
The chart isn’t stimulating, but TXT continues to move above the 150-day moving average while generating significant free cash flow (FY 2027 FCF yield is expected to be around 4.65%).
To capture the potential upside by acknowledging that 1) the broader market is a bit expensive and 2) implied volatility (the way options traders view option prices) is a bit high, I would express that view with a risk-defined bullish bet rather than buying the stock.
You can purchase the September 95/110 call spread for approximately $4.65 at today’s mid-market prices.
Trade
- Buy the September $95/$110 call spread for $4.65
- Maximum loss $465
- Maximum winnings $1035
- Skill level: Medium
Selling the $110 call against the long $95 strike lowers the purchase price and reduces the impact of time loss (aka “theta”). Defined risk, lower cost basis… A strategy that doesn’t require the move to happen tomorrow, thus giving the street some time to re-rate the stock.
My guess is that the market will eventually notice Textron, but by using the spread I’ve defined the risk of my bullish bet in case it doesn’t.
