{"id":43208,"date":"2020-04-27T11:10:00","date_gmt":"2020-04-27T15:10:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=43208"},"modified":"2022-11-21T09:45:26","modified_gmt":"2022-11-21T14:45:26","slug":"harley-davidson-stock-could-crash-this-coming-week-how-you-can-profit","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/harley-davidson-stock-could-crash-this-coming-week-how-you-can-profit\/","title":{"rendered":"Harley-Davidson Stock Could Crash This Coming Week. How You Can Profit."},"content":{"rendered":"\n

Harley-Davidson<\/a> stock could be headed for a serious wipeout this coming week.<\/p>\n\n\n\n

J.P. Morgan<\/a> has advised clients to buy defensive put options <\/a>on Harley\u2019s stock (ticker: HOG) in anticipation that the motorcycle maker\u2019s earnings report, due to be released Tuesday morning, could cause shares to decline by 37% or more.<\/p>\n\n\n\n

The bearish outlook reflects concerns that the economic fallout of Covid-19\u2014the record unemployment and retail weakness\u2014could create trouble for both the company\u2019s sales and its financing for customers.<\/p>\n\n\n\n

At a time when each day seems to bring news of more corporate layoffs and economic difficulties, buying an expensive motorcycle <\/a>probably doesn\u2019t rank high on most people\u2019s immediate shopping lists. A Harley-Davidson 2020 CVO Street Glide<\/a>, for example, costs $40,539.<\/p>\n\n\n\n

In addition to an expected reduction in future demand, Harley may have trouble with some existing customers who bought and financed their purchase through the company, Shawn Quigg, a derivatives strategist at J.P. Morgan, told clients in a recent note. Harley-Davidson Financial Services, which allows consumers to apply for credit online, represents a big part of the company\u2019s operating income. <\/p>\n\n\n\n

Harley-Davidson didn\u2019t respond to requests for comment. The Street expects the company to report earnings of 58 cents per share for the first quarter, compared with 98 cents for the year-ago quarter.<\/p>\n\n\n\n

According to Quigg, the financial-services business represents about 48% of Harley\u2019s operating income, even though it accounts for only 15% of total revenue. Of the total receivables, he wrote, about 18% have credit scores below 640, which is considered to be subprime. <\/p>\n\n\n\n

Manufacturers are incentivized to sell to customers when economic trends are favorable and credit stresses are low, the strategist noted. \u201cHowever, the immediate incentive to sell units may come at the expense of the longer-term risks, which can create a mismatch, increasing the probability of tail-events in times of heightened credit stress, such as that exhibited with COVID-19,\u201d Quigg wrote.<\/p>\n\n\n\n

The economic troubles created by the virus, and the significant contribution that financing makes to the company\u2019s operating income, could drive investors to reconsider how shares are valued. Quigg argued that \u201csignificant operating risks…support a case for HOG to trade at or below its tangible book value per share ($11.34).\u201d<\/p>\n\n\n\n

To monetize his thesis, he suggested clients buy Harley-Davidson\u2019s May $17 puts that cost $1.40 when the stock was at $18.28. Should the stock trade at its $11.34 tangible book value at expiration, the put is worth $5.66. The trade will fail if the stock is above the put strike price at expiration.<\/p>\n\n\n\n

During the past 52 weeks, Harley\u2019s stock has ranged from $14.31 to $40.89. Shares are down about 50% <\/a>this year.<\/p>\n\n\n\n

In addition to the earnings report, Harley implemented new accounting rules <\/a>in January that require a front-load recognition on credit losses on loans and other financing assets. This could bring greater negative attention to the company\u2019s financing operation, Quigg wrote.<\/p>\n\n\n\n

Investors are likely aware that Ally Financial<\/a> (ALLY), one of the nation\u2019s largest prime auto lenders, reported that as of April 16, 25% of its auto-loan customers requested payment deferral\u201470% of whom have never been delinquent. \u201cALLY carries a higher FICO clientele than HOG,\u201d Quigg noted.<\/p>\n\n\n\n

The implied volatility of Harley\u2019s options that expire in one month and are 5% below the stock\u2019s price are not priced with a significant fear premium relative to the S&P 500 index\u2014or those of General Motors (GM) and Ford Motor<\/a> (F). Quigg wrote.<\/p>\n\n\n\n

Harley-Davidson is priced in the options market as if the stock will move about 10%, up or down, in reaction to earnings, compared with an average move of 4.7%, up or down, over the past three years.<\/p>\n\n\n\n

—<\/p>\n\n\n\n

Originally Posted on April 24, 2020 – Harley-Davidson Stock Could Crash This Coming Week. How You Can Profit.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

J.P. Morgan has advised clients to buy defensive put options on Harley\u2019s stock (ticker: HOG) in anticipation that the motorcycle maker\u2019s earnings report, due to be released Tuesday morning, could cause shares to decline by 37% or more.<\/p>\n","protected":false},"author":31,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6,19,8,9,26,3],"tags":[412,399],"contributors-categories":[13583],"class_list":{"0":"post-43208","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-north-america","7":"category-options","8":"category-region","9":"category-securities","10":"category-text-articles","11":"category-traders-insight","12":"tag-hog","13":"tag-jpm","14":"contributors-categories-barrons"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nHarley-Davidson Stock Could Crash This Coming Week. 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