Back on March 24, 2016, we recommended investors construct a bearish put-spread on Acuity Brands, Inc. (AYI), the lighting manufacturing and solutions company. Click here for the original article. The company grew revenues and earnings very nicely since the financial crisis. Investors who bought at the bottom and held into Q2-2016 were rewarded with a 14-bagger. This is the kind of returns once can earn if they find companies whose best commons stocks are trading at depressed values. Investors are attracted to companies that are growing, so it is important to buy “growth at a reasonable price.” It is the reasonable price bit that had our concern and it was the share price action that grabbed our attention.
Our system looks for stocks where the price action is aligned with company valuation and the fundamentals of the company. In this case, we saw a growth company whose stock peaked without any fan fair. In addition, AYI is an industrial company that should benefit from an increase in construction and infrastructure development by the government. The share price was not reflecting that prospect and a closer look a the recent financial performance showed that revenues and earnings growth had slowed and may have come to a halt.
The most recent earnings announcement confirmed our concerns. The company reported earnings that both revenue and earnings were down year-over-year and quarter-over-quarter. EPS came in at $1.53 versus $1.69 for the same quarter last year. Investors did not take this news well and they sold the stock hard.
At this point, we think the easy money has been made and there is not much more we can squeeze out of our put spread. We purchased the put spread on March 24 where the shares were at $202.34. The shares closed last night at $173.12.
| Action | Quantity | Exp. Date | Strike | Type | Buy | Sell | Net |
| Buy | 1 | 5/19/17 | $200.00 | Put | $8.30 | $23.90 | |
| Sell | 1 | 5/19/17 | $185.00 | Put | -$3.90 | -$10.60 | |
| $4.40 | $13.30 | $8.90 |
We paid $4.40 when we entered into the trade and now we collect $13.30 upon liquidating the put spread for a $890 profit per put spread. BE SURE TO USE A LIMIT ORDER TO SELL THE PUT SPREAD AT $13.30 OR HIGHER. THE BID / OFFER SPREAD IS VERY WIDE ON THESE OPTIONS. YOU RUN THE RISK OF A VERY BAD EXECUTION WITH A MARKET ORDER. After the fact, this trades looks like an easy gain. Our analysis and timing were on the mark. Investors should be aware that more can be squeezed out of this trade should you wish to hold on longer and you think the share price will not bounce above $185 between now and May 19. When we entered into this trade is was capital gains oriented. We were looking for a sharp move down. Now that the price of the stock has moved below the lower strike, it has become a yield-oriented trade. If the share price stays below $185, you will be able to close out the spread for $15.00, which gives you an additional $1.70 in profit. We think there is little chance of that happening, but the share price is oversold and could bounce. We do not like trade structures that provide a small gain (even if it is highly assured) by risking a lot. Since the easy money has been made, we suggest taking your profits and allocating your capital to other opportunities as we present them.
