Following the recent earnings call, Priceline (PCLN – $153) surprised analysts by earning $2.02 a share up 30% from a consensus estimate of $1.75. Sales were up 17.5% to $603.7, analysts were expecting $574 million.
CEO Jeffery Boyd said, “Despite a difficult economic climate, leisure travel demand for the summer peak season has been stronger than expected, driven in part by the availability of compelling discounts.”
More recently Citigroup slapped a price target of $185 and Barclays followed with $180. Year to date PCLN is up 108.36% from a low of 73.65 and is currently trading at an all time high of $153. Where was Citigroup and Barclays when Priceline hit its low in November? It is quite easy to upgrade and initiate coverage once momentum has built up on a stock rather than making a call when the outlook seems bleak. Should an investor choose to follow these calls a return of 20% and 17% will be garnered should the price targets be reached.
The contrarian in me chooses a bet against these targets. From a macro perspective the economy is not doing that great and it seems oil is headed back towards $100 (currently $74). Unemployment is still at 10% with no improvement in site and more importantly the boost in GDP from the stimulus package will slowly begin to vanish by the end of this year.
As with the economy I expect Priceline to stall. The trade, sell call Jan10@185 for a premium of $5.50. Initial margin requirement of $2,050.00, proceeds of sale $550.00, for a requirement of $1,500.00. This yields a 36% return annually or approximately 80% for five months. The stock will have to move higher by 24% to breakeven at $190. A close below $185 on Jan and the option expires and the premium is yours. Given the rise in equities over the past few months and the dreary macro outlook I entered into this trade today.
'Disclosure: Short Calls'