Dark Horse Traders’ Hedge: Don't Let the Sun (Trust) Profits go Down - Part II
Thu, Aug 18, 3:25 PM ET, by Scott Brown, Sabrient.com
I can't light, no more of your darkness
All my pictures seem to fade to black and white
I'm growing tired and time stands still before me
Frozen here on the ladder of my life
Too late to save myself from falling
I took a chance and changed your way of life
But you misread the meaning when I met you
Closed the door and left me blind, by the light
Don't let the sun go down on me
Although I search myself, It's always someone else I see
I'd just allow a fragment of my life, to wander free
But losin' everything is like the sun going down on me
- Sir Elton John
After a great summer blockbuster that's amped up the audiences, news on a sequel may follow with renewed interest. But everyone knows it won't be as good. Not the case with STIówe've taken a second helping, and we’re looking for thirds.
The "run around" in the Stock Market continues today with another -4.5% day underway. Markets like this make us especially happy that we keep a hedge in place to take advantage of up days with longs and calls and at the same time take advantage of down days with shorts and puts. The headlines want us to believe that we should blame Europe. I suppose that means that the downgrade of US debt by Standard & Poor is but a memory now and soon to be forgotten. Or that the economic reports about unemployment, GDP, Consumer Sentiment, etc. are simply understood, leaving Europe as a great scapegoat candidate.
It doesn't really matter who we blame as it is much more important to realize our current state, which feels a bit like we're "frozen here on the ladder of (our lives)." It is more important than ever to have a balanced hedge in your investments and capture profits, so we don't have to feel it's "too late to save (ourselves) from falling."
Today we are recommending taking profits on SunTrust, Inc. (STI) again. Like many other "banks" STI "took a chance and changed (their) way of life" and they are in jeopardy of "losing everything (on) the sun going down on (them)."
We recommended shorting STI originally on July 13, 2010 at $25.54 and covered with a profit on August 25, 2010 at $22.68. Incidentally, August 25, 2011 is my parent's 50th anniversary so I felt compelled to make a personal sidebar here. As I noted above, we recommended a second visit to the short side on STI Sept. 2, 2010 at $23.61 for the following reasons:
Sun Trust Bank (STI): SHORT STI at the open 9/2/10
Sun Trust Bank is rated a STRONG SELL by Sabrient and is ranked #3 at the bottom of the VCU strategy. Earnings (or lack thereof) will be announced July 22, 2010 and 29 analysts project a range of -$.06 (on the best side) to -$.46 (on the worst side) with a consensus of -$.34. Price to Sales of 3.49 is significantly higher than the industry average of 2.88 and further convinces us that it is overvalued at this price. STI also has a Fundamental score of 32.1 compared with the industry average of 53.8 and the S&P 500 score of 70.1 which is a measure of a company’s financial health, including its balance sheet, cash flow, revenue, and earnings quality.
Since that time STI has moved out of negative earnings to +$.33 in the most recent quarter giving the company a Trailing P/E of 22.09 but a Forward P/E of 7.99 which is more in line with proper valuation metrics. The really good news for us is that the stock traded down to that "proper valuation" by reaching the current price of $17.89. Closing the short at these prices nets a 25.13% profit. There are still many concerns going forward with STI, as with all regional "banks," but the Fundamental score for STI has improved from 32.1 in September 2010 to 47.4 on August 16, 2011. Recall that this is a measure of STI's financial health, including its balance sheet, cash flow, etc. At that same time, the S&P 500 score has dropped to 60.6, which reduces the Fundamental risk that associated our recommendation to short STI.
SDI Glossary: "price" Definition
SDI Glossary: "Earnings" Definition
SDI Glossary: "GDP" Definition
SDI Glossary: "Stock" Definition
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