Yahoo Finance Love AT&T Inc. (T) Stock While Wall Street Hates It
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AT&T Inc. (NYSE:T) is stuck in a brutal price war thanks to T-Mobile US Inc (NASDAQ:TMUS). As the new kid telco on the block, TMUS is overzealous with the promotions.
Source: Mike Mozart via Flickr
Price wars are not a new concept, but T-Mobile took it to the next level. This benefits us, the consumers, but puts tremendous pressure on the sector stocks.
T stock has been sliding since July of 2016, when it made a multiyear high. In the past 12 months, while equity markets were setting new highs, T stock fell 13%. But now and with most of the froth out of the stock, I want to catch this falling knife … with caution, meaning I will leave plenty of room for error.
Ironically, TMUS, which played a big part in the downside pressure on T stock, is enjoying a near-40% 12-month rally. So it’s not that the sector is toxic. There is money coming into it and it’s only a matter of time before the pendulum swings back into T’s favor on Wall Street.
From a valuation perspective, T is the better bet. It carries a P/E of 18 which is roughly half of that of TMUS, and pays a dividend to boot. Most importantly to my trade thesis is that with a price-to-book under 2, I am not afraid to temporarily own AT&T stock if my trade sours.
I do have to address the gorilla in the room. There are rumors that Amazon.com, Inc. (NASDAQ:AMZN) could become a direct competitor.
Talk about pressure on AT&T profitability. AMZN is the master of thin margins so I must make room for this potential headline.
T Stock Trade Idea
The Bet: Sell the T Oct $34 put and collect 50 cents to open the risk. I have an 85% theoretical chance of retaining my maximum gains. To win, I need the price to stay above my sold strike. Otherwise I will own the shares and could suffer losses below $33.5.
For those who don’t want to own the shares I can use credit spreads instead. There the risk is more limited thereby reducing the overall disaster exposure.
The Alternate Bet: Sell the T Oct $34/$32 credit put spread where I have about the same level of certainty but with much smaller risk. Yet, the spread would yield 15%. Compare this with buying AT&T stock at face value and with no room for error hope that the stock rallies 15% just to match the spread.
Investing is risky, so I never want to expose my portfolio to potential losses from which I can’t recover.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
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