Trade Alert: Betting Against A Bond Insurer

Taking advantage of the market rally to add a short position.

Thinking about those Puerto Rican municipal bonds his firm insured.

A Post-Earnings Trade

In our previous post (Predicting Price Movements Post-Earnings), I mentioned that I didn’t see any compelling (pre-) earnings trades this week, but did have a bearish trade in mind.

The challenge with the (pre-) earnings trades we’ve been doing recently is that ultimately, you don’t know what the company will report. In the case of today’s company, it reported earlier this month, so we know: it missed on top and bottom lines, and crashed 13% overnight. But now it’s back above its pre-earnings price on no news, just riding the recent stock market rally.

This company is a financial insurer that, among other things, insures municipal bonds.

Weak Fundamentals

S&P Global Market Intelligence doesn’t rate the company’s financial health…

…But Chartmill does. On a scale from 0-to-10, with 0 being the worst, here’s how our insurer ranks:

• Overall Fundamentals: 1

• Health: 1

• Growth: 2

• Valuation: 1

In addition, it has a Piotroski F-Score of 2, indicating financial distress, and Portfolio Armor’s gauge of options market sentiment is bearish on it. I am placing two trades on it, one a bet that the stock doesn’t rise much higher than it is currently, and another a bet that it declines.

Details below.