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Option Idea of the Week: Sherwin-Williams

SHW looks poised to keep making new highs

by 11/16/2012 11:39 AM
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For the past year, Sherwin-Williams Company (NYSE:SHW - 150.07) has spruced up portfolios the way a new coat of paint brightens up a room. Year-over-year, the stock is up 77%, and the shares have appreciated more than 67% in 2012 alone. Recently, the equity dipped lower to visit support at their ascending 20-week moving average and have subsequently turned higher. This trendline has helped guide the shares north since last October.

Weekly

The stock's recent press higher is even more impressive when considering it defies the downward trend in the broader market. In fact -- looking back further -- SHW has outperformed the broad-market S&P 500 Index (SPX) by nearly 13 percentage points in the past three months. What's more, the equity's Relative Strength Index (RSI) reading of 54 is far from an overbought extreme, suggesting there is ample upside potential.

Investors have not bought into this impressive price action, which may bode well from a contrarian perspective. For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 2.20, meaning there are 220 puts in residence in the front three-months' series for every 100 open calls. In a similar vein, the 50-day put/call volume ratio measuring buy-to-open activity at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) weighs in at 1.27, meaning puts have been in greater demand than calls during the past 10 weeks.

The brokerage houses covering SHW have also been reluctant to jump on the bullish bandwagon. Of 14 analysts rating the shares, there are just three "buy" or better recommendations, leaving 10 tepid "holds," as well as a "sell" designation. Also, the 12-month price target among analysts is $154.71, just a slight 3.1% premium from current levels. If Wall Street professionals begin to show more optimism toward the shares, retail investors could follow, providing additional buying power.

Investors who expect continued upside in SHW could consider buying the in-the-money March 140 calls, last asked at $15.20. More conservative traders could leg into a call spread by selling the March 160 call for $4.50. This would lower the premium paid to $10.70, thereby reducing risk, but would also cap gains at the 160 strike, which is about 6.6% away.


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