Why I Didn't Trade Quanta Services Inc (PWR)

Why the Schaeffer's Senior V.P. of Research rejected a call option recommendation on Quanta Services Inc (NYSE:PWR) stock

Senior Vice President of Research
Dec 23, 2016 at 2:40 PM
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Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light onto the factors we view as "dealbreakers" to otherwise intriguing trade setups.

Today, Schaeffer's Senior V.P. of Research Todd Salamone shares his analysis on one stock he was considering -- but ultimately passed on -- for our most recent Option Advisor newsletter: infrastructure solutions provider Quanta Services Inc (NYSE:PWR).

PWR got on my radar because it was a trending stock recently making new 52-week highs, and its options are cheap, with a Schaeffer's Volatility Index (SVI) in the 10th percentile of its annual range.  Our proprietary Schaeffer's Volatility Scorecard (SVS) on PWR displayed a 77 (out of 100) reading, implying option buyers are usually rewarded with substantial directional moves relative to the volatility levels priced into option premiums. Moreover, upon further investigation, I found the stock was consolidating into its 20-day moving average and, after making a new 52-week high on Dec. 12, was pulling back to the $35 area, just above $34.58, which is double the 2016 low. 

PWR chart 1 Dec 23

But, there were a couple of deal-breakers from a sentiment and technical perspective.  First, of the 17 analysts following the stock, 13 had "buy" ratings.  Digging further into this, I noticed that at least five of these analysts had a "buy" or "outperform" rating, even though their price targets ranged from $30-$35.  Given the price relative to some of the targets, I thought PWR may be more vulnerable to a downgrade.  If I had seen price targets significantly above the current price, I may have been able to ignore the plethora of "buy" ratings.  

Also, when stepping back and looking at a longer-term chart, I noticed that the stock was trading in the area of its 2008 and 2014 peaks. If this area is to assert itself again as resistance, it would be painful for the call buyer. Or, if the stock simply trades sideways in this area, the upside reward would be small relative to the risk.  

PWR chart 2 Dec 23

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