Unlock: US Bancorp (USB) Trade Idea
(This USB Trade was issued on June 15 for $1.60. Calls were closed today for $2.50 or 56% gain)
Sector: Financial / Banks
Current Price: $44.35
Stop Loss: $42.70
Time Duration: 95 Days
Trade Idea: Buy September 44 Calls for $1.60 debit or less.
This is the second bullish trade in financials after we bought a call diagonal spread in Metlife recently on June 5. Before we dive further into fundamentals, note the following two sets of unusual upside call action noted last week:
June 8 – Buyer of 3,000 July 44 calls paid $0.90
June 10 – Buyer of 5,000 Sept 46 calls paid $0.93
Fundamentals – The logic for liking banks, brokers and life insurance companies is pretty straight forward. We are in an environment where expectations are rising for Fed to hike rates later this year. A rising interest rate environment is almost always universally bullish for financials, especially when we have low inflation, such as the case right now. Additionally, in the case of USB, the management presented at Morgan Stanley conference last week. Investors are increasingly eyeing stronger loan growth stemming from a decent job market in the US. Over 76% of respondents believe total loan growth to track 4-7% y/y vs. management guidance of 4-6%. Coming out of that conference, Morgan Stanley increased 2016 earnings estimates by 9%. For full report, click here: Large Cap Banks Day 1 Conference and see pages 6 and 7.
Technicals – Long term weekly chart is starting to breakout with momentum indicators such as RSI and MACD showing bull crosses just as bullish call activity starts to pick up. We like the odds of the stock grinding higher gradually from here.