Verizon Communications (VZ) is the biggest domestic name to hit the market with earnings Thursday. A strong breakout over the past two weeks has Taiwan Semiconductor (TSM) (which also reports Thursday morning) moving ahead of VZ in terms of market cap, but Verizon will be the most well recognized name.
Verizon has struggled in 2017, with the shares losing more than 9% of their value. Muted growth expectations along with the possible benefits of tax reform declining have dampened excitement heading into the quarterly results. Churn and margins have been an issue all year, so expect investors to scrutinize those numbers.
T-Mobile U.S. (TMUS) has been stealing customers and Sprint (S) has been the main culprit of squeezing margins in the sector. Ironically, those two companies may be announcing (officially) a merger at the end of the month. This certainly could present issues for Verizon; however, the company is aware of this.
Sprint appears in the lead for the 5G space and with SoftBank (SFTBY) this morning announcing a joint venture with Lendlease to purchase 8,000 cellular sites in the U.S., the likelihood of a TMUS-S tie-up appears more likely. These towers mark a big infrastructure and innovation (5G) move for SoftBank and Sprint. Verizon isn't sitting on its hands, though, as the company has teamed up with Qualcomm (QCOM) and Novatel Wireless to make a push into the 5G space via 5G New Radio. We'll want to keep a close eye on any updates of the move into 5G.
Eat or be eaten will be another thing on investors' minds. Verizon has been rumored as a possible buyer of Frontier Communications (FTR) or Dish Networks (DISH) as well as Charter Communications (CHTR) , but it is also possible Comcast (CMCSA) becomes an acquirer of Verizon. I would view this as more a merger of equals, similar to a TMUS-S deal, but I believe Comcast would want the controlling stake in the combined company. This makes some sense after Time Warner (TWX) -AT&T (T) , so we'll watch for hints. I lean move toward the camp where Verizon is a buyer of a smaller company and maintains existing agreements with Comcast and Charter.
The connect vehicle division of the company might be the gem under this pile of disappointment. Though only a small part of Verizon, it is distinctively different than the traditional components of VZ, but a rapidly growing sub-sector for telecom companies. This division was created by two small purchases, Telogis and Fleetmatics, in 2016, and these are the types of acquisitions Verizon will need to reignite growth, rather than a DISH or Frontier. Another stride in the connected vehicle market would be one of the few things which would get me excited about possibly owning Verizon again.
The options market has priced a move around 2.77% by the end of this week and historically, Verizon averages higher intraday moves about half the time while the opportunity to breakeven as a buyer of the 2.77% volatility occurs most of the time.
The recent action in the stock supports the idea of buying volatility while the consistent negative action in the stock makes owning outright difficult. A buy-write strategy appears more practical. That being said, the options market is pricing a one-month move around 4.4%.
Owning Nov. 17 $48 straddles with a priced move of 4.4% is much more appealing than owning Oct. 20 $48 straddles despite the higher nominal cost. The reason is the stock has experienced moves greater than 5% five times over the past two years while only experiencing a move under 4% twice. And neither of those two times occurred in the past 18 months.
Verizon is also a name that supports the continuation trade thesis. If it finishes lower Thursday, then I would expect it to be even lower in three weeks. If it finishes higher, then I expect to be even higher in three weeks. Therefore, a post-earnings continuation trade holds appeal in the form of call spreads should VZ close up and put spreads should VZ finish red tomorrow. Again, I would target the Nov. 17 expiration and I would look to have the long leg of the spread one-dollar in the money with the short leg one to two dollars out-of-the-money.
Despite the pop last quarter I'd wager that seeing $46 on the stock after the report holds a higher probability than seeing $50. Should we get a selloff, I'd expect some income buyers to be attracted to the 5% yield temporarily, but would also expect tax selling to hit the shares in early November on through mid-December.
If this one trades lower, I'd likely hold off until near Christmas to start establishing any buy-and-hold position searching for yield.
This commentary originally appeared on Real Money Pro. Click here to learn about this dynamic market information service for active traders.