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This Latin American Company Could Be a Triple Digit Opportunity

This Latin American Company Could Be a Triple Digit Opportunity

Many smaller companies can trade without being noticed by traders. Following the news offers an opportunity to identify potential trading opportunities among these stocks that may be from companies that are overlooked.

That was the case when a recent earnings report identified a possible trade. PR Newswire reported,

Banco Macro S.A. (NYSE: BMA) announced its results for the second quarter ended June 30, 2019.  All figures are in Argentine pesos (Ps.)

The stock moved higher on the news.

BMA daily chart

Banco Macro S.A. provides various banking products and services to individuals and corporate customers in Argentina. It offers various retail banking products and services.

The Bank’s net income totaled Ps.7.0 billion in 2Q19. This result was 4% lower than the Ps.7.3 billion posted in 1Q19 and 124% higher than in 2Q19.

In 2Q19, the accumulated annualized return on average equity (“ROAE”) and the accumulated annualized return on average assets (“ROAA”) were 47% and 7.7%, respectively.

In 2Q19 Recurring Net Income totaled Ps.7.8 billion increasing 37% or Ps.2.1 billion compared with the previous quarter.

In 2Q19, Banco Macro’s financing to the private sector grew Ps.705 million quarter over quarter (“QoQ”) totaling Ps.174.7 billion and increased 16% or Ps.23.8 billion year over year (“YoY”).

In the quarter, growth was driven by commercial loans, among which Overdrafts and Others stand out, with a 41% and 6% increase QoQ.

In 2Q19, Banco Macro’s total deposits grew 4% or Ps.11.7 billion QoQ, totaling Ps.284.3 billion and representing 84% of the Bank’s total liabilities. Private sector deposits grew 7% or Ps.16.2 billion QoQ.

Banco Macro continued showing a strong solvency ratio, with excess capital of Ps.51.0 billion 26.3% regulatory capital ratio – Basel III and 19.6% Tier 1 Ratio.

In addition, the Bank’s liquid assets remained at an adequate level, reaching 66.4% of its total deposits in 2Q19.

As of 2Q19, the efficiency ratio reached 33.5%, improving from the 38.7% posted in 2Q18.

In 2Q19, the Bank’s non-performing to total financing ratio was 2.12% and the coverage ratio reached 116.1%.

The news pushed the price to the top of a recent trading range and indicates there is a possibility of upside in the stock.

BMA weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying BMA could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for BMA

 Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For BMA, the September 20 options allow a trader to gain exposure to the stock.

A September 20 $80 call option can be bought for about $4.02 and the September 20 $85 call could be sold for about $2.08. This trade would cost $1.94 to open, or $194 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $194.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in BMA the maximum gain is $3.06 ($85 – $80= $5; $5 – $1.94 = $3.06). This represents $306 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $194 to open this trade.

That is a potential gain of about 157% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.