Is FedEx a Healthy Stock for Your Portfolio?

With shares of FedEx (NYSE:FDX) trading around $152, is FDX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

FedEx provides transportation, e-commerce, and business services in the United States and internationally. Transportation is improving, so businesses and consumers are increasing their interest in transacting worldwide. Gasoline prices and vehicle efficiency tend to have a significant impact on the company, so watch for improvements in these areas. As boundaries on international commerce blur, look for companies like FedEx to be able to provide the shipping services required across the globe.

Shipping giant FedEx has been indicted by the U.S. Department of Justice for delivering drugs for illegal online pharmacies. FedEx denies the charges, which could carry a fine of more than $1.6 billion. The case is the government’s latest attempt to hamper questionable online businesses by cutting off access to critical yet more established parts of their supply chains. In the case of online pharmacies, the Justice Department is going after major shipping companies that deliver illicit drugs. To hurt some online lenders, the department has prosecuted banks that process their transactions. In both instances, the Justice Department says suppliers aren’t innocent bystanders but instead that some know their customers aren’t aboveboard and continue serving them anyway.

In the FedEx case, Bloomberg News reports: “The company knew it was delivering drugs to dealers and addicts, with couriers in Kentucky, Tennessee and Virginia expressing concerns circulated to senior managers that FedEx trucks were stopped on the road by online pharmacy customers demanding packages of pills, according to the indictment. Some delivery addresses were parking lots or vacant homes, prosecutors said. … FedEx continued to do business with one Internet pharmacy whose manager had been arrested for violating drug laws.” The approach echoes the government’s attempts to quash unscrupulous online lenders. The Justice Department is pursing what it calls Operation Choke Point, which became public last year.

From The New York Times in January: “In the first action under Operation Choke Point, Justice Department officials brought a lawsuit this month against Four Oaks Bank of Four Oaks, N.C., accusing the bank of being ‘deliberately ignorant’ that it was processing payments on behalf of unscrupulous merchants—including payday lenders and a Ponzi scheme. As a result, prosecutors say, the bank enabled the companies to illegally withdraw more than $2.4 billion from the checking accounts of customers across the country … Some senior bank executives brushed off warning signs of fraud while collecting hundreds of thousands of dollars in fees … The bank has reached a tentative $1.2 million settlement with federal prosecutors.” The financial industry has fought back fiercely. Lenders say the crackdown forces banks to refuse serving legitimate providers. Banks say they’re a neutral intermediary and that prosecutors, not banks, should be responsible for policing customers. FedEx has responded similarly.

Bloomberg News reports: “The company vowed to fight the charges, saying it can’t be responsible for the contents of the 10 million packages it transports daily and that policing customers would violate their privacy.”

T = Technicals on the Stock Chart Are Strong

FedEx stock has been moving higher over the last couple of years. However, the stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, FedEx is trading above its rising key averages which signal neutral to bullish price action in the near-term.

FDX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of FedEx options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

FedEx options

17.29%

53%

50%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on FedEx’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for FedEx look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

15.49%

8.85%

12.95%

5.52%

Revenue Growth (Y-O-Y)

3.51%

3.20%

2.61%

2.13%

Earnings Reaction

6.15%

-0.13%

0.45%

5.03%

FedEx has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about FedEx’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has FedEx stock done relative to its peers, United Parcel Service (NYSE:UPS), Air Transport Services Group (NASDAQ:ATSG), Air T (NASDAQ:AIRT), and sector?

FedEx

United Parcel Service

Air Transport Services Group

Air T

Sector

Year-to-Date Return

5.65%

-2.31%

-0.62%

4.50%

2.80%

FedEx has been a relative performance leader, year-to-date.

Conclusion

FedEx provides valuable and efficient transportation services to growing industries around the world. The company has been indicted by the U.S. Department of Justice for delivering drugs for illegal online pharmacies. The stock has been moving higher over the last couple of years, but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, FedEx has been a year-to-date performance leader. Look for FedEx to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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