Investors should buy Genworth Financial Inc. put spreads before the insurer's February earnings release because the company may post further losses on mortgage guarantees, JPMorgan Chase & Co. said.
The equity derivatives strategists Amyn Bharwani and Marko Kolanovic recommended buying February $14 puts and selling February $11 puts. The move, known as a spread strategy, caps potential gains while cutting the cost of the trade. Genworth is scheduled to report results Feb. 1 and hold an investor meeting the next day.
"We expect the division to continue to generate losses through 2011," the strategists wrote in a note Monday, referring to the company's protection business. Citing the firm's analyst, Jimmy Bhullar, they wrote, "In our view, management is unlikely to announce any dramatic strategic or capital management actions in its 2011 outlook, so we do not view the company's Feb. 2, 2011, investor meeting as a positive catalyst."
Genworth shares have risen 22% since the end of 2009, compared with a 14% rise for the Standard & Poor's 500 index. Of the 16 analysts that cover Genworth tracked by Bloomberg News, five rate the shares a "buy," 10 a "hold'" and one a "sell." After the company's last three earnings reports, the shares dropped between 9% and 13%, according to the report.
Buying the spread becomes profitable when the shares go below about $13.30, the strategists said. The trade makes the most if the shares fall below $11. Genworth shares closed Monday at $13.88.