Editor’s Note: We are providing an equity trade for conservative investors and an option trade for aggressive traders.

EQUITY TRADE INSTRUCTIONS

Symbol: JCI (NYSE)
Limit: Buy below $34
Holding Period: 6 months
Target Price: $39
Target Gain: 15%

OPTION TRADE INSTRUCTIONS

Symbol: JCI190118C00035000
Limit: Buy below $2
Strike Price: $35
Expiration Date: January 18, 2019
Target Gain: 100%

COMPANY DESCRIPTION                     

Johnson Controls International plc was founded in 1885 and is headquartered in Cork, Ireland. It operates as a diversified technology and multi-industrial company worldwide. It designs, sells, controls, and installs heating, ventilating, and air conditioning systems. In addition, it designs, sells, installs, services, and monitors electronic security and fire detection systems. Further, the company produces and supplies lead-acid automotive batteries for passenger cars, light trucks, and utility vehicles, as well as advanced battery technologies to power start-stop, hybrid, and electric vehicles. Link to company website.

TRADE RATIONALE       

JCI earns the highest possible score of 10 from my IDEAL Stock Rating System due to its low forward earnings multiple, high dividend yield and improving cash flow. However, you wouldn’t know it by taking a look at its price chart over the past thirty months. The stock has been in a downward slide, only recently finding support near $33.

Now, go back and look at its price chart over the past five years and you’ll notice that JCI cycled through a nearly identical pattern from August 2013 thru January 2016. After bottoming out near $32, JCI jumped 50% over the next seven months. I’m not expecting a rally of that magnitude this time, but we only need a 15% recovery for this option to double in value.

What might trigger a turnaround in the direction of JCI over the remainder of the year? Two months ago, the company reported decent Q2 results that should have pushed its share price higher. However, concerns over a recent corporate restructuring program have cast a fog over future operating results.

For that reason, JCI is rated as a ‘hold’ by most of the investment banking firms that follow it, even though their average 12-month price target of $40 is 20% above its current value. However, last week Morningstar included JCI on a short list of “Top Picks” in the industrial sector, with a Fair Value Estimate of $52.

I think the worm is about to turn for JCI, sparked by the sale of its power solutions business. Four months ago, JCI announced it was seeking a buyer for its power solutions unit with a goal of completing the transaction this year. We may get an update on that deal when the company releases Q3 results in three weeks, which would remove one of the overhangs on the share price. If not, then such an announcement should be forthcoming well before the expiration date for our option.