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

EQUITY TRADE INSTRUCTIONS

Symbol: XRX (NYSE)
Holding Period: 6 months
Limit: Buy below $21
Target Price: $25
Target Gain: 19%

OPTIONS TRADE INSTRUCTIONS

Symbol: XRX190719C00019000
Strike Price: $19
Expiration Date: July 19, 2019
Limit: Buy the Call option below $3
Target Gain: 100%

COMPANY DESCRIPTION

Xerox Corporation designs, develops, and sells document management systems and solutions worldwide. It offers managed document services, including managed print services and multi-channel communication services, as well as a range of digital solutions, such as workflow automation services, content management, and digitization services. Xerox Corporation was founded in 1906 and is headquartered in Norwalk, Connecticut. Link to company website.

TRADE RATIONALE

We closed out a modestly profitable equity position in a Xerox a year ago (8% gain in three months), and I think we can do considerably better this time. That’s because the stock sold off nearly 30% over the past month after its credit rating was reduced to non-investment grade (i.e., “junk”) status by Moody’s Investor Services.

Clearly, that’s not good news and a share price reduction was in order. But at a share price of $20 Xerox appears oversold and likely to rebound during the first half of this year for the following reasons:

1. Carl Icahn isn’t going to let his substantial investment in Xerox go down the drain (nearly 25 million shares worth almost $500 million as of the most recent reporting period). You can be sure he is working furiously behind the scenes to engineer an asset sale or some other transaction that will drive its share price upward.
2. Xerox’s forward dividend yield of 5% appears safe despite the credit downgrade which is based on the expectation of reduced revenue in the future. We won’t know the company’s fourth quarter results for another month, but what we do know is that Xerox reported a $157 million increase in adjusted operating cash flow during the third quarter.
3. S&P Capital IQ is estimating normalized EPS (earning per share) of $3.55 for Xerox in 2019, which means the stock is currently valued at less than six times forward earnings. That’s less than half the multiple for the overall stock market.

I am putting very tight parameters around this trade given the stock market’s extreme volatility. Use limit orders and be patient.