Option Trade
Equifax Inc. (NYSE:EFX) Puts
Tuesday, September 19, 2017

** OPTION TRADE: Buy the EFX OCT 20 2017 90.000 PUT at approximately $3.80. Place a pre-determined sell at $7.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.55.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

by Ian Harvey   

Equifax Inc. (NYSE:EFX)’s, a global provider of information solutions and human resources business process outsourcing services for businesses, governments and consumers, unprecedented data breach, which potentially exposed 143 million American’s personal information on September 7, has already cost the credit agency $9.75 billion in market value, and the stock could plunge even more.

The security breach goes to the heart of Equifax's business that involves databases of consumer and business information derived from various sources, including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data. Combined with the fact that the stock was already trading at a lofty valuation before this major fall; and potential questions around insider trading activity remain unanswered will pressure more selling of shares.

In its updated bear case out Friday, Morgan Stanley asks, "Where’s the floor?" and says Equifax’s stock could plunge as low as $50 a share, about one-third of where it was before the hack.

"The main risks that we see to EFX center around: 1) greater impairment to the Global Consumer Solutions segment (GCS), 2) potential bleed into other businesses and/or share shift, 3) increased regulation, and 4) higher-than-anticipated fines," writes analyst Jeffrey Goldstein.  "We note that many of these risks are difficult, if not impossible to quantify, but we give our best estimates."

Shares of Equifax have plunged more than 35% since the breach was announced.

Muddy Waters founder and noted short seller Carson Block is now suing Equifax, and U.S. prosecutors have reportedly opened a criminal probe into possible insider trading, after a handful of government bigwigs took aim at the company, including one senator comparing the firm to Enron.

As well, a class action has already been filed against Equifax. The suit seeks as much as $70 billion in damages:

“The case was filed by the firm Olsen Daines PC along with Geragos & Geragos, a celebrity law firm known for blockbuster class actions. Ben Meiselas, an attorney for Geragos, said the class will seek as much as $70 billion in damages nationally. “

As well, analysts at Argus Research turned bearish on Equifax Inc. EFX as the company's data breach could prove to be the "most serious" data-hack in history. Analyst Jasper Hellweg downgraded Equifax's stock from Buy to Hold with no assigned price target.

Equifax's management hasn't handled the data breach very well, especially after its decision to offer its TrustedID Premier Service resulted in even more complaints as the terms of service initially disqualified customers from taking part in any class action lawsuits. Meanwhile, Hellweg noted several high-ranking executives sold large positions of their stock "far in advance" of the public acknowledgment of a data breach.

While the argument can be made that the executives in question weren't aware of the data breach at the time of their stock sale, it could still "somewhat impact the public's perception" of the company.

Influencing Factors

News flow is very negative and this will likely continue due to……….

1. Even though the company indicated the executives did not know about the cybersecurity breach when they sold nearly $2 million of stock, investigations around the transactions will likely ensue for some time. Although the market participants do not yet know all of the pertinent facts, the stock price will likely reflect the uncertainty until the facts emerge.

2. Equifax CEO Richard Smith will testify about the company's massive data breach at an October 3 hearing of the House Subcommittee on Digital Commerce Consumer Protection, and this may pressure the stock further and will cause increased volatility at a minimum.

3. And most importantly as far as investors should be concerned, Equifax is already facing the largest class-action lawsuit in U.S. history, which may reportedly seek up to $70 billion in damages. In order to put this in perspective, note that Equifax's market capitalization is only $11 billion.

4. Also, Bloomberg has reported that Equifax learned about a major breach of its computer systems back in March, nearly five months before the major hack event that was publicly disclosed. The company says the March incident was not related to the hack that involved personal data, but Bloomberg says the breaches may have involved the same intruders.

The revelation of a March event makes the insider trading scenario look even worse, especially regarding the company's CFO, John Gamble. There was already suspicion involving his 6,500 share sale on August 1st, which was shortly after the major hack.

So far, Equifax shares really haven't reacted in a major way to the Bloomberg report; but things could get much worse if the Bloomberg news gets scrutinized more. At the least, the company has more explaining to do as to why this information was not revealed previously, but it also now means that any major insider sales going back to March will need to be examined. That is especially true for the CFO, who has sold more than $9 million worth of stock since May.

5. EFX currently has roughly $400 million in cash on its balance sheet as of 2Q17. Given that so much uncertainty exists around the potential cost of this data breach as well as the relatively low cash on the balance sheet, it is not unnatural for investors to be panicking. The absolute worst-case scenario is that these liabilities endanger the future of the company; leading to bankruptcy.

6. Equifax seemed to know it could be on the hook for some major damages. With that in mind, the company has tried to prevent consumers from having their day in court. Consumers who wished to check whether their data was compromised could do so on the site. While doing so, EFX would offer the consumer a year of free credit monitoring but there was a cunning catch:

“If your data had been stolen, Equifax offered a free year of credit monitoring known as “TrustedID Premier.” But some fine print may also mean that consumers who agree would be giving up the right to sue over many types of damages related to the massive penetration.”

It appears that EFX tried to take advantage of distraught consumers that simply wished to check whether critical and sensitive information of theirs had been exposed. The fact that EFX tried to take advantage of this has aggravated federal lawmakers and a state attorney:For already panicked consumers, that fine print - an arbitration clause - has caused further frustration, prompting federal lawmakers and at least one state attorney general to condemn Equifax for appearing to force aggrieved consumers to give up their day in court. “

Harvey’s Options Volatility Indicator


The stock's valuation has come down to reasonable levels, but the risks are still too high. Although the company's long-term earnings power will likely recover after the hurricane passes, until there are more details on the company's insurance coverage, the near-term risk of a class-action lawsuit wiping out existing shareholders keeps many on the sidelines, for now – but certainly helps with this put option recommendation.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the EFX OCT 20 2017 90.000 PUT at approximately $3.80. Place a pre-determined sell at $7.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.55.


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