Leidos Faces Specter of Contract Cancellations

The company’s reliance on government work leaves it vulnerable to DOGE cutbacks

Investors in the giant defense contractor Leidos (LDOS) may have gotten a scare a few weeks ago if they happened onto the Department of Government Efficiency (DOGE) website. A posting there said Elon Musk’s group had canceled a $1 billion contract with the company. But it turns out the group jettisoned a $560,000 Social Security Administration project to enable recipients to mark their gender as “X” on forms. A harbinger of what's to come? With 87% of Leidos revenue derived from government contracts, the company is vulnerable to federal cutbacks

Leidos, a prominent technology provider to the defense, aviation, information technology and cybersecurity sectors, has a solid reputation. While the company has continued to grow in these high-demand areas, challenges are on the horizon and may affect its short-term prospects.

The new uncertainty of government contracts

Leidos' reliance on government contracts is directly correlated with revenue. The cancellation of contracts would signal a possible slowdown in the company’s core operations.

Its growth strategy depends upon government modernization projects termed NorthStar 2030, but these efforts may face cancellation headwinds.

The company aims to drive high-growth initiatives like cybersecurity and government infrastructure modernization. However, analysts are wary, projecting only 3% growth in revenue for the company in 2025, which is modest compared to previous years.

These challenges have led to analysts like Caydee Blankenship of CFRA to give Leidos a "hold" rating, reflecting a cautious outlook.

Technicals: $125 Support

From a technical analysis perspective, Leidos appears to be finding support around the $125 level. This is an important point for traders because it suggests the stock may have established a "floor" at this price, where buying interest could be strong enough to prevent the stock from falling further.

Why is this important?

• $125 Support: In recent weeks, Leidos has hovered around the $125 price point, which has held firm as the stock's support level. When a stock consistently finds support at a specific price point, it can often signal the market views this as a favorable entry point.
• Potential for Stability: If the stock continues to respect that support level, it could provide traders with a great opportunity to enter a position with less risk of a significant downturn.

This technical support around $125 creates a favorable scenario for options traders looking for a more predictable trade, especially given the absence of any immediate earnings risk that could cause volatility.

Options strategy

One options strategy that could benefit from Leidos' current technical support is selling out-of-the-money (OTM) or at-the-money (ATM) puts for the April 17 expiration. Here’s why this might be a smart move:

• Limited Earnings Risk: Leidos is scheduled to release earnings April 29. By selling options with an expiration on April 17, traders can avoid the potential volatility caused by earnings reports. This provides a safer trading window.
• Betting on Stability: By selling puts, traders are essentially betting Leidos will stay above the strike price by the expiration date. With technical support at $125, traders can sell puts at this price (or slightly lower) and collect the premium from the sale of the options. If the stock holds steady above the strike price, the premium received becomes a profit.
• No Earnings Impact: The timing of the expiration means traders will not have to worry about the price swings that often accompany earnings reports. Because the earnings report happens after the expiration date, there’s no need to fear price swings from earnings surprises or disappointments.

Selling puts is an attractive way to generate income when a stock is showing technical support, and Leidos may be the perfect candidate for this strategy.

For more detailed information on how selling puts works, read our full guide on options strategies.

Opportunities amid challenges

Analysts are projecting only 3% growth of revenue in 2025, and the stock has recently seen significant setbacks. Despite challenges, Leidos' technical support around $125 presents a possible entry point for traders.

Key takeaways for options traders:

• Technical support at $125 creates a favorable environment for selling out-of-the-money or at-the-money puts.
• Earnings risk is removed by choosing an expiration date before the company’s earnings report on April 29.
• Selling puts offers a potential income strategy if the stock holds steady above the support level.

Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go