Stocks To Trade
Today, we are looking at an earnings trade in ExxonMobil (XOM), longs in Mako Surgical (MAKO) and PACCAR (PCAR), and shorts in Best Buy (BBY) and Google (GOOG).
For an earnings trade, we are looking at ExxonMobil (XOM). Oil's decline over the past couple weeks has put a top on XOM, and the company has earnings around the corner on November 1. What type of move can we expect into earnings? Earnings are expected to decline near 10% YoY along with sales. Yet, is that drop priced into the stock? The stock is currently pricing in a sub-10 P/E ratio, so it is pretty cheap right now. The company continues to hold the $90 line despite recent weakness, and we would expect them to continue to maintain that area into earnings. If the stock has not broken yet, its hard to expect them to break further. The company has not dropped more than 5% on any earnings report in the past two years as well, so we like them as well for that. For an aggressive trader, take the 87.50/85 bull put spread for Nov17. For the conservative, take the 85/82.50 bull put spread.
Trade: XOM, Nov17, 160/165 Bull Put Spread
Max Gain: 18%
For longs, we like the looks of Mako Surgical (MAKO) and PACCAR (PCAR). Mako is looking like its ready for a breakout right now. The company has been strong despite recent weakness in the market, and it is about to test a downward price channel to the upside. The company has been strong after a promising report from Intuitive Surgical (ISRG) that was bullish for MAKO's potential. The company reports on Nov. 7, and they are expected to report 37% growth in sales with 33% movement in earnings to the upside. The stock is still operating at a loss, but it looks ready to move right now as it has not dropped for a couple weeks and has coiled below its 20-day MA. We expect a breakout to 16 at least with then movement above 16 if it breaks its 20-day MA. PCAR looks very solid as well. Trucks were strong today on a weak day in the market, and the company is looking strong into its next round of earnings. Those are expected to come in with about 10% drop in sales and 15-20% drop in earnings. So why go long? PCAR has not broke 36 all year, and with a 12 PE, the market is not expecting much for the stock anyways. The stock, though, has held 40 very well despite market weakness, and its benefiting as well from positive headlines coming out of Oshkosh (OSK).
Equity Trade: MAKO, Long
Breakout Point: Take long over 15.60
Options Trade: PCAR, Nov17, 36/35 Bull Put Spread
Max Gain: 11%
For shorts, we like the looks of Best Buy (BBY) and Google (GOOG). Best Buy looked to be breaking a downward triangle pattern today as it moves towards earnings in mid-November, and we believe that the company could be a great short breakout candidate. The stock lost a strong $17 support line today, but it did not completely collapse. It may be a great candidate to drop if it breaks today's LOD tomorrow and does not retake 17. Why is BBY dropping? First off, the market's weakness is not helping, but the stock is underperforming comparatively. The company has lost all of its strength since the company's CEO commented he may try to take the company private, and as they near their next earnings report…things are not looking good. Expectations are for around 33% drop in earnings, and there is just no catalyst for upside right now. Its a great stock to short in market weakness as the fundamentals are very sour. Today's Apple (AAPL) iPad Mini announcement is a hit to GOOG. Whether or not people want to argue about the price point, the iPad Mini will take more business that could potentially be GOOG's business. Mostly what we are talking about is the untapped market. Right now, if a person is deciding between a tablet. They can go with Android tablets between $200 – $300 or for slightly more they can get an iPad. Before, they would all go with the Android, but now they have an entry way into Apple. Its not so much about those that would never choose the expensive iPad before. Its about those that are looking for the new smaller tablet. When information starts to come out about sales, we believe they will challenge GOOG. Recent earnings weakness as well challenges GOOG.
Stock Trade: BBY, Short
Breakout point: Break of today's LOD.
Options Trade: GOOG, Nov17, 725/730 Bear Call Spread
Max Gain: 12%
The market continues to look weak, and even if we rallied back, the market lost the 50-day MA today. The market did not lose a key 1400 level on the S&P 500, and as long as that holds, the market is not completely bearish. At the same time, earnings continue to be weak. There is just no way the market can hold up with this much weight from earnings weakness. A lot seems to now be priced into the market, but at the same time, more weak reports in big names like Apple (AAPL) or Disney (DIS) or retail companies can give us another leg down. Tomorrow, the market will be able to also get some economic data to react to in New Home Sales, FHF Housing Price Index, and Crude Inventories. Housing has been solid and could go a long way to give the market some upside.
We had a nice day in the market as we were able to get almost a 5% gain in our Riverbed (RVBD) long, Monsanto (MON) short. We also exited CBRE Group for a 3% loss. We added a reverse iron condor in Netflix (NFLX) and long in Cree (CREE). We added a short in Texas Instruments (TXN).
We have the following positions:
In our Short-Term Equity Portfolio we are long Cree (CREE). We are short Texas Instruments (TXN).
In our Options Portfolio, we are long Intuitive Surgical (ISRG), Urban Outfitters (URBN), Discover (DFS), Wal-Mart (WMT), and ExxonMobil (XOM). We are short United States Oil (USO) and SPDR S&P 500 (SPY).
In our Earnings Alpha Portfolio, we are long Allstate (ALL), Michael Kors (KORS), Disney (DIS), Continental Resources (CLR). We are short Polo Ralph Lauren (RL) and Salesforce.com (CRM). We have a reverse iron condor in Chipotle (CMG) and Netflix (NFLX).
In our Goldman Sachs Up/Down Paper Portfolio, we are long CSX (CSX), Teradata (TDC).
Chart courtesy of finviz.com.