Stocks To Trade
Today, we are looking at an earnings trade in Amazon.com (AMZN), longs in Qihoo 360 Technology (QIHU) and Lululemon (LULU), and shorts in Comcast (CMCSA) and SPDR Select Energy (XLE).
For an earnings trade, we are looking at Amazon today. The latest batch of earnings showed the same story for AMZN — good revenue, no earnings. The company continues to progress with razor thin margins as they continue to spend lots of money to grow their infrastructure and brand name. While the company does this, they continue to operate at a sky high future PE ratio over 120. So why do investors like the company so much? The company's return on equity (ROE) is very low at 5%. The big drawback in their ROE is the company's margins. They have solid leverage and low interest payments, which tend to mean a higher ROE. Investors believe that the company will eventually be able to turn their strong sales/revenue into earnings once they curb high payments to capital expenditures and development. Despite continued lack of earnings, their investor group is very strong, and we believe that this group of investors will not be wanting to sell through the retail season. So, despite some issues with the company's current makeup, we like them for a bull put spread for December expiration. A conservative play on this company's strength is the 205/200 bull put spread.
Trade: AMZN, Dec22, 205/200 Bull Put Spread
Max Gain: 14%
For longs, we like the looks of Qihoo (QIHU) and Lululemon (LULU). QIHU continues to strengthen as Baidu (BIDU) continues to struggle. What we like about QIHU is that the company has momentum and is benefiting from their better mobil exposure than BIDU. The company has earnings on Nov19, and we believe the stock will make a nice run into their earnings report due out next Monday. BIDU's weak earnings, to many, suggests a strong quarter for QIHU. Expectations are solid for a 70%+ revenue growth. Earnings growth, however, should be flat. We expect a run up into the report and would buy on a break of today's HOD tomorrow. Another stock that looks ready to go is LULU. Lululemon has had quite a year being up more than 20% twice and down 15% once as well on yearly gains. The company has been showing a lot of strength around the 67.50 area with 65 being a very solid support line as that is where the stock started its valuation at this year. Right now, we are liking the stock as it heads into early December earnings that are expected to show 40% increase in earnings and 30% increase in revenue. We believe those prospects are helping to put a nice bottom in the stock for now. Earnings are a big event for the company, and they tend to move quite violently on the report. Yet, we do like 57.50/55 bull put spread that is offering a nice return and has been previous support.
Equity Trade: QIHU, Long
Breakout Point: Break of Monday's HOD
Options Trade: LULU, Dec22, 57.50/55 Bull Put Spread
Max Gain: 14%
For shorts, we like the looks of Comcast (CMCSA) and SPDR Select Energy (XLE). Comcast looks like it could break a key support level right now, which would be a potential short place for the stock. At the same time, we believe energy remains weak for the remainder of the year even if the market strengthens. CMCSA is holding its 50-day MA right now, but its been weakening over the past couple weeks. If the stock loses that level, it could see some money flow out of the safety, dividend play. The catalyst for downside has been the market mostly. Weakness in Disney earnings hurt them as well. They had been very strong throughout the past couple months of weakness, but their recent weakness could signal a potential strong breakdown. XLE, additionally, looks weak. Energy has been weak as oil prices have dropped, global demand has been weak, and Hurricane Sandy has disrupted demand. XLE is a great ETF to use for some portfolio hedging. We like the 74/76 level for a bear call spread. The ETF would have to break its 20-day, 50-day, and 200-day MA to threaten those levels, which means the market would have to soar to end the year. Without any catalyst for that, we like using XLE as an engine for market weakness to capture premium.
Stock Trade: CMCSA, Short
Breakout point: Break of 50-day MA
Options Trade: XLE, Dec22, 74/76 Bear Call Spread
Max Gain: 12%
The market has put together two flat days in a row as it searches for its next move. The market is sort of hanging around the 200-day MA on the Dow Jones while holding it on the S&P 500. A loss of that in the S&P 500 would definitely be detrimental to the markets. Today, we got some better movement on the back of Greece passing their budget and positive comments throughout the weekend from party leaders about the fiscal cliff. At the same time, Greece is far from out of the woods. The country, first, needs additional funding from Europe. Even with that, the country still is a long way from being back on its feet. The situation can be avoided for now, but its going to at some point come back to haunt the market. We have no major economic data tomorrow but important earnings from Home Depot (HD) to watch.
We had a pretty solid day in the market. We were able to make a 5% gain on our First Solar (FSLR) long we entered on Friday. We closed 1/2 of our Capital One (COF) bull put spread, however, for a small loss. We added a long in Eaton (ETN). We added a bull put spread in Hershey (HSY). We added a bear call spread in XLE. We added a long in Taiwan Semi (TSM) to our Goldman Trades.
We have the following positions:
In our Short-Term Equity Portfolio we are long Eaton (ETN) and Fidelity National (FNF) . We are short Symantec (SYMC) and Fastenal (FAST).
In our Options Portfolio, we are long Hershey (HSY), PulteGroup (PHM), Whirlpool (WHR), Capital One Financial (COF), Intuitive Surgical (ISRG), Discover (DFS), Starbucks (SBUX). We are short SPDR S&P 500 (SPY) and Baidu (BIDU).
In our Earnings Alpha Portfolio, we are long Phillips 66 (PSX), Discover Financial (DFS). We are short Direxion Financial (FAS) and SPDR Energy (XLE).
In our Goldman Sachs Up/Down Paper Portfolio, we are long CSX (CSX), Avis Budget (CAR), and Taiwan Semi (TSM).
Chart courtesy of finviz.com.