Stocks To Trade:
For an earnings trade, we are looking at Potash. The stock has earnings in late January and is a good candidate for a January options spread. POT is expected to have flat growth and earnings as the September - November earnings period is a slow time for fertilizers and industrial/feed products. The stock has decreased in price greatly over the past two months, which makes it appealing as a value play. The stock's future PE is now at 11, and we believe that this level is a signal to buy. Yet, we like a bull put spread in the stock even better. The stock has a double bottom at 37, and their October results were quite solid. 37 has not broken all year, and any weakness is priced in now. We like the company to hold that level as earnings are not expected to drop in the next quarter. Finally, we believe that the 2013 year will be good for POT. CEO, Bill Doyle, commented that he believes shipments of potash will increase to 57-58M ton, which is a solid level and should start to price into the stock soon.
Trade: POT, Dec22, 36.67/35 Bull Put Spread
Max Gain: 26%
For longs, we like the looks of J.C. Penney and eBay right now. JCP looks solid for a breakout while EBAY is looking great for a bull put spread. JCP has been showing some positive relative strength right now with support at the 16-17 area, and it looks primed for a breakout. What's the catalyst? The stock has been floated as a potential leverage buyout candidate, and the stock has been moving well since a rumor for a potential LBO floated last week. A buyout makes sense as the stock is cheap right now as can seen by their 0.25 price/sales ratio and 1.0 price/book ratio, which are both solid indicators of value. Further, we believe the stock could make a strong move if sales continue to be strong for retailers in the holiday season. Initial results were not as great as hoped for Black Friday, but the spread between Cyber Monday and Thanksgiving Thursday openings dented Black Friday sales a bit. If the stock can get over 18, we could see a solid short squeeze as the stock holds a 30% short float right now. Additionally, eBay is looking very solid. The results from Cyber Monday were very solid, showing 55% sales growth for eBay. PayPal mobile payments were up nearly 200%. These results show a shift of payment solutions, and we believe Ebay's PayPal system is going to continue to remain very strong moving forward, and we believe they are primed for a bull put spread on these results. Right now, the 47/45 bull put spread is worth 20%, and technically it looks sound. They have the 50-day and 20-day MA support above 48, and they have not failed 46 since it was overtaken in August.
Equity Trade: JCP, Long
Breakout Point: Break of 18.00
Options Trade: EBAY, Jan21, 47/45 Bull Put Spread
Max Gain: 21%
For shorts, we like the looks of Seagate Tech and KeyCorp. STX has been looking very weak as of late, and KEY looks to have limited upside moving forward. STX has recently failed an upward channel, and they are holding support at $26. If that level fails, we believe STX could see a very strong decline. The problem for STX is the PC market, which is vulnerable right now, and it should continue to stay weak in 2013. The tablet market has damaged the PC market, and CLSA, yesterday, commented that the slowdown for PC markets in emerging markets is worse than expected. STX has strong exposure to the PC market, and we believe they will continue to remain soft as the PC market remains weak. KEY is also looking feeble right now. The stock is in a consistent downward channel right now, and it has not been able to break $9 all year. The issue for KEY is the fiscal cliff. Financial stocks will be hurt by a fiscal cliff scenario where spending cuts and tax hikes would hurt the ability for banks to make new loans. KEY is a mid-level regional bank, and they require loans to make money. The situation is dire for regional banks, and until the situation is resolved, look for KEY to continue to struggle.
Stock Trade: STX, Short
Breakout point: Break of 26.00
Options Trade: KEY, Jan21, 9/10 Bear Call Spread
Max Gain: 8%
The market did not get the boost from Consumer Confidence and Greek debt deal that we expected, as the market moved from one crisis to another -- the fiscal cliff. The market took a dive in its late hours as Senator Harry Reid was the first politician to publicly announce that the talks about the cliff are not going as well as everyone thought. That issue will continue to hold the market in check until resolved. At the same time, we have some data to watch for tomorrow. New Home Sales, Crude Inventories, and Fed's Beige Book will be the major data points, and if those points come out solid, they could give us some reason to rally. At the same time, without progress on the fiscal cliff, the market will be held in check.
Chart courtesy of finviz.com.