Emerson Electric (EMR) is a good long term investment based upon its track record. Short term, I believe the stock may pull back before it continues to move up. This provides opportunities for investors and traders.
In terms of sales and growth over a five year term, the company has not done as well as the industry. Sales have lagged slightly behind and net income shows higher expenses that investors would want as the company has been in the red. It does have a higher P/E ratio which signals that it may cost more for earnings than the average company in the industry. The company's value may not look all that great but if one is looking at long term investing, then the long term track record for the company is something that should be considered.
Both the 5 year gross and profit margins have done better than the industry average. How much money is left over from a sale after you pay all your costs to make that sale? This is my gross margin. How good is the company at controlling its costs? This is my net margin. Emerson electric has proven itself above average in both these categories long term. All companies have their down years but the long term track record shows a company's ability to rise back to the top. The company is financially strong with low debt ratios and its management team is reflected in its ability to rise above industry average on its ability to use its money and assets to make more money.
Short term, Emerson had flat orders for the last 3 months for November because of conservative business practices that reflects the global uncertainty. Poor market visibility and mixed economic indicators in the U.S., Europe, and China are expected to result in slow and choppy order patterns in the near term, according to Emerson.
I am observing a repeat pattern about to take place with Emerson. Long term, I believe the stock is going to move up but a see a short term pattern that could bring the stock down for a season. Last time it was over bought according to RSI indicator signals, it pulled back. The MACD formed its high and then the MACD MA's also regressed. A nice bowl pattern formed in the stock and it looks like the beginning of the same pattern is starting all over again. The stock recently pushed through the upper Bollinger Band and could possibly see a pullback to the '48.3' level (if it follows the same pattern) it has before.
The Options Play
Emerson is presently trading at 52.14 and is headed down so I am looking at a short term income play looking a debit spread trade.
- Buy the March 2013 put with a strike of '52.50' (priced at $2.50)
- Sell the March 2013 put with a strike of '50.00' (priced at $1.40)
- Net Debit to Start: $1.10
- Maximum Profit: $1.40
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- Looking at a pull back to continue.
- Flat orders up through November should contribute to short term bearish move.