Stocks To Trade:
For an earnings trade, we are looking at Wells Fargo. The company reports earnings next week on Friday morning, and we believe that the stock may see some upside into that report. First off, the company is expected to see about 20% growth in earnings year/year along with 3.5% growth in revenue. While the sales growth is limited, the stock is very cheap right now with a 10.7 PE. With the addition of about 0.17 EPS, the company should see around 4-5% growth in price in order to properly price in that earnings to maintain the 10.7 PE. On top of that, we believe that the company will benefit greatly from the resolution of a settlement with the government for foreclosure abuses. The settlement is supposed to be around $10B for 14 banks. WFC is one of the largest banks involved, but the settlement is definitely going to lift a burden off the shoulders of the company. Further, the company is the country's #1 residential mortgage provider. The housing market has been on a tear with New Home Sales rising about 10% in 2012. We believe that the company will see a lot of positives from the housing boom of 2012 coming out in this quarter and providing nice catalysts for 2013. We like buying the stock on a break of 35, which is resistance right now, holding into next Thursday, and selling a large portion before earnings.
Trade: WFC, Long
For longs, we like the looks of Riverbed Technology and Wal-Mart.
RVBD took off solidly today after the government agreed to a small deal to avert the fiscal cliff, but we believe the stock is setting up for even higher prices. The company broke through a key price channel that had resistance at 20.30 and chugged higher all day despite the market moving flat for the majority of the day. With this breakout, the stock looks ready to make moves even higher. The reason being that the stock is actually fairly cheap for a growth stock. The 40+ PE is misleading as the company's future PE is only just over 16. The company expects growth of 17% in sales and 19% in earnings, which are very solid levels. We believe that this stock will continue to push higher as long as the fear is out of the market, and the stock really has no resistance at this point. The company saw a significant drop in the beginning of November due to the acquisition of OPNET. Yet, Northland Securities has commented that this is a good fit and that the acquisition is actually a very solid one for them. With the acquisition providing much of the discount and the stock being held in check by the fiscal cliff, we like a buy here.
WMT is also a favorite of ours. The stock was one of our top picks for 2013, and we believe the stock is starting to show a bottom after some recent weakness. The company suffered after a number of reports showed that the holiday season was weaker for "brick and mortar" stores and strong for online retailers like eBay (EBAY) and Amazon (AMZN). Yet, the company dropped 10% from the beginning of November till the end of the year, despite a very solid quarterly report in Q3. We believe that the company is showing support at the 68-70 area, and we like selling a bull put spread on the stock below that area. The company popped back over the 200-day MA today and is holding that line well. Right now, we can still make just under 10% on the 65/62.50 bull put spread for Feb. 16, which is a very safe level. That level has not been penetrated since it was overtaken in June of 2012. The stock is extremely cheap right now with a future PE at 12.7. The fiscal cliff resolution has helped ease fears, and we believe the market is completely pricing in any weakness in sales for the holiday season at this point. We will look to add that spread once WMT retakes its 20-day EMA.
Equity Trade: RVBD, Long
Breakout Point: Broken out, add on move above Wednesday's HOD
Options Trade: WMT, Feb16, 65/62.50 Bull Put Spread
Max Gain: 9%
For shorts, we like the looks of Ascena Retail and Target. Ascena Retail showed a lot of weakness by breaking down on a very strong up day in the market on Wednesday. When we see stocks failing on days when the market is printing one of its best days of the year, we should be worried. What happened? ASNA got downgraded by Citigroup from Buy to Neutral. The company cited that they saw weakening sales trends and lowered their price target to $20. The stock then lost a strong support line at $18 and price channel support at $17.80. The weakness in the stock was intriguing to us. On further investigation, we noticed that in addition to the downgrade and technical weakness, ASNA is expecting to see flat earnings growth year/year for the coming quarter, and they have been in a strong downtrend since September. What happened then? The company guided below estimates for 2013. They then proceeded to miss estimates on sales and reaffirm this weaker guidance in their latest quarter as well. Right now, the stock does not seem to be showing much growth or strength, and the technical weakness reaffirms a weak fundamental picture. We like shorting them below 17.70.
Another stock that is looking fairly weak right now is TGT. While we like WMT due to its 2012 margin expansion and reclamation of the "discount" superstore, TGT looks much weaker. The stock broke down even further on a very strong day in the market, signaling something is not right. Jeffries agreed and downgraded the stock today to hold level. They believe December sales were very weak for the company as they had poor online execution and saw weakness in their Neiman Marcus initiative. The company cut their PT from $74 to $59 - a fairly drastic cut. That news comes only a week after Stifel Nicolaus said similar things. With analysts abandoning the stock, we do not see a lot of prospects for upside until the company reports earnings for the latest quarter. Those are expected to be out mid-February, which will allow us to play the February options into earnings. Right now, we can still make just under 10% on the 62.50/65 bear call spread. The stock has not been over 62.50 since November, and it would require a break of the 50-day and 200-day MA to make this position not work.
Stock Trade: ASNA, Short
Breakout point: Below 17.80
Options Trade: TGT, Feb16, 62.50/65 Bear Call Spread
Max Gain: 9%
For Thursday, the market should start to react to other news outside of the fiscal cliff, but the government's passage of the deal does bring a lot of fear out of the market. Tomorrow, though, is a very significant day for economic data that should have a strong impact on the market. First off, we will get some insight into the employment situation as Challenger Job Cuts, ADP Employment Change, and Initial Jobless Claims will all give insight into employment statistics. The Nonfarm Payrolls on Friday is always a big moment for the market, so we expect to see a large amount of movement off that report. These stats tomorrow will be a precursor to that report and should give the market a boost or bring down the positive move that market has. All in all, though, the avoidance of the fiscal cliff is a definite plus for the market, and we should expect some more upside over the next couple weeks.
Chart courtesy of finviz.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.