3 Stocks To Buy, 1 Stock To Sell, What's Next For The Market

Includes: COF, FXI, KORS, WMT
by: David Ristau

Market Recap:

The market had a nice start to the shortened week as it awaited a number of key earnings reports from Google (NASDAQ:GOOG), IBM (NYSE:IBM), Texas Instruments (NYSE:TXN), and more in after hours. Further, the entire week is full of key reports. The market got a mixed bag of earnings to start, with a solid report from Dupont (NYSE:DD) that showed solid 2013 outlook, but it also got a weaker report from conglomerate Johnson & Johnson (NYSE:JNJ). Further, existing home sales came in weaker than expected at 4.9M vs. 5.1M expectations. The weak report kept shares in check for much of the morning, but shares trended up throughout the rest of the day. The catalyst appeared to be hopefulness over earnings beats, but the markets are starting to look a bit extended.

The Dow Jones finished the day up 62 points at five-year highs. Crude oil finished up 0.7%. Gold finished up 1 point.

Stocks To Trade:

Today, we are looking at an earnings trade in Michael Kors (NYSE:KORS), longs in iShares FTSE China 25 (NYSEARCA:FXI) and Walmart (NYSE:WMT), and shorts in Capital One (NYSE:COF).

For an earnings trade, we like the looks of KORS. The retailer looks very solid heading into its Q3 earnings report for FY13. The reason we like the company is its combination of strong growth, growth sustainability and decent future valuations. This coming quarter, KORS is expected to show over 100% earnings growth and 45% revenue growth. For the entire year, KORS is expected to show over 50% revenue growth, as well as 100% earnings growth. Can shares continue higher, though? The company's current PE is over 40. Yet the future PE is just over 25. Not a ton for a growth stock. So, can KORS' growth continue? We believe so. The reason we really like KORS is it has found a great niche beneath ultra-luxury and above mid-level. KORS is taking advantage of what Business Insider labeled as HENRYs (High Earners Not Rich Yet). These consumers make $100K-$250K, but they are not ultra-wealthy. They are spending more money, and there are over 21M of them. The consumers like the look of KORS clothes, which are fashionable and glitzy. Yet these consumers cannot afford luxury goods. They can afford the $400-$500 bags and $200-$300 watches. With such strong growth expected in 2013 and the company moving into foreign nations right now, upside looks great. We like starting a position using a Feb16 bull put spread of 50/48 strikes. If KORS continues higher, we make the entire premium. If KORS drops for whatever reason, we can obtain shares at a cheaper price.

Trade: KORS, Feb16 50/48 Bull Put Spread

Max Gain: 21%

For longs, we like the looks of iShares FTSE China Index and Walmart. FXI is a key Chinese ETF that we believe could be a solid play moving forward, as we expect China to continue to be solid. First off, the country just reported solid GDP with a 7.9% increase in Q4, beating expectations of 7.8%. The Chinese market appears to be looking much better right now, and we believe a play in FXI is tempting. The supposed "hard landing" of China appears not to be happening. Other data shows great strength as well. Retail sales rose 15.2% in December. Industrial output was up over 10%, and things are looking good. Here is comment from HSBC about the Chinese economy:

The upside surprise in China's 4Q GDP data confirmed that the economy has officially exited its slowdown, driven mainly by cyclical factors -- exports growth deceleration and property market destocking in the earlier part of 2012. Thanks to the filtering through of Beijing's counter cyclical spending, domestic demand is picking up on the back of infrastructure and property led investment, as well as loose liquidity conditions, leaving the worst of GDP growth at 7.4% y-o-y in 3Q behind us and dispelling the fears of China hard landing.

We believe that the near-term outlook is solid, and we like China to continue higher. FXI is a great way to play China, and will do well as China's economy does well. Right now, we are seeing resistance at $42, which is showing general resistance for China's markets. If we can break through that level, we see a strong breakout for the ETF. We are confident in the country based on recent results. The 2H of 2013 may be a bit weaker for China due to tightening government spending, but for the first six months, look for FXI to continue higher.

Equity Trade: FXI, Long

Breakout Point: $42

Another stock we like long is Walmart. WMT was one of our top picks for 2013, and we believe the stock is looking very solid for a buy right now. WMT is starting to build right now, and looks to have broken out over the 50-day MA today. We see this as a great entry point. Here is what we like for WMT: good growth, reattainment of consumers that fit its model, and solid international expansion. The company's 12+ future PE is very attractive, with over 6% growth in revenue and 10% growth in earnings in 2013. On top of that, the company has a very sexy 2.5% yield on its dividend, which is a plus to solid growth as well as to shares. One of the most attractive aspects of the company is that we believe 2012 was a great year for WMT to get itself back on track with cost cutting. The company grew operating margins from 5.6% to 5.7%, despite the fact that it worked hard to cut costs. On top of this, the company has restructured stores to be more appealing, and is moving apparel back to Arkansas from New York as a general microcosm of the company's return to its roots. The company is also set to increase international expansion in Canada in 2013 with a $450M expansion to help battle Target's (NYSE:TGT) expansion into Canada. We like selling a put spread to accompany adding shares here as a hedge.

Options Trade: WMT, Long / WMT, Mar2013, 65/62.50 Bull Put Spread

Max Gain: Buy over 50-day MA / 9% max gain

One stock that we are looking at bearishly is Capital One. The company's latest round of earnings was definitely a sign of weakness, and we believe it will have limited upside moving forward. COF's latest results showed EPS at 1.41 vs. 1.60 expectations, as well as a miss in revenue at $5.6B vs. $5.8B expectations. What happened? Here are comments from the company's CFO:

Seasonal expense and margin trends led to a reduction in fourth quarter earnings compared to the previous quarter... With a few exceptions largely related to these seasonal patterns, fourth quarter 2012 results give us a good picture of what to expect in terms of pre-provision earnings in 2013, assuming little change in the external environment.

The company said 2013 would be similar to 2012, and it guided for $22.5B in 2013 FY vs. expectations for $22.8B. The company is seeing lower asset yields, which is compressing margins. Overall, these issues sound to us to be simply a slowdown in COF's growth and cyclical weakness over long-term weakness. At the same time, upside should be limited until sentiment changes. Resistance for the stock appears to be at the $62-$63 level, and we like using that area for a bear call spread.

Options Play: COF, Mar2013, 60/62.50 Bear Call Spread

Max Gain: 14%

Tomorrow's Outlook:

The market will be reacting to a number of earnings reports tomorrow with IBM, GOOG, TXN, and others reporting earnings after hours today. At quick glance, we could see more upside. IBM, TX, and GOOG beat expectations on EPS. Tomorrow morning, the market will get earnings from Abbot Labs (NYSE:ABT), Coach (NYSE:COH), McDonalds (NYSE:MCD), and United Tech (NYSE:UTX), among others. Right now, with shares of GOOG and IBM rising in after hours, the market looks solid to continue higher. At the same time, a slew of bad reports tomorrow morning could make for a mixed move from the market. With a lack of other news, the market should be moving nearly entirely on earnings tomorrow. Look for technology to be strong to start.

Charts 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.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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