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

Includes: BP, C, TSO, WLT
by: David Ristau

Market Recap:

The market continued higher on Tuesday after great earnings reports from IBM (NYSE:IBM), United Tech (NYSE:UTX), McDonalds (NYSE:MCD), and Google (NASDAQ:GOOG). The solid earnings in these companies, though, did not move the rest of the market to start the day as most stocks were held in check by a vote to extend the debt ceiling for three months to allow for more time for the government to solve the debt crisis. The move allowed the market to continue higher in the afternoon. Markets were cautious though with a number of important earnings coming in AH like Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and SanDisk (SNDK). The market has continued to be strong since the aversion of the fiscal cliff, but the market has seemed tired as of late. We worry that a couple of bad reports could really hurt the market's bullishness.

The Dow Jones finished the day up 67 points at five-year highs. Crude oil finished down 1.2%. Gold finished down 7 points.

Stocks To Trade:

Today, we are looking at an earnings trade in Tesoro (NYSE:TSO), longs in Walter Energy (NYSE:WLT) and Citigroup (NYSE:C), and shorts in Williams-Sonoma (NYSE:WSM) and

For an earnings trade, we like the looks of TSO. The company is expected to report over 250% gain in earnings year/year. The big gain will come from better margins on gasoline prices in California that hurt the stock one ear ago. We believe that shares remain very discounted despite the fact they look very attractive in terms of earnings growth potential in the future. The company operates with a sub-8 future PE, but the company is set to take over a significant amount of refining in California after the company bought BP's (NYSE:BP) southern California refining unit, which would boost production by 40%. That growth potential along with a higher margin gas in California makes this company very attractive to us. We believe that the market is heavily discounting shares despite this lucrative deal that still needs approval. At the same time with a 7.5 future PE, TSO presents great risk:reward. In Q3, the company made some positive comments about this quarter as well. Crack spreads were up year/year, diesel and gasoline cracks remained strong, and the company seemed to suggest Q4 would be much better year/year. We like shares right now as they broke out from the $44 level, and we believe they could be ready for a bigger move to $46 by earnings. Post-earnings, the stock should get a lot of upside from the California deal being approved.

Trade: TSO, Long

Breakout: 44.00

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For longs, we like the looks of Walter Energy and Citigroup for longs right now. WLT looks very strong right now and should push higher. First off, WLT is going to have a weak Q4 with around 18% drop in revenue and move to the red in earnings. Yet, we see a lot of this issue priced into the stock at this point. The stock trades at just 2x book, and we see fewer than 4 as showing good value. With EPS in the red, the company has no PE, but price/sales are also below 1, showing good value as well. Yet, the cyclical weakness in coal could be ending. Here are comments from Dahlman Rose via Benzinga today:

We are upgrading shares of WLT… to Buy from Hold based on an improving outlook of the global met coal market. In our view, recent global coking coal supply issues and spot market price improvement have provided an attractive entry point for the equities ahead of our expectation of an upward move in the commodity. That said, our bullish met coal call is not an earnings call. We are looking through what we expect to be tempered commentary from coal companies during the 4Q12 earnings season. Our call is predicated on what we see as a firming in coking coal prices off of a well-defined bottom - $165-170/metric ton FOB settlements over the last two quarters, and a subsequent gradual improvement in benchmark and spot pricing over the remainder of the year into 2014.

The tempered earnings are what we are seeing as well, but the bottoming in coal could be big for the market as these shares are very cheap. Further, we believe that the weakness from Obama's election is overdone. While Obama has not been friendly to coal, we do not expect any further downside from his election/policies. At this point, looking at WLT, if you believe the company is worthless. Yet, if you think that coal has any future in our nation...WLT and much of its industry is very undervalued. We are looking to buy on a break of resistance at 40.00, which is the same area as the 200-day MA.

Equity Trade: WLT, Long

Breakout Point: $40

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Another stock we like long is Citigroup . The bank showed some nice bounce back after earnings as investors moved past the rear view and looked forward. At the end of the day, Citigroup's international business is very attractive, and we believe that C could see some solid upside in 2013. The company's latest earnings were not great. Yet, they were not as bad as you might think. CEO Michael Corbat had his first quarter, and he wants to have good year/year results. The quarter saw the company take a lot of charges, negative adjustment, etc. Without those adjustments, the company made 0.69 EPS. Further, the company is still expected to see around 20% growth in earnings in 2013. Where is all that growth going to come from? We believe that the rest of the business other than trading looks solid. The international business remains the source of future upside. The company saw another 2% growth in income in their global consumer business, and they are pushing growth in Mexico and Asia strongly. We believe that the company can make a lot of upside in that area, and those results were be even better when the company finishes restructuring South Korea. All in all, the company has an 8 future PE, which is extremely cheap. Much like WLT, we see a lot of value in these shares. Earnings dip has already passed, and we believe that shares have strong value at 38 where the 50-day MA is sitting. We can start a position there by selling a bull put spread.

Options Trade: C, Mar2013, 65/62.50 Bull Put Spread

Max Gain: 12%

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Tomorrow's Outlook:

The market will be reacting to a number of earnings reports tomorrow with AAPL, SNDK, and NFLX reporting in AH. At quick glance, Apple's earnings appeared to have been good but revenue was light as iPhone sales missed expectations. Shares were down in AH. That miss will definitely hurt the market, but it may be balanced out by solid results from SNDK and NFLX. Further, we have tons of important reports tomorrow as well. 3M (NYSE:MM), Bristol Myers (NYSE:BMY), Union Pacific (NYSE:UNP), and more report tomorrow morning. Further, we get some interesting economic data as well with initial jobless claims and leading indicators. Should be interesting tomorrow, and it will likely be in the red unless something changes from the Apple issue.

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.

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.