The market had a great day on Tuesday to reach a new all-time high in the Dow Jones Industrial Average. The market rallied on positive data about the services industry, as well as better than expected retail sales from the eurozone. ISM Services came in at 56.0 versus 55.4 expectations. The beat helped drive the market higher, as well as eurozone Retail Sales that came in at -1.3% year/year versus expectations of a 3% drop. Economic indicators from Europe have not shown improvement, but they have showed a slowing downside, which is typically a sign of a bottom. The all-time highs in the market may signal a top, though, as typically a capitulation day like today tends to signal the end of a trend. With so many various uncertain issues present, like the sequester, Italian elections, and jobs data at the end of the week, the market could see some profit taking for sure.
Stocks To Trade:
The first stock we are looking at today is Ford. We recently reiterated Ford as a Buy with solid upside potential, and we believe that the stock is in for a big 2013. The early results for the year are looking very promising. January and February auto sales have been solid for the company. Early estimates for auto sales in 2013 were for an increase of 4-5% in 2013. Ford saw a 22% sales increase for January and 9% for February. The increases outpace expectations thus far, and Ford is seeing a lot of strong potential. One major positive is that SUV sales increased over 20% in January and February. This number is crucial to F, as it means better margins for the company than its smaller cars offer. On top of this, Ford commented today that it is seeing signs of a recovery in Europe, and continues to expect to breakeven by 2015.
Further, we believe that the growth of emerging markets in 2013 is another great sign for F. A lot of future growth will come from places like China, India, Indonesia, and Brazil. Ford saw China sales double in January. India and Brazil were weak in February, but we believe that these areas of growth are going to continue to provide upside for Ford. Analysts are expecting Ford to see a 5-6% increase in sales in 2013 and 2014. While not levels of growth for massive upside, the stock is not valued even close to what it should be. Future PE is currently 7.6, and price/sales are 0.4. We might see a lower future PE if expectations were that margins would stay low from smaller cars being sold, but price/sales shows even more value for shares. Interestingly, Ford has a 3:4 debt to sales ratio, while General Motors (GM) has 1:10 ratio. We believe this ratio is probably the single greatest reason for Ford's weakness.
Moving forward, we believe that at some point, F has to be valued correctly, and there is tons of upside when that occurs. For now, we like being long the stock and complementing that with bull put spread to hedge the position.
Trade: F, Long and Apr20, 12/11 Bull Put Spread
Entry: Break of $13 / Max Gain: 10% on spread
Another stock we like right now is Gap. GPS is making quite the comeback, and we believe shares have a lot of upside. The company is combining a solid turnaround with solid earnings growth potential and lots of value. In its latest quarter, the company saw a 61% increase in income on the back of a 5% increase in same-store sales. The company has been making a turnaround in the past few years as it worked on closing down American stores and rededicating its efforts to international growth markets. In 2006, the company had stores in 6 countries. Now, its stores are in over 40 countries. That dedication to growth is going to take GPS a long way. Right now is a great time to get involved as well, as the company has value and recently raised its dividend.
After its last report, the company announced it was increasing its dividend by 20%. Yield is now just south of 2%, and with growth coming in 2013 and 2014, the company looks very solid. Earnings are expected to grow 10% in 2013 and 2014. That growth looks like it should continue. Analysts agree. Piper Jaffray and Stifel Nicolaus both noted that the earnings were very solid, and they believe that more growth should be expected.
Value also looks very promising. The company has price/sales at just 1.0, and future PE is just over 10. We look for value at 2.0 for price/sales, and under 15 for future PE. Those levels of value with a company that is bottoming look very solid. We like GPS over $34, and it should move higher.
Trade: GPS, Long
Buy Point: Over $34
One stock that looks very weak right now is BlackBerry. Several weeks ago, we wrote about liking a reverse iron condor on the company, as we believed that BB10 would make or break BlackBerry. Right now, it does not look like BB10 is working out. Recent news shows signs that BB10 and its new phone Z10 are not giving BBRY the comeback it actually needs. The company has seen Z10 inventories rising, which could mean that BlackBerry is stocking shelves because of strong growth, but we are fearful it means that not enough of the phone is being sold. Further, PacCrest reported that the Z10 was seeing reduced pricing from Vodafone and Carphone Warehouse. Further, Sprint noted it would not sell the Z10 phone. While BB10's results are not definitive yet, these initial signals are not positive.
Further, Canaccord comments that channel checks are not great. From BGR News:
"Our global surveys post the recent BlackBerry Z10 launch indicated mixed initial sales with limited initial supply cited as the reason for early post-launch stock-outs at some carrier stores during the first week of launch," Walkley wrote in a note to investors on Monday. "Our follow up surveys have indicated steady but modest sales levels for the Z10."
He continued, "With new BB10 smartphones launching in the U.S. only in mid-March or later at subsidized prices no better than competing high-end Apple/Samsung smartphones combined with our expectations for the Galaxy S IV to launch at a similar time frame in the U.S. market, we anticipate BlackBerry will struggle to reclaim high-end smartphone market share."
Earnings are March 28, and we believe that the company should continue to see downside into that report. Things could obviously go either way with earnings, but we believe that the risk is so much greater than the reward. Even if BBRY has one decent quarter, will the company see an entire turnaround and be able to compete with Apple (AAPL) and Samsung (OTC:SSNLF)? If the company does not show good results with BB10, the stock could see a major decline. Right now, we would stay far away from BBRY if you are an investor.
Tomorrow, we are actually worried that the market may take a step back. Today was a great day, but market movement was so strong on really quite limited news. Further, we believe that at some point, sequestration and Italian election issues will start to prove to be an issue for the market. We also have a lot of key news coming out tomorrow. First off, we will get ADP Employment Change data, which will be key for the market. If the ADP Employment Change is not solid, the market could see a lot of correcting. If the ADP report is not positive, it could signal a weak report for Friday. On top of that, Factory Orders will be key to the market. Look for most of the move to come off of the market's take on employment data.
Charts courtesy of finviz.com