The market has now seen a 9-day rally in the Dow Jones, and thing are still looking pretty solid. The market got some great news today about consumer spending that is actually bullish. Retail sales grew 1.1% in the past month year/year, which is a very solid level and beat expectations of 0.4%. The positive of this number, though, is a bit outshined by January's CPI rising 1.6%. Therefore, a lot of this increase in sales could be just an increase in pricing. Either way, the market continues to ignore sequestration, issues in Europe, and technical highs. The market continues to act very strong right now, and we do not see a lot of reasons that it will completely reverse at the moment.
Stocks To Trade:
The first stock we are looking at today is Sprint. We believe that S has a lot of potential mixed with extreme value. First off, Sprint trades at very cheap multiples. Price/sales are only at 0.5 (under 2 tends to show good value), while price/book is 2.5 (under 3 tends to show good value). While Sprint has good value, can the company start to turn solid profits? We believe so. The biggest knock for Sprint has been that the company has had a weak network and significant debt. Two moves in the past six months, though, give us reason to be positive, and we believe give the company long-term potential that is not currently priced in. First, the company got a solid deal from Softbank (SFTBY.PK) to buy up 70% of Sprint back in November 2012. That deal is great because it adds a solid line of credit so that S does not have to add to its over $20B of debt. Of the $20B deal, Softbank will spend $8B on network improvements. While some might say this is old news, since the deal happened, the stock has increased 0%. We believe this deal will help to give Sprint a solid capital injection, as well have a solid line of credit if needed. Additionally, to help the company's network, Sprint acquired Clearwire to add to its spectrum. As spectrum becomes scarcer, S made a solid move to ensure that it can compete with Verizon (VZ) and AT&T (T). Both of these moves have not been priced into the stock, and we believe that the stock has extreme value over the long term. Further, recent results show that Sprint is gaining on its competition. Here is a quote from Catalyst Investments about that deal.
They also point out that Sprint's wireless revenue growth rate in the first nine months of 2012 exceeded Verizon Wireless's revenue growth. Sprint's wireless revenue growth rate has also exceeded AT&T Mobility's wireless revenue growth rate in the last three quarters, and it has also exceeded AT&T Mobility's wireless service revenue growth rate for the last five quarters.
Right now, profits look like they won't be coming until late 2014, early 2015. At the same time, if the company were to meet the valuations of VZ and T, S would double or triple. With S, you are buying in at the bottom, and we believe any risk for the stock to move lower is limited. $6 is a huge resistance level, and if that breaks, the stock could take off.
Trade: S, Long
Entry: Break of $6
Another stock we like right now is PCLN. PCLN has taken a hit over the last couple of days, as its deal to merge with Kayak has been delayed due to a British antitrust suit. Kayak gives PCLN a metasearch component of its business that it is lacking, and Kayak investors overwhelmingly approved the deal. The deal is a great boost to PCLN, and we believe that shares have a lot more upside once this merger goes through, among other reasons. The current issue is a delay, and we do not see any reason it creates a trust issue. Competitor Expedia (EXPE) just acquired its own metasearch company in Trivago. The growth potential for PCLN is very solid. The company is expected to grow revenue by 23%+ this year, as well as 18% next year. Both growth levels are very solid, and we believe that the appetite for travel is looking good. Unemployment is coming down, consumer spending is rising, and recent signs of a bottom in Europe are good catalysts for PCLN.
The knock, though, tends to be value. Current PE is 26, while future PE is 15. Current PE is a bit high, but a 15 future PE shows good value for a growth stock like PCLN. We believe that growth continues to look very solid. Margins need to remain high at PCLN for the company to continue upwards, but we do not see a lot of threats to this. The company has low overhead costs, and most of its costs are on marketing and maintaining its top spot in online travel. As the market continues to move more towards online spending, PCLN continues to benefit from that trend. We like PCLN moving forward, and with a temporary snafu that can create value along with long-term potential, we believe PCLN has lots of potential. We like using a bull put spread to take advantage of available premium, and can buy the stock on any sharp decline.
Trade: PCLN, Apr20, 655/650 Bull Put Spread
Max Gain: 11%
We continue to be bearish on Apple. In our last write up on Apple, we commented that the stock would need a major catalyst to get going again. We still have yet to see that catalyst take shape. And until then, shares will remain depressed. Many suggest value is a reason to buy Apple, but we believe that until a demand for the stock is created through a fresh product or development, the stock will lag considerably. So, what are potential catalysts for AAPL? First off, a new iPhone and new iPad would go a long way to restoring investor and consumer confidence, but will another version of the same product create a lot of interest again? We do not think so. The company needs to restore investors' confidence that it can continue to create new revenue lines that will maintain long-term interest. Ideas such as Apple TV, iWatch, and more have been floated around. Another major catalyst would be a stronger dividend that breaks 3% yield, so it will create additional yield or a strong share buyback plan.
The problem for Apple is that Samsung has created strong competition in the smartphone race with its Nexus/Galaxy lineup. Two analysts have come out stating that Apple may lose market share to Samsung over the long run. Jeffries commented that Apple would have a 25% chance of missing its next quarter's revenue estimates due to Galaxy S4. Additionally, Jeffries noted the new iPhone might be delayed due to casing issues with suppliers. It would delay the launch to July-September, further denting any potential upside. Argus made similar comments about rising competition. While Apple still has maintained a top spot in smartphone market share, Samsung/Google/Android is not going away. Right now, we need a catalyst for AAPL to get into it again. Further, the stock needs to retake the key 50-day MA. Stay away from the stock until then. If you are long, look at selling a bear call spread.
Trade: P, Long
Entry: Break of $14
Is tomorrow the day we finally start to see some correcting? The market has been on fire for quite some time, and it's likely that some consolidation and profit taking will need to occur to allow more buyers to enter the market. Tomorrow, the market will be reacting to initial jobless claims and the PPI. If the PPI comes out under 1%, then it means that companies are successfully passing on costs to consumers. Jobless claims will likely be the main catalyst. If those come out weak, it could take out some of the recent euphoria in the market. With little news expected for the day, though, the market could end up fairly flat.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.