The market rose on Thursday, but the market fell from early highs to end only slightly higher. The market was rallying on economic data from initial jobless claims. The latest report showed jobless claims dropping to a 6-week low, which was a big plus for the market. On top of that, we got some positive earnings reports from several companies including ExxonMobil (NYSE:XOM), Southwest (NYSE:LUV), and UPS (NYSE:UPS). Yet, we also got some weaker reports from 3M (NYSE:MMM) and Bristol Myers (NYSE:BMY). The market rose strongly early, but fell at the end of the day after Bundesbank President Jens Weidmann criticized the ECB treasury buying program. Loss of support of Germany would obviously be bad for Europe.
The Dow Jones rose 25 points while the S&P 500 rose six points.
Stocks To Trade:
LNKD was one of our top picks for earnings season, and we believe that the company has a lot of potential moving into its May 2 report. Despite high valuations, we like LNKD in the short term to continue to be strong. Yet we do believe in the long term that the company has more limited upside. With growth stocks, the key to knowing when to buy them and sell them is understanding how growth investors think. When stocks are showing growth and future growth does not seem threatened, valuations really are not important. When any signs of weakness are shown [look at Lululemon (LULU) or Under Armour (UA) in the last six months], growth stocks suffer considerably. For now, the story on LNKD continues to shine, and we see do not see that stopping before/after earnings.
Here are some thoughts from our earnings report:
LNKD has been very strong during market weakness as of late, and we believe that strength will continue moving forward. The company has lots of revenue and earnings growth potential moving forward as well. The company is expected to see over 50% revenue growth at nearly 40% revenue growth in 2014. Those numbers are priced into the stock, but as we move into earnings it's unlikely that most investors will cut their shares or want to exit. There is no fear currently that the company will slow down in growth or has any issues, which is the key to growth names.
Some threats to LNKD are the Facebook (NASDAQ:FB) Jobs Board as well as other employment services, but overall, these options are different than LNKD's role. Right now, there is no major competition to LNKD as well, and we believe that the company will start to see great ad revenue to complement its professional services.
ITG Research has commented that LNKD's revenue is tracking above consensus estimates and with no reports of any weakness, we believe buying into earnings can net some solid gains. Into the last four earnings reports, the company has moved fairly flat but with such strong reports in the past two, we believe that traders will want to get into the stock before the report. We believe the stock could press $200 by earnings. Can the stock move even higher after that? We believe so. If the report is strong, it will squash any fears that FB's Jobs Board is hurting the company. Further, we believe that the company may strongly outperform due to ad revenue being stronger than expected. The company's move to mobile has strongly helped ad revenue and we believe that this portion of the LNKD equation can help LNKD considerably in the same way it has sold investors on FB.
Trade: LNKD, Long
Entry: Break of $190
Target: $200, $220
Stop Loss: $175
Another stock we believe will continue to be strong moving forward is Home Depot. It is important for investors when markets get extended, to consider low beta names. Stocks with low beta perform well in weak markets because they are less impacted by market trends. Typically, these stocks are blue chip names with solid dividends and inelastic businesses. HD represents both of those. The company has a nice dividend with 2%+ yield. While smaller than some names, the company complements that with solid growth prospects and what we believe is fairly inelastic demand. The company is expected to see 14-15% earnings growth in both 2013 and 2014. A lot of that growth is being powered by a secular housing recovery, which is not showing any signs of slowing. Despite other weak spots in the economy, housing is picking up. Housing data over the last couple weeks has been solid and earnings from some housing companies have been great.
PulteGroup (NYSE:PHM) reported great earnings with backlog up 35% and beat earnings expectations by 40%. M/I Homes (NYSE:MHO) beat earnings expectations by 120%, Q1 contracts up nearly 40%, and Q1 deliveries up 24%. Housing earnings are showing demand for new homes and that is good for HD. We believe that this secular recovery, coupled with rebuilding still occurring from super storm Sandy and the company's attention to increasing margins this year are great reasons that the company can continue higher.
We like approaching HD with a long position along with a bull put spread for May 18 expiration to take advantage of premium before earnings. Right now, we can make 5% on the 70/67.50 bull put spread. We believe HD can make a move to $84 by the end of this year.
Trade: HD, Long / HD, May 18, 70/67.50 Bull Put Spread
Buy Point: Break of $74 / 0.10 or higher
Target: $78, $84 / 0.00
Stop Loss: $70
One stock we are not a fan of right now is Deere . We believe that the stock could see some potential weakness into earnings on May 15. Earnings are expected to see about 4% revenue and earnings growth this quarter. DE has been weak this year. The stock has moved flat YTD while the market has increased quite substantially. The issue for DE has been that corn production has been weak due to droughts. Corn prices have also declined, which means that the demand for farming machinery is lower. Since the beginning of the year, corn prices have gone from $700 per bushel to under $650. We fear that DE's earnings may be hit by this report, and we believe it's a good place to make money shorting.
The stock has made some gains over the past couple weeks, and we believe that upside is an opportunity to short. Moving into earnings, we do not expect to see a change in sentiment about the potential for DE. Growth will have to come from international markets for DE, but we are cautious about that as well. China and India are also reported to be experiencing heavy droughts as well, which would mean low demand for Deere's goods. Long term, agricultural demand will increase but into earnings and likely out of earnings, we are cautious about DE.
Recent gains are a nice place to short. We like shorting under $86 into earnings. The company has not performed well this year and lagged the market. During correction periods this week, DE has been targeted. It still only has 2.5% short float, so short squeezes seem unlikely. If the market starts to correct into May, Deere should be on your radar.
Trade: DE, Short
Sell Pick: Under $86
Target: $82, $80
Stop Loss: $88.50
The market showed strength to start this week but the market looked tired on Thursday. The afternoon drop could be a signal for today. Much of today's move will depend on Q1 GDP and Michigan Consumer Sentiment for April. GDP needs to be solid to get the market moving higher again today. A miss of the 2.8% expectations for GDP would be hurtful to the market. Additionally, we get key earnings today morning from D.R. Horton (NYSE:DHI), Tyco (NYSE:TYC), and Weyerhaeuser (NYSE:WY). In after hours, we got a solid report from Starbucks (NASDAQ:SBUX) but weak reports on Baidu (NASDAQ:BIDU) and Amazon (NASDAQ:AMZN), which may spell trouble for the market. We expect weakness unless GDP surprises today. Be careful!
Charts courtesy of finviz.com.