Hercules Offshore Inc. (HERO), Met-Pro Corporation (MPR), and Delta Air Lines Inc. (DAL) are three analyst stock picks priced under $10.00 per share this week. We’ll take a look at these three analyst upgrades, the catalysts behind the moves, and how investors can best profit.
Hercules Sees Better Rates and Leverage
HERO, a shallow-water drilling and marine services provider operating primarily in the Gulf of Mexico, was upgraded by Raymond James to Outperform with a $6.00 per share price target. At a significant 36% premium to the current market price, the analyst’s price target reflects a very bullish sentiment on the company’s future outlook.
The analyst cited improving Gulf of Mexico jack-up rates and improving cash flow leverage as the primary catalysts behind the upgrade. These improved metrics could lead to higher-than-expected revenues and earnings during the third quarter. While the firm beat bottom-line expectations last quarter, it missed top-line revenue estimates by just over $5 million.
Met-Pro Benefits From Key Contract Wins
MPR, a manufacturer of product recovery and pollution control equipment for purification purposes, was upgraded by Brean Murray to a Buy with a $15.00 per share price target. At a significant 51% premium to the current market price, the analyst’s price target reflects a very bullish sentiment on the company’s future outlook.
The analyst cited recent contract wins as the key catalyst behind the upgrade, which have included several large orders during July and August. On August 2, the firm announced that it received more than $2 million in orders in the aerospace industry, while it reported nearly $3 million in orders in July for a major alternative energy company and natural resource company.
Delta Air Lines May Be Ready to Take-Off
DAL, a provider of air transportation throughout the United States and around the world, was upgraded by Dahlman Rose to a Buy with a $10.00 per share price target. At a significant 35% premium to the current market price, the analyst’s price target reflects a very bullish sentiment on the company’s future outlook, despite several perceived challenges ahead.
The analyst cited capacity reductions, deleveraging of its balance sheet and limited union exposure as the key catalysts behind the upgrade. Currently, shares of the airline are trading near their 52-week low of $7.28 per share, which could suggest a relative undervaluation. However, the airline sector as a whole has rarely been profitable and could face lower consumer spending and higher fuel costs ahead.
How to Trade and Profit From the Stock Picks
While purchasing outright equity is certainly one way to trade any stock pick, investors can use stock options in conjunction with equity to enhance risk-adjusted returns. With Delta Air Lines Inc. and Hercules Offshore Inc., investors have the ability to purchase long-term stock options called LEAPS, which can serve as a highly-leveraged stock substitute with a lower capital investment.
Here are the at-the-money LEAPS for these companies:
- 4.50 Jan ’12 HERO Calls @ $0.95 per contract
- 7.50 Jan ’13 DAL Calls @ $2.00 per contract
Investors may also want to consider – especially in the case of MPR – creating a spread bet by purchasing longer-term put options in competitors. These put options should have an underlying value roughly equal to the long equity position, so investors will profit when the stock outperforms, but remain relatively protected against market or industry downturns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.