Alcatel-Lucent Technologies (ALU) is a telecommunications equipment vendor that was created by the merger of Alcatel and Lucent in 2006. But it has not fared that well since the merger. However, after a good 2011, there is an opportunity to make money off this stock even for those not interested in buying the stock outright.
Is there anything good happening in ALU?
- 2011 was the first year of profitability since the merger.
- Growth estimates for 2012 is 8.5% and very attainable.
- 38% of revenue comes from North America, and the economy is growing.
- It still has a 61% upside potential toward a 52 week high, and it is bullish.
Troubles in 2012 to Consider
Bernstein Research recently downgraded ALU because investors will be watching the financial performance of the company this year. Bernstein says reaching 4% operating margins will be hard. Overall, we believe 2012 will be a good year for ALU. One big reason for this is the development of the 4G LTE network which is designed for data streaming. It is the fastest developing network ever. ALU stands to benefit greatly from this. The company's lightRadio Technology will help ALU, and is being tested successfully by a number of companies.
Believing that ALU has enough promising opportunity to move forward, we like a long term options play on ALU in 2012. Owning the stock may appeal to some, but we like a lower risk vertical option spread here.
With a nice round cup formation possibly forming a handle at the present, this reversal pattern could signal a future move up. We do not believe it will move substantially, at least not in the near future, but we like its ability to move above 3 to 3.5 before the year is over. Because of this, we are looking at a Bull Put Spread:
- Buy a January 2012 '2.5' call option (priced at $0.55)
- Sell a January 2012 '3.5' call option (priced at $0.20)
- Net Debit to Start: $0.35
- Maximum Profit: $0.65
Reasoning behind the Trade
ALU is coming off a good year and is expected to continue this year. With a reversal pattern in place that looks to get started soon, and the opportunity to increase revenues in the 4G development, we see the stock continuing up. We are not concerned about the long-term stock value, but as a short-term options play. It has the potential to move up like this through the year.