Market Recap: It was a fairly lackluster day for the market as the market awaits a bevy of data and the Fed's Jackson Hole meeting on Friday. Mondays are typically a bit weaker as shorts reposition and there is typically a lack of economic data. The news dominating today was the Apple (AAPL) win against Samsung in the patent case. The company has now cleared the way for cellular telephone dominance for some time, and the stock rallied on the news. The rest of the market, however, did not have much catalyst for more upside as it awaits a potential QE3 announcement on Friday from Fed Chairman Ben Bernanke. Overall, its a wait and see week with the Fed around the corner.
Going into tomorrow, we do get a healthy slate of economic data from the US and Asian markets that should be giving us some more concrete movement. Any major rally or dip, though, should be quickly reversed as the big day is Friday and no one wants to be overly long or short into that.
Stocks To Trade
For an earnings trade, we are liking Lennar (LEN). The residential construction market continues to be very appealing to us. Sales are growing, recovery is happening, and residential construction makers are primed to explode. These companies have been working to shore up balance sheets, improve efficiencies, and are ready to make some serious earnings when things turn around. Things are starting to look that way. LEN's last report was excellent, showing a great backlog build, and we believe its coming report in mid-September is going to be another great one. We like going long on the stock and selling the 29 puts to hedge it for an earnings play for those earnings. 20% growth in earnings and 10% growth in revenue is no doubt here.
For longs, we like Hershey (HSY) and Mellanox (MLNX). HSY has been one of the best companies of 2012. They have built a strong base, grown earnings and revenue at great rates despite a weak backdrop in Europe, and are holding a great base right now. The company moved up nicely after their last earnings report, which saw the company raise its outlook for the year. The company has been holding its 20-day MA ever since that report, and we believe they are a great place right now to go long as a breakout over $73 seems imminent. MLNX is another company that continues to move with no concern for market movement. The company is an Israel-based semiconductor company that crushed earnings in the last report, and is one of the fastest growing tech companies right now. They have gotten offers from IBM (IBM) and Oracle (ORCL), and they are growing like a wildfire. One sign is that their PE is 80+, but their future PE is just over 20. We like selling puts against them at the 105/100 level.
For shorts, we like the look of Under Armour (UA) and Seadrill (SDRL). UA has made quite a run this year, but we have an aggressive price target just over $50 for the next 12 months, given UA has the best growth models for the next five years. So, where the stock is pricing right now is just too high. Unfortunately, this is a stock that when it breaks, which may never happen, but if they execute poorly for one quarter at all, it will lose its footing. We believe it's best to look at this company in the same way Lululemon (LULU) and Green Mountain Coffee (GMCR) lost their footing. Right now, they are showing some sell signals. Fundamentally, they are overvalued. Further, the company broke its 20-day MA for the first time since June. The last time this occurred, the company dropped 10% in days. The stock seems to be rolling over, and if we get market weakness, UA could be about to see $50 again.
Seadrill announced very good earnings this morning with nice guidance and solid dividend growth. The stock did nothing. Why? Offshore drillers are going to get hit by Tropical Storm Isaac, and that news is keeping this stock in check. We see SDRL as a company that has made its move on energy recovery, and its report today showed the move may be ending. We like selling a bear call spread off the 45 level on them.
The market does have some important data to look at tomorrow. In Asia, we will get the Japanese Economic Monthly Report as well as Chinese Leading Index. In Europe, the German Consumer Confidence report is important, and here at home we will be led by Consumer Confidence and Case-Shiller Index. We cannot expect any giant moves that last as the market should reverse on most dips and rallies into Friday's Fed meeting, but some movement could definitely take place with such a large slate of data on the docket for tomorrow. To add fuel to the fire, we also get the Fed Richmond Manufacturing report and some earnings from PVH (PVH). The big days are Wednesday and Thursday, but there is enough here to definitely move the market 50-75 points tomorrow.
We had a really fantastic day in the market. In our Short-Term Equity Portfolio, we were able to close half of our longs in Pharamcyclics (PCYC) for a 3.7% gain, Amgen (AMGN) for a 1.2% gain, and Pepsico (PEP) for a 0.1% gain. We also were able to close out our bull put spread in Starbucks (SBUX) for Sep22 for a 22% gain, and we were able to close some sold puts in Discover (DFS) for a nice 16% gain. Additionally, we sold 1/3 of our long-term position in Equinix from our Extended Value Portfolio for a 10% gain. We added longs in Hershey and Smith & Wesson (SWHC) today as well as a short in Gamestop (GME). We also added Crocs (CROX) to our long-term portfolio with 10%, 20%, and 30% profit targets.
We have the following positions:
In our Earnings Alpha Portfolio, we are long Discover Financial, Smith & Wesson, Lennar, Ulta (ULTA), Francesca's (FRAN). We are short RedHat (RHT). We have a reverse iron condor in Abercrombie & Fitch (ANF).
Chart courtesy of finviz.com.