In an article I wrote on EMC in mid September, I was very bullish on the stock and recommended a short term income play along with the investment. But the stock did turn bearish after the play and looks like it may want to move up again. Here was the original suggestion:
The Options Play
The stock is presently trading at $27.67, and I believe it will continue to move up in a strong trend. I am looking at a bullish income play.
- Buy the January 2013 call with a strike price of "27" (priced at $2.22)
- Sell the January 2012 call with a strike price of "28" (priced at $1.72)
- Net Debit to Start: $0.50
- Maximum Profit: $0.50
- Maximum Risk: net debit
- Maximum Length of Play: four months
Reasoning behind the Trade
- The stock is very bullish, so play the trend.
- The company's well-organized sales system will keep it pushing up.
When the stock rose above 28 on September 21st, I closed out the play for a profit. What I did not anticipate was that the stock would take a turn south after that day, so I consider the move fairly fortunate and a bit lucky. But it is another good example of how combining short and long term strategies can work together in an investor's portfolio.
EMC Corp (EMC) struggled like other companies in the tech industry as a whole because a series of earnings reports were not favorable. Many companies beat earnings but fell short on revenue-again, and this frightened investors. In the tech industry many big companies are just holding back on spending and IT becomes one of those areas. Google (GOOG) stunned Wall Street with a third-quarter earnings decline and weak revenue amid Motorola integration woes and falling online ad rates. Intel Corp. (INTC), the world's largest chipmaker, says net income fell 14 percent from last year in the latest quarter, and it's looking at tough conditions in the new quarter. Intel blames a difficult global economy for declining sales. These are just a couple examples of declining sales causing a decrease in revenue.
EMC is trying to rebound and looks like it may be in a good place to do it. The only road block that stands in its way is the fiscal cliff which really stands in the way of the whole market right now post election.
The company has a bright outlook on the future with two analysts giving it good growth opportunity. Both Cantor Fitzgerald and Piper Jeffray give it a buy rating with price targets of $31.00. This is a good 20% growth from off its present position.
EMC is one of the largest disk storage system providers in the world. It is no secret that the company struggles with an anemic economy that has caused many of its clients to pull back the reigns on IT spending. And even though the stock may rebound again, I am betting on the fiscal cliff fiasco to bring the whole tech environment down even further before it moves up because the industry will follow the markets as a whole. EMC is in a good position to move up from where it is. But before it does, it's the fiscal cliff that provides ample opportunity for an income play again.
(click to enlarge)
Technically Speaking
EMC Corp is a highly volatile stock and appears to have found some ground just under 24. After dropping significantly since the first of October, it rebounded last week retaking about 35% of what it lost all last month - highly volatile. So where is it going now? The RSI indicator has followed the stock, although its movement down was gradual compared to how the stock dropped last month. There are no special directional hints here. The MACD also tends to follow the stock right now. The recent move up is still in bearish territory, but that means nothing with this stock. It could push through into bullish country fairly quickly. Watch the stock to move between the Bollinger Bands. It could bounce off the middle band and move back down before it challenges another move up. Also, I believe it would be advantageous to watch the 50 day MA as a possible resistance point.
The Option Play
Presently trading at 24.92, I am looking at taking advantage of what I believe is the fiscal cliff bearish move.
- Buy the January 2013 put with a strike of '24' (priced at $0.87)
- Sell the January 2013 put with a strike of '23' (priced at $0.56)
- Net Debit to Start: $0.31
- Maximum Profit: $0.69
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- Third quarter earnings continues to be less than stellar for the markets.
- I do not see whole lot of bullish catalysts
- The Fiscal Cliff is another bearish catalyst coming along
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
