Options Plays for 5 Top Analyst Stock Picks Trading Under $10

by: Simon Monger

8x8 Inc. (NASDAQ:EGHT), Neurocrine Biosciences Inc. (NASDAQ:NBIX), PulteGroup Inc. (NYSE:PHM), New York & Company Inc. (NYSE:NWY), and Inhibitex Inc. (NASDAQ:INHX) are five analyst stock picks trading under $10.00 per share. In this article, we’ll look at the reasons behind the bullishness and how investors can best profit using options.

8x8 Benefits from Several Catalysts

8x8 Inc. (EGHT), a provider of telecommunications services using both telephony and the internet, was recently upgraded to an Outperform with a $4.75 per share price target by Northland Securities. The analyst based the upgrade on valuation, subscriber growth, new sales initiatives and its leadership in hosted PBX and UC markets combining to offer several catalysts to investors.

Investors looking to capitalize on these developments may want to look at taking an equity position, which would gain 55% if Northland Securities’ price target was reached. In the meantime, investors could write out-of-the-money 5.00 February ’12 calls at $0.40 to recoup some of the cost and lower their breakeven point.

Neurocrine Could See Promising Results

Neurocrine Biosciences Inc. (NBIX), a developer of neurological and endocrine-related treatments, was recently initiated with a Buy rating and $12.00 per share price target at MKM Partners. Analysts are closely watching the company’s Elagolix drug development, with partner Abbott Laboratories (NYSE:ABT), which is expected to enter Phase III clinical trials during the fourth quarter of 2011.

Investors looking to capitalize on this potential may want to look at the company’s 8 February ’12 call options priced at $0.40 per contract. If MKM Partners’ price target is reached, the position could gain nearly 10x their investment. However, it is likely that the options may need to be rolled out to a future expiration date given the development timeline.

PulteGroup Appears Undervalued

PulteGroup Inc. (PHM), a homebuilder that also has mortgage banking operations in the U.S., was recently upgraded to an Outperform with a $6.00 per share price target at Raymond James. The analyst believes that the stock could be undervalued after moving some 30% lower over the past week and 40% lower over the past month amid concerns of a waning economic recovery.

Investors seeking a long-term position in the company may want to look at its at-the-money 5 January ’12 LEAPS calls trading at $1.10 per contract. If Raymond James’ price target is reached, the options position could increase 45% with a minimal capital outlay. Meanwhile, a diagonal spread (created by writing calls against the synthetic position) may also be prudent to hedge against potential industry declines.

New York & Co. Could Turnaround

New York & Company Inc. (NWY), a specialty retailer of women’s apparel with more than 500 stores in the United States, was recently upgraded to a Buy with a $6.00 per share price target by Brean Murray. The analyst believes that the retailer is undervalued with significant turnaround potential after falling nearly 30% over the past month.

Investors looking to capitalize on this opportunity may want to consider a hedged position given the state of the retail industry and the potential for consumer spending to decline. After purchasing underlying shares, investors may consider purchasing put options on a popular index ETF, such as the SPDR S&P 500 ETF (NYSEARCA:SPY), in the same dollar amount.

Inhibitex Could Double in a Year

Inhibitex Inc. (INHX), a biopharmaceutical company focused on anti-infective products to treat serious infections, was recently initiated with a Buy rating and $6.00 per share price target by Bank of America/Merrill Lynch. Many analysts are watching the company’s recent Phase II clinical trials of INX-189 in HCV-infected patients.

Investors looking to profit from this stock do not currently have many choices in the options market, but there are a few relatively illiquid bets that can be made for the long-term. Investors may want to consider holding equity for the time being and then moving into options when these issues become more liquid in the coming quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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