Market Overview

Stocks to watch for the week of July 8, 2013

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Michael Fowlkes, InvestorsObserver

Alcoa reports second quarter results on July 8
What's happening with AA:
Wall Street bellwether Alcoa (NYSE: AA) will report its second quarter results after the market closes on July 8. With aluminum prices weak, 2013 has not been a very good year for the stock, which has lost 9.5% year to date. Going into the company's second quarter report, analysts have forecast earnings of $0.10 per share. When the company reported its first quarter results, it beat analyst estimates for its quarterly earnings, but revenues came in under expectations.

Technical analysis: AA was recently trading at $7.80, down $2.13 from its 12-month high and just $0.09 above its 12-month low. Technical indicators for AA are bearish and the stock is in a weak downward trend. The stock has resistance under $8.50. Of the 15 analysts who cover the stock three rate it a "strong buy", two rate it a "buy", six rate it a "hold", and four rate it a "strong sell". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

Analysts' thoughts:Alcoa issued a positive outlook when it reported its first quarter results, and now we will see whether or not that positive outlook has resulted in improved operations. I find it hard to believe that the results are going to be very pretty. Aluminum prices remain weak, and are unlikely to recover over the next 18 to 24 months. I expect to see the company miss its earnings forecast, and shares to trade lower.

Stock-only trade: Expecting weakness in the company's earnings report, I would not recommend setting up a long stock position on the Alcoa at the current time.

Option trade: If you are looking for a hedged options trade on AA, consider a September 6/7 bull-put credit spread for a 12-cent credit. That's a potential 13.6% return (110.6% annualized*) and the stock would have to fall 7.5% to cause a problem.

Speculative call-only trade: For those with an appetite for higher risk and bigger returns, consider buying the October $6 call. If AA rises just 4.1% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.

Oil prices break through $100 a barrel
What's happening with COP:
Oil prices have been trending higher since the middle of April, but have really made a strong move over the last few weeks, breaking through the psychological $100 mark. ConocoPhillips (NYSE: COP) has been in a fairly tight sideways pattern since the start of the year, but has been showing strength over the last two weeks. With oil prices surging higher in recent weeks, COP stock has moved higher as well, and is currently trading up 8.9% year to date.

Technical analysis: COP was recently trading at $61.79, down $2.98 from its 12-month high and $8.95 above its 12-month low. Technical indicators for COP are bearish and the stock is showing signs of a possible trend reversal. The stock has support above $60.25, and resistance below $63.00. Of the 17 analysts who cover the stock seven rate it a "strong buy", one rates it a "buy", five rate it a "hold", two rate it a "sell", and two rate it a "strong sell". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

Analysts' thoughts:Oil prices have been strong in recent weeks, mainly a result of civil unrest in Egypt. Egypt does not produce a material amount of oil, but where the concerns come in is that the country does control the Suez Canal and pipeline, which transports around 4 million barrels of oil a day. The Middle East and North Africa account for roughly one-third of the world's total oil, and any unrest in Egypt has the potential to disrupt output by the entire region. In addition to what is going on in Egypt, an improved global economy, growing appetite for oil by the United States and lower supplies have resulted in a 16% jump in crude in the last two months. If we see oil continue to move higher, all the major oil companies, including ConocoPhillips, will show strength.

Stock-only trade: If you're looking to establish a long stock position in COP, consider buying the stock under $61.50, and sell if it falls below $57.50 or take profits if it gets to $70.50.

Option trade: If you are looking for a hedged options trade on COP, consider an August 55/57.50 bull-put credit spread for a 30-cent credit. That's a potential 13.6% return (110.6% annualized*) and the stock would have to fall 5.9% to cause a problem.

Speculative call-only trade: For those with an appetite for higher risk and bigger returns, consider buying the November $60 call. If COP rises just 3.5% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.

Honda teams up with General Motors
What's happening with HMC:
Japanese automaker Honda Motors (NYSE: HMC) has announced plans to team up with U.S. based General Motors (NYSE: GM) to work on hydrogen-powered cars. It has been a rocky year for Honda, with the stock making slow gains during the first five and a half months during the year, but then giving the majority of those back over the last month and a half. With the recent reversal of fortune for the Yen, there has been weakness in the stock and its year to date gain is currently sitting at just 2.2%.

Technical analysis: HMC was recently trading at $37.77, $4.36 below from its 12-month high and $9.27 above its 12-month low. Technical indicators for HMC are bearish and the stock is showing signs of a possible trend reversal. The stock has support above $35.50 and resistance under $40.00. The stock gets a "strong buy" rating from the one analyst who covers it. The stock receives Standard and Poor's 3 STARS "Hold" ranking.

Analysts' thoughts:I believe that teaming up with General Motors to work on hydrogen cars is a smart move by Honda. The market is ready for an affordable alternative energy vehicle, and by working in tandem with General Motors, Honda will be able to lower the monetary risk of dumping huge amounts of money into research and development, and take advantage of patents that General Motors already has. General Motors holds the largest number of patents in the technology, with Honda coming in second. In addition to combining research and development, the main advantage of the two collaborating is that together they will have more influence on pushing for more hydrogen fuel stations. Currently there are very few such stations, but with Honda and General Motors working together to influence their spread it should make it easier. The more fueling stations that pop up the easier it will be for manufacturers to sell cars, so I believe this collaboration is great for the future of hydrogen cars.

Stock-only trade: If you're looking to establish a long stock position in HMC, consider buying the stock under $38 and sell if the stock drops under $35.50 or take profits if it gets to $42.

Option trade: There are no hedged option trades that we like on HMC at the current time.

Speculative call-only trade: For those with an appetite for higher risk and bigger returns, consider buying the October $35 call. If HMC rises just 3.8% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.

June chain store sales due July 11
What's happening with M:
The entire retail sector will react to June's chain store sales figures which are due for release on July 11. As the U.S. economy has been improving, retailers have been strong. Macy's (NYSE: M) has been enjoying a strong year thus far, with the stock trading up a stellar 25.3% year to date.

Technical analysis: M was recently trading at $48.40, down $1.60 from its 12-month high and $16.09 above its 12-month low. Technical indicators for M are bearish and the stock is in a strong upward trend. The stock has support above $46.00 and resistance under $49.50. Of the 15 analysts who cover the stock seven rate it a "strong buy", one rates it a "buy", and seven rate it a "hold". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

Analysts' thoughts:Results for chain store sales in May were strong, and I expect to see another strong showing for June results. Unemployment has been falling, and combined with improvements in the housing market consumers have gained confidence, leading to strength in all the major retailers. Macy's has been one of the stronger performers, and if June results are indeed solid, there is no reason to expect Macy's stock to weaken over the summer months.

Stock-only trade: If you're looking to establish a long stock position in M, consider buying the stock under $48, and sell if it falls below $44 or take profits if it gets to $55.

Option trade: If you are looking for a hedged options trade on M, consider an August 40/44 bull-put credit spread for a 35-cent credit. That's a potential 9.6% return (77.8% annualized*) and the stock would have to fall 8.4% to cause a problem.

Speculative call-only trade: For those with an appetite for higher risk and bigger returns, consider buying the November $45 call. If M rises just 4.9% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.

Family Dollar reports fiscal third quarter results July 10
What's happening with FDO:
Discount retailer Family Dollar (NYSE: FDO) will report its fiscal third quarter results before the market opens on July 10. Going into the company’s quarterly report, analysts have forecast earnings of $1.04 per share. The company is trying to redeem itself after a dismal second quarter, which came in under analyst estimates. In addition to missing analyst forecasts for the quarter, Family Dollar also lowered its full year guidance, the second time it did so this year. The stock has been in a fairly tight sideways pattern for the past three months, and year to date the stock has managed to trade up a mere 0.7%.

Technical analysis: FDO was recently trading at $63.32, down $9.22 from its 12-month high and $9.26 above its 12-month low. Technical indicators for FDO are bearish and the stock is in a weak downward trend. The stock has support above $60.00 and resistance under $64.50. Of the 19 analysts who cover the stock six rate it a "strong buy", 11 rate it a "hold", one rates it a "sell", and one rates it a "strong sell". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

Analysts' thoughts:Coming off the company's disappointing second quarter results, it desperately needs to at least match analyst estimates for its fiscal third quarter results. During the recession, dollar stores were one of the top performers, but with an improving economy they have found it difficult to maintain the same strength as improved consumer confidence has resulted in a shift in consumer habits back to more traditional retailers. There are some positives to Family Dollar's business. Sales were up 18% last quarter, and the company continues to open new stores at a blistering pace. If the company is able to post better than expected numbers, Wall Street may start to focus on the positives and push the stock higher, but another miss will put big pressure on the stock.

Stock-only trade: If you're looking to establish a long stock position in FDO, consider buying the stock under $63, and sell if it falls below $58 or take profits if it gets to $72. If you set up a new position in the stock, be sure to pay close attention to the earnings report, and be ready to pull the trigger if the numbers disappoint.

Option trade: If you are looking for a hedged options trade on FDO, consider an August 55/57.50 bull-put credit spread for a 30-cent credit. That's a potential 13.6% return (110.6% annualized*) and the stock would have to fall 8.3% to cause a problem.

Speculative call-only trade: For those with an appetite for higher risk and bigger returns, consider buying the October $60 call. If FDO rises just 3.4% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.

 

*Annualized returns provided for comparison purposes only

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At the time of writing, Mr. Fowlkes does not have direct ownership in any of the other stocks mentioned.

 

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