Market Overview

Stocks to Watch for the Week of February 4, 2013

Michael Fowlkes, InvestorsObserver

Disney reports fiscal first quarter results February 5th

What's happening with DIS: Disney (DIS) is currently trading just shy of its 52 week high. The company is coming off a strong 2012, which saw the stock climb just shy of 33%. While it was a strong year for the stock, the majority of the gains took place during the first nine months, before the stock hit a sideways pattern during the last three months. One of the biggest pieces of news about Disney of late was the company landing "Lost" creator, and "Star Trek" director J.J. Abrams to direct the next "Star Wars" film. Disney purchased Lucasfilm late last year for $4.05 billion. The company will be reporting fiscal first quarter results on February 5th, with analysts forecasting earnings of $0.76 per share. During the same period last year the company had earnings of $0.80. Disney has either met or beat analyst estimates each of the past 6 quarters.

Technical analysis: DIS was recently trading at $53.79, down $1.08 from its 12-month high and $15.23 above its 12-month low. Technical indicators for DIS are bullish and the stock is in a weak upward trend. The stock has support above $51.85. Of the 25 analysts who cover the stock 13 rate it a "strong buy", three rate it a "buy" and nine rate it a "hold". The stock receives Standard and Poor's 5 STARS "Buy" ranking.

Analysts' thoughts: We like Disney for a couple of reasons. The first is that the U.S. economy is improving, which will help Disney theme parks as tourism picks up. We are also bullish on the stock in the long term. One reason is that by the end of 2013 we expect to see Disney re-negotiate its affiliate fees for ESPN. If there was ever a "must have" channel for television providers, it is ESPN, and Disney will be able to get whatever it wants in the negotiations. Looking further down the road, its Studio is gearing up for a blockbuster year in 2014 with titles such as "Thor 2", "Captain America 2", "Iron Man 3", and Pixar's next feature "The Good Dinosaur". It will then follow those titles up with the new "Star Wars" film in 2015. Lower unemployment should lead to greater tourism, and with its studio lineup as strong as it is, Disney is a great long-term play.

Stock-only trade: If you're looking to establish a long stock position in DIS, we like the stock at its current level. Set a stop loss around $49, and take profits if you see the stock trade higher than $59.75.

Option trade: If you are looking for a hedged options trade on DIS, consider a July 41/46 bull-put credit spread for a 45-cent credit. That's a potential 9.9% return (20.4% annualized*) and the stock would have to fall 14.0% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the July $55 call. If DIS rises just 7.2% 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.

 

Research in Motion launches Blackberry 10, changes name

What's happening with RIMM: Research in Motion (RIMM) / Blackberry (BBRY) has been in serious trouble for the past few years. The company, which was once the leader of the smartphone revolution, has been struggling to compete in a market dominated by Apple (AAPL) and Google (GOOG)-powered Android phones. Analysts have been waiting to see the company's new Blackberry 10 mobile operating system, which the company believes will breathe life back into the company. After several delays, it finally launched Blackberry 10, but the stock has been down since the launch. RIMM introduced two new phone models, but neither will be available until March and one is not scheduled to hit stores in the U.S. until April. Analysts fear that the phones will not be good enough to lure customers back and more importantly won't convince current Blackberry owners to stay with Blackberry. The company also announced it would be changing its name to Blackberry and changing its ticker to BBRY.

Technical analysis: RIMM was recently trading at $13.78, down $4.54 from its 12-month high and $7.56 above its 12-month low. Technical indicators for RIMM are bullish but showing a possible trend reversal. The stock has support above $11.10. Of the 32 analysts who cover the stock two rate it a "strong buy", one rates it a "buy", 15 rate it a "hold", two rate it a "sell" and 12 rate it a "strong sell". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

Analysts' thoughts: The fact that RIMM stock lost 10% on the day of Blackberry 10's launch, and an additional 7% the following day is a clear indication that Wall Street has lost faith in the company. Shares advanced ahead of the launch, but now that it the news is out, skepticism has returned. Early reviews are positive, but serious questions remain as to whether or not anyone will be willing to give up their iPhone or Android phone to try out the new Blackberry. There is also the danger that a lot of current Blackberry users that have been putting off the decision on a new phone until they can try Blackberry 10 will decide to jump ship. Traders expected the phones to be available sooner than March or April and the fact that users have to wait a couple more months opens the window for more people to abandon Blackberry out of frustration. The long-term view of this company is not positive, and we believe Blackberry 10 is not going to be enough to turn things around.

Stock-only trade: Even with the steep selling we have seen immediately following the Blackberry 10 launch and the stock currently trading at $12.87 it seems as though there is still room to the downside. If we were to set up a stock-only trade we would want to wait until the stock trades under $12.25 and set up a stop loss on the position at $11.00, or 10% under your purchase price. Take profits if the stock trades higher than $13.50.

Option trade: If you are looking for a hedged options trade on RIMM, consider a June 4/9 bull-put credit spread for a 75-cent credit. That's a potential 17.6% return (74.9% annualized*) and the stock would have to fall 24.3% to cause a problem.

Speculative option-only trade: With so much uncertainty surrounding Blackberry, and our bearish outlook on the stock we do not want to set up an option-only trade on the stock at this time. We definitely do not want to go with a naked call, and with the recent sharp sell off the pricing on long term puts makes a put-only trade unattractive at current prices.

 

Boeing continues to investigate Dreamliner problems

What's happening with BA: Boeing in the midst of a serious investigation into its flagship Dreamliner jet, which has been grounded around the globe following a couple mishaps with the plane's lithium-ion batteries which led to the grounding of a plane in the U.S. and an emergency landing in Japan earlier this month. The company is coming under pressure for possibly overlooking safety concerns in order to get the Dreamliner operational and so far investigators have yet to pinpoint exactly what is causing the batteries to overheat. The stock has been headed lower as the company works to isolate the problem, but still has not taken too big of a hit. The company recently reported better-than-expected fourth quarter earnings of $1.28 per share, above the $1.19 analysts were expecting.

Technical analysis: BA was recently trading at $74.59, down $3.43 from its 12-month high and $7.77 above its 12-month low. Technical indicators for BA are bearish and the stock is showing a possible trend reversal. The stock has support above $74.35. Of the 21 analysts who cover the stock 15 rate it a "strong buy", one rates it a "buy", three rate it a "hold" and one rates it a "strong sell". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

Analysts' thoughts: It is hard to estimate the impact that the Dreamliner problems will have on the stock. During its recent earnings report, the company reported that they do not expect to see any material impact on its 2013 earnings, but that is assuming a lot. The problem comes if Boeing is not able to quickly figure out what is going on with the lithium-ion batteries to make them overheat. The longer it takes, the longer airline companies are going to have to keep their Dreamliner planes grounded, which will wind up costing them millions. There have not been any lawsuits against Boeing yet, but that will change if the damages to airlines continue to mount. Boeing is also in danger of order cancellations should the problems turn out to be more severe than Boeing is leading us to believe. There is a lot of risk around the stock at this point, regardless of what Boeing is telling us.

Stock-only trade: With so much uncertainty surrounding the Dreamliner problems, we do not want to set up a stock-only trade on the stock at this point. We have not seen much downside since the Dreamliner problem started, which means that a big drop could still be in store if the situation takes a more serious direction.

Option trade: If you are looking for a hedged options trade on BA, consider an April 65/67.50 bull-put credit spread for a 35-cent credit. That's a potential 16.3% return (69.1% annualized*) and the stock would have to fall 8.3% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the August $75 call. If BA rises just 7.5% 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.

 

Kellogg reports fourth quarter results February 5th

What's happening with K: Kellogg (K) stock has been strong since August and is currently trading just shy of its 52-week high. The U.S. economy is improving, and lower unemployment is helping boost consumer staples like Kellogg (K). During the recent recession, consumers started shifting away from name brand products in favor of cheaper generic brands, but that trend has reversed and that is a big reason why there was such a strong move by Kellogg over the last six months. Not only is Kellogg the world's largest producer of cereal, but last May it acquired Pringles, making it the second-largest producer of snacks. Kellogg will be reporting its fourth quarter results on February 5th, with analysts expecting to see earnings of $0.66 per share, up slightly from the $0.64 that it earned during the same period last year. Out of the last four earnings reports, the company has beat estimates twice, reported in-line earnings once and posted lower than expected earnings once.

Technical analysis: K was recently trading at $58.71, just shy of its $58.90 high and $12.38 above its 12-month low. Technical indicators for K are bullish with the stock showing a possible trend reversal. The stock has support above $56.50. Of the 20 analysts who cover the stock three rate it a "strong buy", 16 rate it a "hold", and one rates it a "sell". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

Analysts' thoughts: We like Kellogg as a long-term holding due to a couple different factors. The first factor is the company's strong brand recognition. Its cereal lineup boasts some of the best-known brands and it sells its products in 180 different countries around the world. We also like the amount of investing that the company does in order to keep its lineup fresh. It spends more than any of its peers on new products, and as a result it had over $800 million in sales last year from new products. Understanding the importance of continued growth, the company spent $2.7 billion last year to acquire Pringles, which will in turn triple its international snack operations. With its strong brand recognition, and attention to developing new products, we believe Kellogg is a perfect long term holding.

Stock-only trade: We like Kellogg at its current price of $58.71, but would prefer to set up a new position under $58.50. Place a stop loss on the trade at $52.75, or 10% under your purchase price, and take profits off the table if the stock climbs above $67.50.

Option trade: If you are looking for a hedged options trade on K, consider a June 50/55 bull-put credit spread for a 55-cent credit. That's a potential 12.4% return (30.3% annualized*) and the stock would have to fall 5.4% to cause a problem.

Speculative option-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the September $60 call. If K rises just 4.8% 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.

 

Cardinal Health reports fiscal second quarter results February 5th

What's happening with CAH: Cardinal Health (CAH) stock has moved significantly higher since September and is currently trading just shy of its 52 week high. While the stock has been strong, there are reasons for concern. The company has big contracts up for renewal later this year with both CVS (CVS) and Walgreen's (WAG), and if these companies do not renew their contracts then Cardinal is going to be in serious trouble. The company will report its fiscal second quarter results on February 5th, with analysts expecting earnings of $0.86 per share, up from $0.81 during the same period last year. The company has posted better-than-expected earnings for each of the last four quarters.

Technical analysis: CAH was recently trading at $44.68, just $0.55 shy of its $58.90 high and $7.77 above its 12-month low. Technical indicators for K are bullish and the stock is in a strong upward trend. The stock has support above $43.25. Of the 11 analysts who cover the stock seven rate it a "strong buy", two rate it a "buy", and two rate it a "hold". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

Analysts' thoughts: We believe it is unlikely that CVS or Walgreen will fail to renew their contracts with Cardinal Health later this year. Switching drug distributors is a huge risk and as a result it does not happen very often. The fear comes from the fact that Express Scripts (ESRX) replaced Cardinal last year with Amerisource (ABC), but we do not believe either Walgreens or CVS will jump ship. Even if the worst-case scenario does happen, it would not destroy the company. The mere possibility of losing its CVS and/or Walgreen business has been holding the stock back since the two combine for close to 20% of the company's 2012 earnings. Once that uncertainty is removed we see more upside for the stock.

Stock-only trade: We like the long-term prospects for CAH and would set up a long position in the stock at $43.75. Put a stop loss on the trade at $39 or 10% under your purchase price, and take profits off the table if the stock climbs above $48.50.

Option trade: If you are looking for a hedged options trade on CAH, consider a June 35/40 bull-put credit spread for a 40-cent credit. That's a potential 8.7% return (21.3% annualized*) and the stock would have to fall 9.6% to cause a problem.

Speculative option-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the September $45 call. If CAH rises just 5.3% 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 owns a long position in AAPL but does not have direct ownership in any of the other stocks mentioned.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Options Markets Trading Ideas

 

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