Market Overview

Five Stocks To Watch For The Week Of January 22, 2013

Michael Fowlkes, InvestorsObserver

McDonald's reports fourth quarter earnings January 23rd

What's happening with MCD: After a steep selloff in October, shares of the fast food giant have risen steadily over the last two months. McDonald's (MCD) shares sold off so much in October due to weaker-than-expected third quarter results, so Wall Street will be paying close attention on the 23rd when McDonald's looks to redeem itself with its fourth quarter results. Analysts have forecast earnings of $1.33 per share, which would fall in-line with the same period last year.  

 

Technical analysis: MCD was recently trading at $91.10, down $11.12 from its 12-month high and $7.79 above its 12-month low. Technical indicators for MCD are bullish and the stock is in a weak upward trend. The stock has support above $88.00 and resistance below $93.75. Of the 26 analysts who cover the stock 13 rate it a "strong buy", two rate it a "buy" and 11 rate it a "hold". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

 

Analysts' thoughts: Based on the action following McDonald's third quarter results, we expect to see increased volatility immediately following the company's upcoming fourth quarter results. Wall Street has turned bullish on the stock, but it is still trading below the level it was going into the Q3 results. This is partly because investors fear another disappointing quarter. Better than expected numbers could see MCD quickly trade up to $100 a share, but an earnings miss or even in-line numbers could result in another selloff.

 

Stock-only trade: If you're looking to establish a long stock position in MCD, we like the stock at its current level, but would put in a stop loss order just in case the company disappoints with its fourth quarter earnings numbers and we see another selloff similar to the one that occurred following its third quarter report. Set a stop loss around $90.50, and take profits if you see the stock trade higher than 100.

 

Option trade: If you are looking for a hedged options trade on MCD, consider a March 82.50/87.50 bull-put credit spread for a 60-cent credit. That's a potential 13.6% return (52.9% annualized*) and the stock would have to fall 3.3% to cause a problem.

 

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the June $92.50 call. If MCD rises just 7.9% 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.

 

 

Starbucks reports fiscal first quarter results January 24th

What's happening with SBUX: Starbucks (SBUX) stock has been in a strong upward trend since the company last reported earnings on November 1. Over the past year the company has reported mixed results, with big moves coming after each earnings report. Based on the volatility that we witnessed immediately following the company's last two reports we can expect to see more of the same when Starbucks reports its fiscal first quarter numbers. Analysts expect the company to report first quarter earnings of $0.57 per share, up from $0.50 during the same period last year.

 

Technical analysis: SBUX was recently trading at $54.35, down $7.65 from its 12-month high and $11.31 above its 12-month low. Technical indicators for SBUX are bullish and the stock is in a weak upward trend. The stock has support above $52.00 and resistance below $55.80. Of the 27 analysts who cover the stock 19 rate it a "strong buy", one rates it a "buy" and seven rate it a "hold". The stock receives Standard and Poor's 4 STARS "Buy" ranking.

 

Analysts' thoughts: We expect to see positive earnings from Starbucks for its first quarter. Consumer confidence has been rising and we believe that consumers are once again willing to spend a little extra for Starbucks' premium offerings. The stock has a profit margin of around 10% and has been rapidly expanding in China. In addition to its recent growth in China, it is now also starting to show impressive growth figures in Vietnam as well. Because of its strong brand recognition in the U.S. and its rapid international growth, we believe 2013 will be a strong year for Starbucks.

 

Stock-only trade: With the recent bullish run in the stock's price and high volatility following the last two earnings report, we do not recommend setting up a long position in the stock at the current time.

 

Option trade: If you are looking for a hedged options trade on SBUX, consider an April 42/47 bull-put credit spread for a 40-cent credit. That's a potential 8.7% return (33.8% annualized*) and the stock would have to fall 12.8% 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 $57.50 call. If SBUX rises just 9.0% 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.

 

 

 

New home sales report due January 25

What's happening with LEN: Lennar (LEN) stock has been in a solid bullish trend over the past year. The housing market is improving and all of the major homebuilders have benefitted from the improving housing market. While the housing market continues to rebound, it is being held back by tight lending standards that are preventing some potential homebuyers from entering the market. As a result, there is increased demand for rental properties and Lennar has expanded its business into the rental market in order to take advantage. Rental properties are becoming a new asset class and Lennar is the first homebuilder use rental properties as a profit center. On January 25, the Commerce Department will announce new home sales figures for December.

 

Technical analysis: LEN was recently trading at $40.52, down $1.48 from its 12-month high and $19.19 above its 12-month low. Technical indicators for LEN are bullish and the stock is showing signs of a possible trend reversal. The stock has support above $38.50. Of the 17 analysts who cover the stock five rate it a "strong buy", two rate it a "buy", eight rate it a "hold" and two rate it a "strong sell". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

 

Analysts' thoughts: We do not expect anything in the December new home sales report that indicates weakness returning to the housing market. We believe that the housing market will continue to improve through 2013, which should help homebuilders build on gains they enjoyed during 2012. With Lennar jumping into the rental market, it is putting itself in a good position to take advantage of a situation where both the housing market and rental market are improving.

 

Stock-only trade: If you are looking to establish a long stock position in LEN, consider buying the stock when it is below $40 and sell if it falls below $36 or take profits if the stock climbs higher than $44.

 

Option trade: If you are looking for a hedged options trade on LEN, consider a May 28/33 bull-put credit spread for a 55-cent credit. That's a potential 12.4% return (37.0% annualized*) and the stock would have to fall 17.2% to cause a problem.

 

Speculative option trade: With the recent strength we have seen in the stock, we would not consider setting up a speculative call-only trade at this time. At the same time, we believe it would be too risky to go bearish with a put-only trade as well.

 

 

Defense industry takes center stage for earnings

What's happening with NOC: Despite budget cuts that are scheduled to hit the defense industry, most defense stocks have held strong in recent months, including Northrop Grumman (NOC). The stock sold off a bit in early November, but other than that has been strong and has earned back most of its November losses. There are going to be several defense stocks reporting earnings during the coming week including General Dynamics (GD), Raytheon (RTN) and Lockheed Martin (LMT). And their results will impact NOC sympathetically.  NOC is scheduled to report its own fourth quarter earnings on January 30.

 

Technical analysis: NOC was recently trading at $68.65, down $4.40 from its 12-month high and $10.26 above its 12-month low. Technical indicators for CMG are bearish with the stock showing signs of a possible trend reversal. The stock has support above $66 and resistance below $68.75. Of the 16 analysts who cover the stock one rates it a "strong buy", 11 rate it a "hold", one rates it a "sell" and three rate it a "strong sell". The stock receives Standard and Poor's 3 STARS "Hold" ranking.

 

Analysts' thoughts: Unless we see major earnings disappointments from other defense stocks, we do not expect too much action in the defense sector over the next month. The scheduled defense cuts that were supposed to take place at the end of December have been postponed until March 1 and traders will likely wait to see what steps Congress takes, if any, to stop these automatic cuts before acting. If nothing is done, the Pentagon cuts will kick in, with $42.7 billion in cuts this year alone. Starting next year the cuts will reach $54.7 billion annually until 2021. If some sort of deal is reached, we expect the entire defense industry will rally, but if Congress and President Obama decide to allow the budget cuts to start, it could have a devastating impact on every defense stock, NOC included.

 

Stock-only trade: With so much uncertainty surrounding the pending defense cuts we would not suggest setting up a new stock position in NOC at the current time. We will revisit the situation after we learn how steep the defense cuts are going to be, and how the industry reacts to those cuts.

 

Option trade: If you are looking for a hedged options trade on NOC, consider a March 55/60 bull-put credit spread for a 50-cent credit. That's a potential 11.1% return (33.2% annualized*) and the stock would have to fall 11.9% 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 $70 call. If NOC rises just 5.7% 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.

 

 

Chipotle Mexican Grill reacts to weak preliminary Q4 results

What's happening with CMG: Chipotle Mexican Grill (CMG) was in a steady upward trend until it disappointed analysts with weak preliminary fourth quarter results on January 15. The company will not report full earnings results until the first week of February, but they forecast fourth quarter earnings in a range of $1.92 to $1.97, well below the $2.08 analysts had been expecting. CMG fell as much as 10% on the next day of trading before finally closing the session down 5.5%. The weaker than expected preliminary results raised fears that increased competition combined with rising food costs were starting to weigh on the restaurant chain.  

 

Technical analysis: CMG was recently trading at $280.94, down $161.46 from its 12-month high and $47.12 above its 12-month low. Technical indicators for CMG are bullish with the stock showing signs of a possible trend reversal. The stock has support above $273. Of the 22 analysts who cover the stock five rate it a "strong buy", 15 rate it a "hold", one rates it a "sell" and one rates it a "strong sell". The stock receives Standard and Poor's 2 STARS "Sell" ranking.

 

Analysts' thoughts: The advantage of releasing preliminary results is that CMG was able to get its bad news out of the way before its earnings report. The stock has sold off in reaction to the lower guidance, but with the disappointing results already priced into the stock, we do not expect much more downside on the earnings date. However, if CMG disappoints even further by missing its lower guidance, then we could easily see another big drop like the one we saw following its preliminary results.

 

Stock-only trade: If you're looking to establish a long stock position in CMG, we like the stock at its current level. We believe that the weaker than expected quarter has already been priced into the stock and do not see too much additional downside from its current price. We would sell the stock if it falls under $250 or 10% under your purchase price and take profits off the table should the stock jump above $320.

 

Option trade: If you are looking for a hedged options trade on CMG, consider a March 245/250 bull-put credit spread for a 70-cent credit. That's a potential 16.3% return (100.7% annualized*) and the stock would have to fall 10.8% to cause a problem.

 

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the June $290 call. If CMG rises just 11.3% 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. Fowlkesowns a long position in McDonald's but does not have direct ownership in any of the other stocks mentioned.

Posted-In: Trading Ideas

 

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