PLAY: Buy the CMI January 90 Calls (O:CMI 11A90.00) at market, good for the week. Place a protective stop limit at $2.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the MELI January 67.50 Calls (O:MELI 11A67.50) at market, good for the week. Place a protective stop limit at $3.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Dear Bottarelli Research Member,
In today’s LEAPS alert, we’ll take full advantage of one of Bottarelli Research’s longstanding trading rules that I refer to as the “Downside Gift Gap.” After that, we’ll follow this up by introducing a more speculative play on a company that’s posting some truly astounding growth figures. When you see this company’s growth comparison (below), you’ll see why this play makes so much sense. So on that note, let’s begin!
We’ll start by talking about the Downside Gift Gap…
A downside gift gap doesn’t happen too often, but when it does, it’s practically money in the bank. The secret is the oldest saying in the floor-trading book: The trend is your friend.
The theory goes like this…
No stock goes straight up. Not even the most bullish stock in all of Wall Street moves higher at a straight 45-degree angle. There will be bumps in the road, such as profit-taking, one-day sell-offs, or earnings disappointments. The trick is to find a large-cap (or mid-cap) stock in a bona fide up-trend, and buy it anytime a one-day move pushes the stock down 5% or more. Traders consider this down-move on a bullish stock a “gift” because it allows them to own a great stock for a temporarily discounted price.
This past Tuesday, this exact situation occurred on Cummins Engine (CMI – NYSE).
As you probably know, Cummins is a global manufacturer of clean energy diesel and natural gas engines for heavy-duty trucks, buses, recreational vehicles, and light-duty automotive vehicles. They also serve the agricultural, construction, mining, marine, oil/gas, rail, and governmental equipment markets.
On Tuesday, CMI reported a big jump in Q3 profits and raised their full-year forecast. But they didn’t score on every metric (notably hitting Wall Street’s expectations). As a result, CMI shares gapped down.
Specifically, CMI reported a Q3 profit that nearly tripled to $283 million ($1.44 a share), which was up from $95 million ($0.48 a share) earned one year ago. Their sales rose to $3.4 billion (up from $2.53 billion), but since analysts were looking for earnings of $1.58 per share on sales of $3.91 billion, Cummins gapped lower.
As an overall statement, when it comes to this latest round of Q3 2010 earnings reports, it’s clear that Wall Street expects absolute perfection. For example, Apple (AAPL – NASDAQ) recently blew the doors off their Q3 earnings report, but since iPad sales were not as strong as Wall Street expected, the stock gapped lower. In the case of CMI, they had a great report, but not a blockbuster report. As a result, the stock followed this same pattern and gapped lower on the news. But in my view, this sets up a wonderful buying opportunity. While the market makers play their games and push CMI lower because it failed to hit “expectations,” let’s step in and buy the dip. After all, the more I read CMI’s earnings, the more I realized that CMI’s numbers were quite strong. Heck, they raised their forward earnings guidance, which is something Wall Street always loves to see! This leads me to believe that this downside reaction was a fluke, especially as CMI stabilized (and bounced) from Tuesday’s low. When this happened, it was clear that a downside gift gap was in play.
As an added bonus, the Obama administration just recently said that all future tractor-trailers, school buses, delivery vans, garbage trucks and heavy-duty pickup trucks must adhere to new fuel efficiency rules. Specifically, the Environmental Protection Agency and the Transportation Department are moving ahead with a proposal for medium- and heavy-duty trucks (beginning with those sold in 2014) that seeks a 20% reduction in greenhouse gas emissions and fuel consumption. This is huge news for CMI.Let’s get positioned now!
PLAY: Buy the CMI January 90 Calls (O:CMI 11A90.00) at market, good for the week. Place a protective stop limit at $2.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
BONUS PLAY: In addition to our play on CMI, I’d also like to get positioned on MercadoLibre (MELI – NASDAQ). MELI hosts online commerce and payment platforms in Latin America, including Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay, and Venezuela. They’re commonly known as “The eBay of Latin America,” and as you can see from the chart below, MELI had been engaged in a very strong up-trend until late September. That’s when a valuation downgrade from Stifel Nicolaus, who said that the stock reached their $75.00 price target, caused the stock to drop. Now, it’s interesting that Stifel Nicolaus also said in their note that they would be buyers of MELI again in the “low $60s.” So, when MELI hit $60 last week and sharply bounced, is there any wonder who’s stepping back in?
MELI has an earnings report due November 4th, which comes on the heels of strong earnings from eBay (EBAY – NASDAQ) that have set a tone for extended growth in this sector. At the same time, there’s also whispers that MELI could be a takeover target by AMZN, EBAY, or a host of other companies looking to grow their international exposure. Add it all up, and getting positioned to the upside on MELI makes a lot of sense.
What’s more, over the next five years, MercadoLibre is expected to grow their earnings at a substantially faster clip (40% per annum) than e-commerce titans like Amazon (26%), Google (17%), and Microsoft (10%). That’s incredibly impressive. Therefore, get positioned now!
PLAY: Buy the MELI January 67.50 Calls (O:MELI 11A67.50) at market, good for the week. Place a protective stop limit at $3.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
UPDATES
PROFITS TAKEN – IPI January 26 Calls (O:IPI 11A26.00) & AAP March 2011 55 Calls (O:AAP 11C55.00): On Thursday, we used a pop in both IPI and AAP to lock in profits of 55% and 156%. Congratulation on two strong winners! Sold.
ABX January 45 Calls (O:ABX 11A45.00) & PXP February 26 Calls (O:PXP 11B26.00): As the U.S. dollar continues to bounce around, we’ve seen choppy trading on our two newest LEAPS plays. But as the dollar reverts back into it’s down-trend, both ABX and PXP will trend higher. Not only that, but on Thursday, Barrick reported powerful earnings of $837 million ($0.85 per share) on sales of $2.8 billion. That’s way up from the $473 million ($0.54 per share) they earned a year earlier. Since analysts were expecting earnings of $0.75 and sales of $2.64 billion, ABX blew the doors off. This sets a great tone going forward. Be sure to sell half of ABX at the 50% profit level. We’re currently at 32%. Hold.
CREE January 57.50 Calls (O:CREE 11A57.50): After an earnings disappointment, CREE looks to have hammered home a strong support level at $50.00. Since I still really like CREE going forward, let’s lower our cost basis and add to our position.
PLAY: Buy more CREE January 57.50 Calls (O:CREE 11A57.50) at market, good for the week.
CLF January 2011 70 Calls (O:CLF 11A70.00): On Thursday, Cliffs Natural Resources reported that their Q3 profit rose five-fold as revenue doubled. Cliffs earned $297.4 million ($2.18 per share) compared with $58.8 million ($0.45 per share) one year ago. That is a serious year-over-year improvement. But CLF’s revenue rose to $1.35 billion (up from $666.4 million last year), which actually was below the analyst estimates for $1.45 billion. As a result, CLF dipped. Once again, I see this as a buying opportunity. The company is clearly on the right path, and Wall Street’s expectations are just too ridiculous. The company’s profits rose five-fold and Wall Street still wasn’t impressed? Give me a break. Let’s lower our cost basis and add to this position as well.
PLAY: Buy more CLF January 2011 70 Calls (O:CLF 11A70.00) at market, good for the week.
TZA January 2011 27 Calls (O:TZA 11A27.00) & FAZ January 13 Calls (O:FAZ 11A13.00): The major market averages continue to show breakdown signs, which is why we’re holding these two protective positions. But with the elections and QE II looming, the downside momentum has yet to take hold. Trust me, it’s coming soon. Banks look exceptionally weak, hence our FAZ calls. Then, as soon as the markets turn south, small caps will be the first sector to take it on the chin, hence our TZA calls. Hold.
MELA January 7.50 Calls (O:MELA 11A7.50): On November 16th, MELA expects to see the release of the FDA’s briefing documents on their MELAFind skin cancer detection device. This is the make-it or break-it day for MELA. Maintain your calls for good news! Hold.
Sincerely,
