Back to Basics

Add GIS Calls

PLAY: Buy the GIS April 70 Calls (GIS DN) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

Dear Bottarelli Research Member,

Bruce Bittles, chief investment strategist at R.W. Baird, tells CBS MarketWatch that the current market sentiment is about as bad as it can get. In fact, you can easily make a case that today’s market news hasn’t been this negative since the Great Depression.

After all, homes prices have fallen over 10%, the most in over 80 years. Equities have collectively fallen 20% (or more) across the world. And just this week, it was announced that Lehman Brothers (LEH – NYSE) is on the brink of insolvency. Washington Mutual (WM – NYSE) traded under$2.00 per share. And you already know about the Freddie and Fannie bailout. How much worse can it get?

Here’s a truly shocking figure that puts our current financial crisis into perspective: According to The Financial Times, in the 36 years that Merrill Lynch (MER – NYSE) has been a public company, it has achieved cumulative profits of $56 billion. But over the past 18 months, MER has lost $14 billion, representing 25% of the profits they’ve achieved over their 36-year time span. That’s truly amazing, if you ask me.

So for this week’s LEAPS play, we’re going “back to basics.” In other words, in nervous times like this, the best tactical move is to gain exposure to a consumer staple company. After all, from a historical perspective, consumer staples always out-perform the market in times of recession — simply because investors rush into these names to protect their portfolio in uncertain times.

The rationale is simple: A consumer staple company manufactures and sells items like food and beverages, tobacco, prescription drugs, or other standard household products. Regardless of the state of the overall stock market, consumer staple stocks provide constant dividends and stable earnings. During recessions, they tend to perform better than the market. However, during an expansion phase, they tend to perform below the market. Since we’re clearly in a down-trend, the market environment now supports adding consumer staples for out-performance.

Proctor & Gamble (PNG – NYSE) is one of the top consumer staple companies, because most of their products are household- and food-related. One look at the PG chart (below) shows you that the stock has gained 20% over the last three months, clearly out-performing the major market averages.

Another consumer staple is Campbell Soup (CPB – NYSE). On Thursday, CPB reported a quarterly profit jump of 46% from one year ago, aided by their ready-to-eat Chunky soups. Once again, their stock chart has produced strong near-term returns despite a volatile and weak market.

But in terms of today’s newest pick, I think the best consumer staple that we can own right now is General Mills (GIS – NYSE).

General Mills sells branded and packaged consumer foods primarily in the United States and Canada. If you go into your cupboard right now, I’d bet you have 5 or 6 General Mills products, which include brands like Betty Crocker, Bisquick, Pillsbury, Cheerios, Chex, Wheaties, Fruit Roll-Ups, Progresso Soup, Gardetto’s, Nature Valley, Pop Secret, Green Giant, Haagen-Dazs, Yoplait/Colombo, Hamburger Helper, and Old El Paso (just to name a few).

As you can see, their well-diversified product line includes ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, frozen vegetables, dessert and baking mixes, frozen pizza, microwave popcorn, grain, fruit, and organic granola bars, and ice cream. And despite the “dull” nature of this product line, there are a few very strong reasons why GIS will make you money right now.

On one hand, General Mills’ Progresso soup brand is severely threatening Campbell’s soup franchise. And if Campbell just reported a 46% year-over-year profit increase, I’d expect to see even better results from General Mills when they report their earnings on Wednesday, September 17^th. This can be a strong upside catalyst.

But more importantly, the recent sell-off in the commodity sector (especially wheat and corn prices) will provide a tremendous boost to General Mills. After all, as commodity prices fall, GIS’ profit margins increase, and this should help them to report strong numbers in next Wednesday’s earnings conference call.

In terms of the GIS stock chart, it’s one of the strongest formations you’ll see right now. Just this past week, shares hit a new 52-week high, while virtually every other stock was selling off. This shows you just how strong they are right now — and I fully expect the upside to continue.

Combine the historic bullishness of consumer staple stocks with a sizeable commodity sell-off, and this paints a very strong picture for continued upside movement in shares of GIS. Therefore, let’s add GIS April 2009 calls now!

PLAY: Buy the GIS April 70 Calls (GIS DN) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

UPDATES

Las Vegas Sands December 40 Puts (LVS XH): On Wednesday, we officially locked in a gain on our entire position, which offered us a nice gain in the midst of a weak market. Congrats on this quick winner! Sold.

NOTE: Some members have emailed to ask why we’re not holding these positions longer? My response is simple: Considering the current market conditions, we have no choice but to lock in our gains now. Under typical market conditions, for example, our LEAPS methodology would be to let these positions ride over a 6-12 month time horizon. But in today’s market, we simply must lock in gains whenever we have the opportunity. Of course, this tactic will not last forever. As the market volatility settles back down, we can revert back to our standard LEAPS methodology. But right now, we simply must adjust our tactics to account for the current market volatility — and that means taking quicker profits.

Wells Fargo January 2009 30 Puts (WFC MF): News from Lehman Brothers and Washington Mutual further support our downside play on Wells Fargo. Despite some intra-day rallies in the financial sector, maintain your downside bias. More negative news could still be coming. Hold.

Southern Peru Copper January 2010 25 Calls (YPV AE), Barrick Gold January 2010 40 Calls (WRX AH), United States Natural Gas Fund January 40 Calls (UNG AN), & JA Solar Holdings January 15 Calls (QJP AC): I still remain bullish on every one of these positions. In fact, we may have found a bottom in PCU, and if that’s the case, we’ll see a bounce across the entire metals sector. Maintain all of these positions for a coming bounce. Hold.

UltraShort Dow30 ProShares October 65 Calls (DXD JM) & CBOE Volatility Index October 25 Calls (VIX JE): Continued market volatility does nothing but support holding both of these “protective” positions. Hold.

Valero Energy January 35 Calls (VLO AG): This past week, refiners like VLO and TSO each bounced above their 50-day moving averages. This could be the early indication that they’ve hit their low. If so, your VLO calls will hand you a strong return very soon. Hold.

Overseas Shipholding Group January 95 Calls (OSG AS), America Movil January 2009 70 Calls (AMX AN), Petroleo Brasileiro January 90 Calls (PMJ AR), & Entergy January 140 Calls (ODF AH): Some of the very best companies are getting pushed to ridiculously-low levels — with absolutely no regard for future earnings potential. All four of these companies fall into this category. Thankfully, the weakness could be coming to an end. For example, PBR had a strong end-of-week rally after reporting that their recent oil find in the Santos Basin could contain up to 4 billion barrels of oil. This is PBR’s third find in the BM-S-11 concession, which is a discovery that could contain a total of 8 billion barrels of oil.

With numbers like this, we’re talking about an oil find that could make PBR one of the world’s top oil companies over the next three decades. After all, Deutsche Bank analysts have estimated that this recent discovery could be worth $13.5 billion to Petrobras alone. These are staggering numbers — which are mostly being ignored by Wall Street. Despite the fact that PBR shares have gotten clobbered lately, the news continues to support a bullish thesis ahead for many, many years. So let’s maintain our upside calls and hope that this week’s recovery can spark strong upside momentum going forward.

Sincerely,