Introducing “Obama’s List”

Add ADM Calls & CASY Puts

PLAY: Buy the ADM January 2010 20 Calls (WRA AD) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the CASY February 30 Puts (CQO NF) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

Leading up to the election, the markets were in rally mode. But as you know, I was incredibly skeptical about a 1,200 point gain over six trading sessions. As it turned out, this skepticism was warranted, as the Dow gave back over 800 points on Wednesday and Thursday, setting the tone for a possible re-test of the October 10^th low of 7,800 sometime in November. Chart below:

As a result of this volatility, we’ll continue our strategy of playing long-term calls on stocks that have reported powerful earnings, but gotten knocked down to incredible valuations. And at the same time, we’ll combine these longer-dated calls with near-term puts on the stocks that (I consider) are doomed in the current recessionary market.

By owning both these call and put positions, you’ll have a really nice balance of longer-dated calls on stocks like AK Steel, Tesoro, and Excel Maritime Carriers, combined with near-term puts on stocks like Visa, Wynn Resorts, AutoZone, Toyota, and Zale. You’ll find a full position breakdown on every open position in the “Updates” section below. But in terms of today’s alert, I’d like to continue our strategy of adding longer-dated calls.

Starting this week, we’ll begin a new series of adding calls on companies that fall into a category I call “Obama’s List.” As you can imagine, these are companies that’ll benefit tremendously over the next four years of Democratic leadership.

At the same time, I’d also like to issue a new near-term put play on a company that’ll experience massive weakness over the next 4-6 months of contained economic hardship. So let’s get started!

The first “Obama’s List” company is Illinois-based alternative energy giant Archer Daniels Midland (ADM – NYSE).

For some reason, investors consider ADM a pure ethanol play. That’s entirely wrong. In contrast, ADM should be considered a pure play on feeding the global population, similar to Monsanto (MON – NYSE). After all, Archer Daniels Midland is an agricultural commodities company that operates three segments: oilseeds processing, corn processing, and agricultural services. Here’s a quick breakdown of these segments:

• Oilseeds Processing: Engages in processing oilseeds into vegetable oils and meals for the food and feed industries, such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed.
• Corn Processing: Engages in wet milling and dry milling corn operations, which produces syrup, starch, glucose, dextrose, sweeteners, corn gluten, distiller’s grain, corn germ, alcohol, amino acids, and other food and animal feed ingredients.
• Agricultural Services: Engages in buying, storing, cleaning, and transporting agricultural commodities such as oilseeds, corn, wheat, milo, oats, and barley.

Looking at ADM’s current price metrics, the numbers are quite attractive. The stock currently has a $13.86 billion market cap, yet it only carries a P/E ratio of 7.70. What’s more, their price to sales ratio is a microscopic 0.22 and their price to book ratio is an equally small 1.13. In other words, at these values, you’re basically buying ADM at cost.

NOTE: Just to give you a comparison, Monsanto currently has a P/E ratio of 24, a price to sales ratio of 4.10, and a price to book ratio of 4.98. When I look at these numbers, it’s clear that ADM is grossly undervalued. Perhaps by as much as 5x! That’s why ADM is such a strong buy right now.

You see, investors are valuing ADM like the other ethanol-producers — all of which have fallen on hard times. With oil prices around $60.00 a barrel, the benefit of ethanol is all but gone. That’s why Pacific Ethanol (PEIX – NASDAQ) is trading for pennies. It’s also why VeraSun (VSE – NYSE) has filed for bankruptcy. But ADM is not part of this group. Sure, ethanol is indeed part of their business operation, but it’s only one small segment. And remember, if oil prices shoot back up to $150.00 a barrel, all of the other ethanol companies will be out of business. ADM will be the only game in town!

Here’s the bottom line: As the world population continues to grow (and develops a more protein-based diet), ADM stands to profit for years to come. And when it comes to the Democrats, the fact that ADM also produces bio-diesel makes them a strong company to stand behind.

But that’s not all. Despite the difficult market, ADM’s earnings have been spectacular. On November 4^th, ADM reported earnings of $1.63, which is a terrific increase based on the $0.68 that they reported one year ago. Under any other market environment, this would have been considered a blowout. They’re raising prices, and they’re also benefiting from lower energy costs. Throw it all together (combined with a forward annual dividend yield of 2.10%), and it looks like a perfect storm for ADM. Therefore, as today’s first order of business, let’s add calls on the highest-quality alternative energy company you can buy. Here’s the play…

PLAY: Buy the ADM January 2010 20 Calls (WRA AD) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Over on the put side, we have a company called Casey’s General Stores (CASY – NASDAQ).Casey’s operates 1,468 stores in the Midwest, with a presence in states such as Iowa, Missouri, Illinois, Kansas, Minnesota, Nebraska, South Dakota, Wisconsin, and Indiana.

They’re a high-end grocer that specializes in their meat department, which has the feeling of your old-time neighborhood butcher. They also sell bakery products, beer, fountain drinks, donuts, cookies, brownies, Danish rolls, ham and cheese sandwiches, chicken tenders, sub sandwiches, and quarter-pound hamburgers.

They currently carry a market cap of $1.48 billion and a forward P/E ratio of 16.88, yet their quarterly earnings growth is down -3.3% year over year. What’s more, their current book value is $13.26 per share, yet the stock is trading for $29.50 per share.

As the recession takes hold, consumers will scale back — and that means NOT paying premiums for high-end groceries. In other words, the produce departments at Wal-Mart or SuperTarget will soon replace shopping at Casey’s.

Case in point, the Dow Jones U.S. Food Retailers & Wholesalers index, which is made up of 20 food retailers, fell -5.3% over the last three months and -22% over the last 52 weeks. During the recent quarter, grocers like Great Atlantic & Pacific Tea dropped 53%, Supervalu dropped 28%, and Safeway lost 18%. But perhaps the most telling of all is the recent price action of (what I consider) the best grocery store on the planet, Whole Foods Market (WFMI – NASDAQ). Just check out their hideous stock chart below:

NOW GET THIS: Just like Casey’s, Whole Foods currently trades at a market cap of $1.51 billion. But unlike Casey’s forward P/E ratio of 16, Whole Foods has a more-appropriate value of 10. In my opinion, this is where Casey’s should be trading, which would put the stock around its current book value of $13.00 per share.

You see, Whole Foods currently trades for $10.73 per share and carries a book value of $10.72. But Casey’s currently trades for $29.50 per share and carries a book value of $13.00. It just doesn’t add up. That’s why I think Casey’s needs to shave 50% off its current stock valuation to be priced correctly.

Considering that the stock is scheduled to report earnings on Thursday, December 4^th, this could be the trigger that begins their downside move. And if you look closely, CASY is in the process of forming a “double top” formation. This is all bearish. Therefore, let’s get positioned to profit off this fall!

PLAY: Buy the CASY February 30 Puts (CQO NF) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

Visa January 55 Puts (V MK): What a volatile week.Visa rose more than 12% on Tuesday after reporting a fourth-quarter loss of $356 million. But on Wednesday and Thursday, the stock gave it all back on fears that credit card spending will drop significantly during the holidays. The best-case scenario is that earnings will remain flat, and I can’t imagine that’s a good reason to buy Visa stock. Our puts traded up to $7.53 this week, good for a 34% gain. Since the stock was completely rejected at the 50-day moving average, the downside trend remains in place. Continue to hold your position, and be sure to lock in half of your profits at the 50% level. Sell HALF at 50%.

AKS January 2010 15 Calls (YDF AC): Steel stocks are probably the most under-valued sector group right now. They all reported blowout earnings, yet their stocks have continued to under-perform. I remain bullish, as this will soon change. Hold.

Ultra Financials June 8 Calls (UUF FH): Our decision to take HALF of our profits at the 50% level was well-timed. Continue holding the remaining half of your position for more gains. Hold.

Wynn Resorts January 35 Puts (UWY MG): Our decision to add to our puts during the classic short-covering rally was another well-timed move. The company simply cannot sustain any earnings growth in the current market environment. Toss in new travel restrictions in China, which limit the number of gamblers into Macau, and their numbers are sure to take a substantial hit. The stock should be re-testing its lows soon. Hold.

Auto Zone January 100 Puts (AZO MT): The “hot air” that has held the stock up is now beginning to fizzle out. As you can see, a dip below the 50-day and the 200-day moving averages paints a gloomy picture over the next two months. Eddie Lampert can only prop the stock up for so long. I expect to see shares dip below $100 on their way down to $60.00. Hold.

Tesoro January 2011 5 Calls (ZGC AA): The more oil prices fall, the better it’ll be for refiners like TSO. Over a 24-month time horizon, this could be an explosive winner. Hold.

Zale February 20 Puts (ZLC ND): Jewelry sales will get decimated this holiday season, and that makes a strong argument for holding Zale puts. We’re currently sitting on a 38% gain, so be sure to sell half of your position at the 50% profit level. Sell half at 50%.

Toyota Motors January 65 Puts (TM MM): Once again, our decision to add to our puts was very well-timed. As I mentioned in your action alert this week, Toyota reported a 48% decline in net income, which forced them to slash their full-year profit forecast. This paints a weak picture for the rest of the year, so let’s continue holding our puts. Be sure to lock in profits on half of your position at the 50% profit level. Sell half at 50%.

American Capital May 25 Calls (DQS EE) & Excel Maritime March 15 Calls (EKN CC): These two positions represent companies that I feel could quickly bounce back. EXM is a global dry-bulk shipper that moves very, very fast. ACAS is a company that’s positioned to benefit from the current credit environment. While both positions are currently down, I remain bullish on a sharp snap-back. Hold.

Apex Silver Mines January 2010 2.5 Calls (YSB AZ), Southern Peru Copper January 2010 25 Calls (YPV AE), & Barrick Gold January 2010 40 Calls (WRX AH): As I study the charts, all of the precious metals look very attractive at current levels. In fact, the current price of gold mining stocks compared to the price of gold is now at the cheapest level since 1984! All three positions are poised to quickly snap back. Hold.

America Movil January 2009 70 Calls (AMX AN), Petroleo Brasileiro January 90 Calls (PMJ AR), & Entergy January 140 Calls (ODF AH): Still no signs of life for these three. Since they’re at such nominal values, we might as well continue holding for a miracle. Hold.

Sincerely,