Re-Loading the Gold Ledger

Add CELG and IAG Calls

PLAY: Buy the IAG September 5 Calls (IAG IA) at market, good for the day. Place a protective stop limit at $0.85 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the CELG July 55 Calls (LQH GK) at market, good for the day. Place a protective stop limit at $2.85 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

In last week’s LEAPS alert, we used two “CYA” plays to protect us against any further downside selling pressure. Despite some choppy trading behavior throughout the week (which included a series of intra-day up and down moves in excess of 200 points!), I continue to feel that both protective plays should be mainstays in your LEAPS portfolio.

After all, not only do these plays offer you protection against rapidly falling markets, but they also give you the freedom to add new upside call positions to our ledger. And when you’re properly protected against falling stock prices, you can enter into a select group of plays exhibiting strong upside characteristics without worrying about further downside. Today’s alert zeroes in on two of these unique possibilities — each of which exhibits strong technical patterns. When it’s all said and done, both of these plays could hand you explosive returns. So let’s dive right in!

We’ll begin with an upside call play on IAM Gold Corp. (IAG – NYSE).As you know, we hit our first triple-digit winner of 2009 by locking in profits on our Barrick Gold (ABX – NYSE) calls. Now that we’ve successfully liquidated our upside gold exposure, I’d like to get re-positioned in a smaller and more explosive gold company that is exhibiting very strong internals. This past week, gold prices moved up to a six-month high, setting a positive tone for all gold stocks. And after reviewing a series of gold companies, I’ve concluded that IAG offers you the best risk versus reward scenario in the entire gold sector.

IAM Gold has interests in three gold mines located in the Province of Quebec (one of the best gold regions in all of North America). They also hold interests in gold mines located in Ghana, Botswana, Ecuador, Peru, and Tanzania. Their balance sheet shows total cash of $153.27 million versus total debt of only $5.48 million, which tells you that they’re in a very powerful financial position. In fact, their book value per share currently stands at $6.21, which is only $0.40 below what the shares are currently trading for right now. If gold prices continue to rise (as I expect), shares of IAG will continue to increase as well.

Why will gold prices keep rising? Well, to be honest, there are a number of powerful tailwinds all colliding right now, but the most critical factor is continuing concerns about global financial instability. As more and more investors become fearful about market volatility, you’ll see a rush of investment dollars flowing back into gold. In fact, this pattern has already started. Case in point, there’s a very powerful signal on the gold chart that I’d like to bring to your attention, shown below.

If the 50-day moving average moves through the 200-day moving average, traders call this a “Golden Cross” formation. It’s one of the most powerful intersections you can ever find. If this occurs (and I think it will), you’ll see gold prices shoot over $1,000 per ounce, which would offer a tremendous lift to IAG. With the longer-dated IAG options available for very reasonable prices, I’d like to get re-positioned to ride an up-move in gold by adding IAG September 5 calls. Here’s the play…

PLAY: Buy the IAG September 5 Calls (IAG IA) at market, good for the day. Place a protective stop limit at $0.85 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Today’s second play comes to us in the form of Celgene Corporation (CELG – NASDAQ).Consistent with my bullish 2009 thesis on the biotech sector, two charts below show you that adding extended upside calls on CELG at current levels represents a very strong buying opportunity. Let’s start by looking at CELG’s two-year chart. As you can see below, the stock is currently making a strong bounce off the 200-day moving average, which appears to be a solid level of support.

Let’s now look at CELG’s daily chart, and you’ll see an equally strong technical signal. As shown below, CELG is currently moving above its 50-day moving average, which offers you a bullish indicator on both the 2-year and the 6-month chart.

From a company standpoint, I consider CELG to be one of the most promising biotech companies on the market. You can argue that investing in CELG today is like buying shares of Amgen very early in their growth cycle. CELG’s three main cancer drugs (Revlimid, Thalomid, and Vidaza) bring in around $560 million per quarter, making CELG one of the most profitable and stable biotech companies your money can buy.

Furthermore, CELG reported on Thursday that their fourth-quarter profit more than doubled. Earnings reached $200.9 million ($0.43 per share) compared to $94.6 million ($0.22 per share) one year ago. In my view, this was a very strong report. Total revenues in Q4 increased 50%, fueled by a 49% increase in Revlimid sales. All told, Revlimid earned $369.4 million, Thalomid earned $126.8 million, and Vidaza totaled $69.7 million in Q4. Very strong.

Based on these earnings, Celgene reiterated their 2009 financial outlook, which to me looked like a low-ball reiteration. This conservative guidance puts CELG in position to beat these numbers going forward, which is something Wall Street always loves. All told, CELG expects to earn total revenues of $2.6 billion in 2009, up 20% from 2008 levels. Revlimid sales alone are expected to hit $1.7 billion, up 28% from last year.

At the same time, CELG has a loaded pipeline, with clinical trials and investigational compounds for incurable tumor cancers such as multiple myeloma, myelodysplastic syndrome, chronic lymphocyte leukemia, non-Hodgkin’s lymphoma, glioblastoma, and ovarian, pancreatic, and prostate cancers.

Their income statement shows year-over-year quarterly earnings growth of 252%, but what’s more impressive (in my view) is the fact that CELG lost only 3.26% over the last 52 weeks, far outpacing the S&P 500’s loss of 35.5%. With a solid revenue stream, a stocked pipeline, and two bullish indicators on the near-term and longer-term charts, let’s add CELG calls now and profit off a continued upside push. Here’s the play…

PLAY: Buy the CELG July 55 Calls (LQH GK) at market, good for the day. Place a protective stop limit at $2.85 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

DIA April 70 Puts (DIJ PR) & VIX May 60 Calls (VIX EN): After some upside strength early in the week ,the major market averages gave back nearly all of the losses, which sets a bearish tone going into next week. With the Dow threatening to trade under the 8,000 level, be sure to maintain both of your “CYA” plays. Hold.

GERN January 2010 7.5 Calls (WNM AU), Teva Pharmaceuticals January 2010 45 Calls (WTX AI), & Cubist May 20 Calls (UTU ED): Our collection of healthcare-biotech plays continues to look strong. GERN hit a new 52-week high on Friday, which signals more upside ahead. TEVA and CBST have been trading sideways, but our extended expiration times will allow us to participate in any forthcoming upside run. Hold.

Genentech March 80 Calls (DWN CP): I don’t quite understand this move, but on Friday, Roche Holdings lowered its takeover bid for Genentech from $89.00 down to $86.50. As a result, shares of DNA lost $3.00. I consider this a perplexing move, simply because Roche currently owns 56% of DNA’s shares. In other words, Roche is taking a hostile takeover approach towards a firm it mostly owns. That’s like your right hand beating up your left hand. Either way, I think DNA will bounce off the 50-day moving average, so let’s take this opportunity to “roll” our March contracts out into June.

In other words, we’re simply selling our March contracts and simultaneously buying June contracts, all in an effort to give ourselves more time for DNA to rally. Therefore, come next week, here’s what I’d like you to do…

PLAY: Sell your Genentech March 80 Calls (DWN CP) at market, good for the day. Then turn around and buy the Genentech June 85 Calls (DWN FQ) at market, good for the day. The price premiums from this sale and re-purchase should be close to equal. Therefore, we’re effectively buying ourselves more time at a minimal cost — and also taking advantage of the $3.00 down-move sparked by Roche.

Yellow Roadway January 2011 2.5 Calls (VYX AZ): Our powerful recovery play continues to look strong. I expect continued upside. Hold.

ETH February 15 Puts (ETH NC): Shares continue to drift lower, which has now given us a 22% gain on this position. While I am sticking to my $6.00 per share price target, our February expiration is now coming into play. Therefore, to avoid any time decay, let’s go ahead and lock in profits now.

PLAY: Sell your ETH February 15 Puts (ETH NC) at market, good for the day. Congrats on a modest 22% winner.

Salesforce.com May 25 Puts (CRM QE) & Verizon April 30 Puts (VZ PF): Just like last week, both VZ and CRM continue to languish below their 50-day moving averages. This supports more bearishness ahead. Hold.

MCD June 55 Calls (MCD FK), ADM January 2010 20 Calls (WRA AD), & YUM January 2010 30 Calls (WRJ AF): All three positions are attempting to find support at their 50-day moving averages. Given their ability to remain strong in a weak market environment, I think that our extended expiration times will help these plays to recover. Hold.

Tesoro January 2011 5 Calls (ZGC AA): TSO continues to blast higher, so be sure to lock in gains at the 100% level. Take remaining profits at the 100% level.

Excel Maritime March 15 Calls (EKN CC): A late-week downgrade of dry bulk shipper DryShips put a big dent into recovery efforts of this entire sector. Therefore, it’s time to close out this position for good. Sell.

AK Steel January 2010 15 Calls (YDF AC) & Southern Peru Copper January 2010 25 Calls (YPV AE): A 6-month high in gold prices bodes well for steel and copper, so maintain both plays for more recovery efforts. Hold.

Sincerely,