Downside Positioning
Dear Bottarelli Research Member,
A fresh batch of 52-week lows popped onto the scene today, which means we can balance out our three upside positions with some downside plays. This way, you’ll be covered no matter which way the market moves leading into the New Year.
Topping the new 52-week low list is Commonwealth Telephone Enterprises (CTCO – NASDAQ). Commonwealth Telephone Enterprises, Inc. provides telephony and related services as a rural incumbent local exchange carrier (RLEC) in Pennsylvania. After hitting a short-term high of $43.93 on August 3rd, CTCO has promptly lost $9.64 over the last four months. In fact, CTCO was a $53.28 stock on June 10th before getting absolutely crushed, dropping over $10.00 in one day. Now trading at a fresh 52-week low of $34.29, the stock hasn’t recovered. And judging by their earnings, they won’t recover anytime soon.
On Tuesday November 8th, the reported that their 2005 third quarter earnings per share came in at $0.62, a $0.02 drop compared to their EPS of $0.64 in the 2004 third quarter. Quite frankly, the company is not growing, and investors are starting to panic. In an attempt to alleviate the problem, the Board of Directors declared $.50 a share dividend for the 2005 fourth quarter. But that didn’t help, the stock keeps falling. If shares break under $33.00, which they could easily do, it’s a all-out free fall. Let’s play this downside with February 35 puts.
PLAY: Buy the CTCO February 35 Puts (QOK NG) at or under $1.60. The current bid/ask spread is $1.35 to $1.50. Place a protective stop loss at $0.70.
In addition to CTCO, two downside plays in the housing sector just hit new 52-week lows. The first candidate is Redwood Trust (RWT – NYSE).
Redwood Trust’s primary business involves making jumbo residential real estate loans. In an obviously overblown housing market, it’s the most expensive houses that take the first price hit. And that spells bad news for jumbo loan companies like RWT.
This was quite evident in their recent 3Q profit announcement – which cited a 23% fall from last year. Their earnings fell to $55.9 million, or $2.21 per share, from $72.3 million, or $3.18 per share last year. This is quite substantial. According to President Doug Hansen, “It appears that we are near the end of the bullish phase of an extraordinary real estate credit cycle.”
That sure doesn’t sound like it’s the time to buy shares. Rather, it’s time to dump them. So let’s play the downside using February 45 puts.
PLAY: Buy the RWT February 45 Puts (RWT NI) at or under $4.00. The current bid/ask spread is $3.40 to $4.00. Place a protective stop loss at $2.90.
Another housing play comes in the form of MDC Holdings (MDC – NYSE). The company builds homes under the name Richmond American Homes in the United States – primarily single-family and town homes in Virginia and Maryland. If you look at the insider transaction list, you’ll see that MDC insiders have been selling their shares for the entire 2005 calendar year. In fact, between July 18th and July 20th, President David D. Mandrich personally sold over $30 million of his stock. Amazingly, the last insider buy came on November 22nd 2004.
That doesn’t make too much of a bullish case for me. So let’s play the drop using February 65 puts.
PLAY: Buy the MDC February 65 Puts (MDC NM) at or under $5.00. The current bid/ask spread is $4.60 to $4.90. Place a protective stop loss at $3.00.
UPDATES
Your three upside plays continue to look good…
Your TALX February 45 Calls (TUB BI) were bought for $4.40. They currently trade for $5.20, good for an 18% gainer. Hold.
Your Psychiatric Solutions February 60 Calls (BYU BL) were bought for $2.70. They currently trade for $2.75, a virtual break-even. Hold.
Your Intergraph February 50 Calls (INQ BJ) were bought for $2.20. They currently trade for $2.45, good for an 11% gainer. Hold.
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.
Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.
CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.
Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.
