Average Down on EV

Plus Commentary on CHE

Dear Bottarelli Research Member,

Paul G. writes in to ask, “I didn’t get into EV until the 27th and ended up paying $6.39 including fees. Then the stock tanked this am and the option fell to $4.50 where I doubled down. Smart or dumb?”

In short, I think the answer is “smart.” In fact, I was planning on doing the exact same thing today.

You see, Eaton Vance reported yesterday that their net income totaled $39.1 million, or 29 cents a share in the quarter ended January 31. Those results were up from $32.7 million, or 23 cents, in the year-earlier quarter.

Not only that, but Eaton Vance reported that their revenue totaled $206.4 million, up from $181.8 million a year earlier, and their assets under management totaled $113.3 billion, up 16% from $98 billion a year-earlier.

To me, those numbers point to nice, steady growth. So why did the stock fall so much? Two reasons: First, analysts polled by Thomson First Call had predicted 32 cents and EV reported 29 cents. Second, the strong selling pressure in the markets yesterday did all it could to scare EV shareholders into selling. This exacerbated the earnings news and lead to heavier selling than was deserved.

If you look at the chart, you’ll notice that EV did not gap down the moment these results were announced — but rather it drifted gradually lower as the day progressed. This tells me that the selling pressure was overdone.

In fact, EV has never experienced a down-day like yesterday in recent past, and the down-move took the stock right to the top of their 50-day moving average (purple line) right above $28.00. This will most likely be the support point for the stock. Let’s use the August time frame to our advantage and add more calls to your position at these lowered valuations.

PLAY: Buy more EV August 25 Calls (EV HE) at or below $4.60, good for the day. This lowers your cost average down to $5.25 on these calls, but maintain your same $3.00 stop.

Ian D. writes, “Just wonder if you have any comment on the CHE April 55 Calls. I was stopped out yesterday at 1.15 (my stop was set at 2.00), although I did not see it move below 3.00 on the board (admittedly I was not watching full time). I am using ‘stops’ whereby when the stop is hit it turns into a market order, rather than Stop limits (whereby when the stop is hit it turns into a limit order). Did someone goof and put in a sell order 3.00 too low?”

I must say, I spent the morning watching the real-time bid/ask spreads fluctuate when the CHE trading pit opened — and it was quite a ridiculous sight. Both the in-the-money calls and in-the-money puts were showing ridiculous bid prices around $0.30 while the ask prices on the same contracts were as high as $5.10. Then, after maybe five minutes of this action, prices reverted back to a normal bid/ask range.

Although I have no proof of this, it looks to me like the floor traders at the CHE pits are being crooks. They’re getting together for a few minutes in the morning and lowering their bid prices to fill any lowered stop-out orders — and then quickly setting prices back up to a normal range after the stock is opened for trading. If questioned, they’ll probably blame it on a computer glitch. Shameless.

This type of action is why some floor traders are considered slime balls, and I personally think the exchanges should police this digital form of theft. It’s a real shame because I still like the future upside prospects of CHE.

On Tuesday February 21^st, Chemed announced earnings that beat by $0.06, which finally pushed the stock above the critical $54.00 barrier that if failed to break on two past occasions. This break-out points to further upside gains in the weeks and months ahead. Using yesterday and today’s slight pullback as an entry point could lead to a nice winner.

But to avoid being subjected to these sort of unethical trading practices happening on the CHE pit, I’d recommend that you take Ian D’s suggestion and place “stop limit” orders. That way, you can take an additional step to protecting yourself — and your stop orders will only get filled once prices have indeed executed for the price that you designate. Although it’s not fool-proof, it is an additional step to ensure getting you the best sale prices.

As far as the CHE April 55 calls (CHE DK), I’d love to recommend adding more to your position at current levels, but I don’t want you to get taken to the cleaners once again by these idiot floor traders. If you’re a speculative type, I’d recommend adding more to your position and changing your protective stop to a protective stop limit at $2.00.

SPECULATIVE PLAY: Buy more CHE April 55 calls (CHE DK) at or under $3.20, good for the day. Maintain your same $2.00 stop limit.

And finally, I noticed that after yesterday’s alert was sent, some orders were placed at $4.60 on the Lear April 25 Puts (LEA PE).

If you recall, the recommendation was to sell them at or above $4.50. If you did not get price, the current bid/ask spread is $4.40 to $4.50, so maintain your orders and I think you’ll get filled soon. In fact, as I’m writing this, prices did just trigger for $4.50. If you didn’t get out yesterday, you should be getting out for profits right now.

FOLLOW-UP: Lear April 25 Puts (LEA PE) sold at $4.50 and $4.60 for gains of 25.0 % to 27.7%.

Now that we’ve trimmed down on our put positions, I may come out with a new put recommendation later today. Until then…

Lock and load!

Sincerely,