A Defense Stock Shooting Higher

CRDN Rallies on Huge Numbers

By Bryan Bottarelli
Wednesday, April 12, 2006 3:11 PM EST
Wed, 12 Apr 2006 20:11:00 GMT

PLAY: Buy the CRDN May 50 Calls (AUE EJ) at or under $4.20, good for the day. Place a protective stop loss at $2.50 and a “busy man” sell that triggers if these calls trade at or above $5.00.

Dear Bottarelli Research Member,

At the beginning of the week, I told you that I expected a muted trading week due to the market holiday on Friday. This action is evident today, as the Advance/Decline line on the NYSE stands at 1,593/1,586, a virtual split right down the middle on light volume.

This action has dropped our ATW May 52.5 Calls (ATW EX) from $5.00 down to $4.20 while our OXM May 50 Puts (OXM QJ) are holding the line around $5.20. To be honest, I’m not too concerned. If we get though this week, we’ll once again experience a continuation of each stock’s trend, which should give you a gain on each play.

In the meantime, I wanted to follow up on another comment I made earlier this week when I noted that I’m paying special attention to the defense stocks — especially as the Iran news keeps getting scarier and scarier. Today it was more of the same, as Secretary of State Condoleezza Rice took a hard line by denouncing Iran’s successful enrichment of uranium and called for “strong steps” to induce Tehran to change course.

Other than the typical list of defense stocks — like General Dynamics (GD – NYSE), Lockheed Martin (LMT – NYSE), Raytheon (RTN), and Boeing (BA – NYSE), I’ve been keeping a close eye on names such as L-3 Communications Holdings (LLL – NYSE), and Alliant Techsystems (ATK – NYSE).

But without question, the biggest eye-popper today came in the form of Ceradyne (CRDN – NASDAQ), the ceramic body-armor maker that’s up 9% as I write.

Today, CRDN announced that they expect their earnings (which they’ll report on April 27th) to be higher than they expected. Thomson First Call projected that earnings would come in at $0.73 cents a share, but CRDN reported today that the numbers will be closer to $0.88 or $0.90 a share. When you consider that last year’s quarterly number was $0.24 a share, it shows just how much growth the company is experiencing right now. A company statement from CRDN said “we continue to believe that the lightweight ceramic body armor business will remain firm through 2007 and into 2008." Given all the escalating news in Iran, I’d have to agree.

If you look at the chart, you’ll notice that even despite today’s up-move, the stock could still have a lot of room to run. From current levels of $51.20, a move up to $55.00 could very well be in the cards, so I’d like to play this one up to their earnings announcement on the 27th. We’ll do that through the CRDN May 50 Calls (AUE EJ). Trading between $3.80 and $4.10, we can expect a quick move up to $5.00 on CRDN’s continued upside momentum. Here’s the trade:

PLAY: Buy the CRDN May 50 Calls (AUE EJ) at or under $4.20, good for the day. Place a protective stop loss at $2.50, and if you plan to be away from your computer, place a “busy man” sell that triggers if these calls trade at or above $5.00.

Lock and load,

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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