Toeing the Water

Enter PEP October Calls

By Bryan Bottarelli
Wednesday, June 07, 2006 2:37 PM EST
Wed, 7 Jun 2006 19:37:00 GMT

PLAY: Buy the PEP October 60 Calls (PEP JL) at or under $3.20, good for the day. Current bid/ask spread is $2.95 to $3.10. Place a protective stop loss at $1.90.

Dear Bottarelli Research Member,

The headline on CBS Marketwatch today reads, “After two days of selling on hawkish remarks from the Fed chief, bargain hunters dig, trigger a rally.”

As I look at the markets at 1:35 Central Time, I can’t say that I agree with this statement. After all, not a single major market index is up more than 0.4%. The Dow is only showing a 7 point gain, so if the bargain hunters are indeed out, they’re being extremely coy.

In times of broad-based market troubles, look for a safe-haven among the strongest consumer staples. Within that group, look for corporate buy-backs. This proves to you, in one fall swoop, that management considers their stock undervalued. Also look for steady cash show and increasing dividends. When markets are overwrought with fear, cash flow and dividends are the first items that bring the bulls out of hibernation.

The company I found that fits all these important “safe-haven” criteria is Pepsico (PEP – NYSE).Pepsi is boasting a current quarter that’s growing at a 10% clip — that’s twice the industry growth average of 5.5% and more than five times the sector growth rate of 1.8%. Clearly, they’re the shining stars within their peer group.

PEP

Plus, as I noted yesterday, PEP management does a great buy of backing their shareholders by purchasing their stock — which has helped the stock prosper during the recent market sell-off, hitting new 52-week highs on May 25th, May 26th, and June 1st.

In a difficult market like this, PEP looks like one of the safest plays out there. Looking at the chart, an upside move past $61.00 is virtually a lock. With any sort of upside momentum, we could see a carry-on move up to $65.00. That’s why I’d like to dip a toe back into the water and initiate an upside position in PEP

PLAY: Buy the PEP October 60 Calls (PEP JL) at or under $3.20, good for the day. Current bid/ask spread is $2.95 to $3.10. Place a protective stop loss at $1.90.

Also, get ready to add to your position in the CAT November 75 Calls (CAT KO). The stock has gotten absolutely walloped — and the downside pressure has gotten way, way overdone. I’ll tell you exactly when it’s time to add more November 75 calls to your position. I think it’s coming very soon. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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