Three “Bloated” Techs

How Long Can These Sky-High P/E’s Last?

By Bryan Bottarelli
Monday, July 10, 2006 4:30 PM EST
Mon, 10 Jul 2006 21:30:00 GMT

Dear Bottarelli Research Member,

Last week, I made a case for establishing a longer-term upside position in the Amex Airline Index (XAL). Today, that bullish thesis has been supported by even more positive data.

Stocks like JetBlue (JBLU – NASDAQ), British Airways (BAB – NYSE), and AirTran (AAI – NYSE) all noved up on the news that crude-oil futures began the week with a slight dip under $74.00 to $73.56 a barrel. It’s interesting to me that the markets consider this so-called “dip” a positive development. After all, crude just hit a record high above $75.00 during Friday’s session, so the trend in crude prices is certainly going up. Nevertheless, it appears like any dip in oil prices – no matter what happened the previous day – will be viewed as a positive for the airline sector. Plus, if the top stocks within the sector keep reporting positive news, I see the upside run continuing. Plus, when you look at each component of the XAL, they’re all reporting promising numbers.

Continental (CAL – NYSE) recently reported that June traffic rose 13.7% while capacity rose 10.6%. The stock hit a new 52-week high today at $32.04.

Southwest Airlines (LUV – NYSE) recently reported their June revenue passenger miles (RPMs) rose 13.2% to 6.15 billion. Their passenger load factor also rose from 76.2% to 80.4%. Since mid-June, the stock has moved from $15.10 to $17.42.

Also chiming in was UAL Corp.’s United Airlines, who said June’s RPM rose 2.3% and their available seat miles also gained 2.2%.

XAL

Despite a choppy trading day, the Amex Airline Index (XAL) was one of the top sector performers, gaining $0.92 to close at $55.21. I’d like to establish a longer-term upside position in the XAL, but the options are not as liquid as I’d like. For instance, the bid/ask on the XAL September 55 Calls (XAI IK) closed today at $3.50 to $4.60. The XAL September 60 Calls (XAI IL) are bid $1.25 and ask $2.25. That’s quite a large gap. Even though I’m a calling for an upside run in the airline sector, I’d like to see a much tighter spread on the options before initiating a position. Right now, the odds are stacked against us, so it’s wise to hold off.

In other news, the market’s top tech stocks continue to get hammered. SanDisk (SNDK), was down $4.00. The Semiconductor HOLDRs (SMH) hit a new 52-week low at $30.90. Even Dell (DELL – NASDAQ) hit a new 52-week low at $23.25. I’m beginning to think that you can make money by simply scanning for the tech stocks with the highest price multiples and entering puts on these companies blind.

If that’s the case, we should definitely own puts on Webmd (WBMD – NASDAQ), a $44.88 stock sporting a 448.80 P/E ratio. Or Synopsys (SNPS – NASDAQ), a $18.23 stock with a 260.43 P/E/ ratio. Or even Dr Reddys Labs (RDY – NYSE), a $28.99 stock with a whopping 483.17 P/E ratio. In fact, I’m now putting these three in a special tech stock watch list titled “Bloated P/E.” If the markets begin to experience another big fall, these three would be the first to own puts on!

Until tomorrow…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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