End of Day Position Updates

MDT, CSX ATK & CELG Highlight the Day

Dear Bottarelli Research Member,

It’s been a wild day for shares of medical-device maker Medtronic (MDT – NYSE).

This morning, the stock dipped on a Wall Street Journal report that said MDT was recalling their 8731 Intrathecal Catheter and Model 8598 Intrathecal Catheter Distal Revision Kit. The recalls were attributed to problems during implantation that caused the device can become dislodged. The company said it received 22 reports of tip dislodgments — with one patient experiencing post-operative leg pain. A MDT spokeswoman said the recall affects about 1,000 devices that might be in hospitals and clinic inventories — and this negative news increased the value of our MDT August 50 Puts (MDT TJ) up to $2.75.

In fact, it looked like one final downside push would move your puts above our June 27^th entry price of $3.10. After all, today’s recall news comes at a time where Medicare and Medicaid have each proposed reimbursement changes that could cut rates on many procedures. It also comes at a time when implantable cardioverter defibrillator slowdowns and recalls from companies like Boston Scientific (BSX – NYSE) have slowed future growth — as physicians reconsider the risks of products currently on the market. In my book, all of these factors outlined a strong case for continued bearishness. But in late trading today, MDT took a sudden upside jump that unfortunately stopped us out of our MDT August 50 Puts (MDT TJ).

It appears like two things are happening. The first is that MDT investors are breathing a sigh of relief after learning that the recalls reported in the Wall Street journal are not as severe as they originally thought. Also, investors are thinking that the troubles surrounding Boston Scientific could actually open doors for Medtronic. Like I mentioned above, all it’ll take is one recall — or one lowered earnings forecast — to push shares of MDT much lower. Although I’m still bearish on the stock, I must adhere to our trading rules and call the position closed.

Also taking an unnecessary hit today was our newest longer-term play on CSX (CSX – NYSE). The stock was down as much as $1.84 today — alongside the rest of the transport sector — solely based on the negative news from United Parcel Service (UPS – NYSE).

In fact, Burlington Northern Santa Fe (BNI – NYSE) reported a better-than-expected 28% rise in quarterly profit — but shares actually fell thanks to a UPS. The thinking is that railroads will suffer the carry-forward effect of the weaker demand indicated today by UPS — but I think there’s a certain flaw in that line of thinking.

For one, FedEx just recently reported superb earnings which shot the stock $5.00 higher. The fact that UPS is struggling while FedEx is prospering is a management issue — not an economic slowdown issue.

Secondly, railroad companies like CSX and BNI have been able to successfully pass along the increase in fuel to customers — whereas UPS hasn’t been to lucky. BNI, for example, collected fuel surcharges of $425 million in the quarter — which is nearly double the figure from a year ago. The fact that CSX and BNI have reported strong earnings despite their fuel-charge increases means they’re better suited to handle the increases than their competitors. Heck, the higher fuel prices go, the more restrictive it is to ship by truck. That just makes the case for railroads that much better!

And third, the big increases for the railroads have come thanks to coal. According to recent reports, BNI’s revenue from hauling coal increased 21%, and there are no signs of coal transporting slowing down. This is a luxury not shared by UPS, as I can’t remember the last time I sent a package of coal through overnight mail.

The bottom line is that I feel a railroad sell-off based on UPS is unwarranted. As you can see by the chart, CSX has posted a strong recovery off their intra-day lows, which makes me comfortable holding an upside position. In fact, I may consider adding to our longer-term CXS November 65 Calls (CSX KM) if they drift any lower. For now, they’re a strong hold.

Finally, this late-day rally has extended the gains from yesterday’s up-move, which has helped push your ATK November 80 Calls (ATK KP) and your CELG October 50 Calls (LQH JJ) back up to our profit levels. On a conservative note, I think it’s smart to use these two days of back-to-back bullishness (which we certainly haven’t seen in a while) to take your profits off the table.

Lock and load,

Sincerely,