Transports Get Jack-Hammered (again)

I Call it a Buying Opportunity

Dear Bottarelli Research Member,

For the second day in a row, railroad stocks like CSX Corp. (CSX – NYSE) have taken an unnecessary hit due to weakness in the overall transport sector. Yesterday’s weakness came in the form of United Parcel Service (UPS – NYSE) and today’s weakness comes in the form of Boeing (BA – NYSE).

This morning, Boeing reported a $160 million loss for the second quarter, pushing shares of the world’s largest aerospace company down 5% in early morning trading. The net loss for the April-through-June period look particularly bad compared to BA’s net earnings a year earlier — which were a $566 million gain. Once again, this has spooked the transport sector, sending nearly all its components lower on the day.

As I reported yesterday, there is a distinct difference between transport stocks like the rails, which are blowing earnings out of the park, and ground/air transports like UPS and BA. Once the downside volatility in the sector stabilizes and investors realize this variance within the transport stocks, I think we’ll see a bounce in CSX. Plus, a look at the chart shows CSX moving right down to their most recent support point at $60.00. Therefore, I’d like to use today’s weakness to add to our November upside position.

PLAY: Buy more CSX November 65 Calls (CSX KM) at or under $3.00, good for the day.

I’d also like to add to our longer-term play on Barrick Gold October 30 Calls (ABX JF). In the last few days, ABX has quietly strung together a nice recovery — one which I’m hoping could continue for the next few months. If the stock can hold the line at the 50-day moving average, we could see an upside rally.

Gold for August delivery closed yesterday at $618 an ounce, but many experts still think we could see $700 an ounce before the 2006 calendar year comes to an end. It may sound silly, but jewelry demand for the Indian fall wedding season could help to establish a strong floor at $600. Then, if the shiny metal could pop past resistance at $625, a rally to $675 or $700 could be in the cards. Let’s use this thesis as the rationale to add to our longer-dated ABX calls.

PLAY: Buy the Barrick Gold October 30 Calls (ABX JF) at or under $2.20, good for the day.

Another longer-dated call possibility popped up today in the form of Allergan (AGN – NYSE).The company is a niche pharmaceutical stock that develops specialty ophthalmic, neurological, medical aesthetics, and medical dermatological markets.

You’ll probably recognize them by their popular Botox treatment — which looks to be an aging baby-boomer play for years to come. Plus, AGN’s skin care products for plaque psoriasis, acne, facial fine wrinkling, mottled hypo-and hyperpigmentation, and benign facial lentigines all make a strong upside case. If you take a quick look at the company’s recent headlines, you’ll see some very positive developments.

June 23^rd: Allergan Announces FDA Approval of LUMIGAN(R) as First-Line Treatment for Elevated Eye Pressure in Open-Angle Glaucoma

June 5^th: Allergan Announces FDA Approval of JUVÉDERM™ Gel Family of Products for the Treatment of Facial Wrinkles and Folds

Jun 5^th: Allergan Wins ACULAR(R) Patent Infringement Lawsuit against Apotex and Novex

May 3^rd: Allergan Reports First Quarter Operating Results; Pharmaceutical Sales Increased 22% Percent for the First Quarter; Board of Directors Declares First Quarter Dividend

That’s two FDA approvals, one lawsuit win, and a strong earnings report all in the last three months. Not bad if you ask me. When I look at AGN chart, it appears like AGN will soon fill the downside gap that it set in late-March — which could signal an upside move to $112.00.

With the company set to report second quarter results on Wednesday August 2^nd, we could have a new upside play depending on how Wall Street reacts to this report. So stay tuned, as I think AGN could be a great position to own to the upside over the next 2-5 months.

Also moving up is Celgene (CELG – NASDAQ), as the stock hit a new 52-week high on the even of their earnings report. I know that some of you are rolling the dice and holding your October 50 Calls (LQH JJ) into tomorrow’s earnings report, but if you’d like to take the conservative route and take your profits off the table today, you can get filled currently between $4.10 and $4.20.

Other highlights today involves 3M (MMM – NYSE), which was taken to the woodshed again yesterday as they simply affirmed their reduced earnings guidance of three weeks ago. Sometime soon, we’ll have an upside buying opportunity in this well-diversified conglomerate.

We also have Merck (MRK – NYSE) quietly setting new 52-week highs at $39.97. The MRK January 45 Calls (MRK AI) could be a nice speculative play for only $0.45 per contract. If Merck moves up just $2.50 over the next six months, you could have a straight double on these calls. If the stock moves down a little, it may be a speculation worth taking.

Finally, it looks like I set our stop loss too tight on our Capital One August 80 Puts (COF TP). As I was sending out yesterday’s alert, these puts ticked up and triggered our protective stop loss at $2.70.

While I still think the stock has room to move lower before finding support (similar to MMM’s recent downside chart formation), I must call this play stopped.

Lock and load

Sincerely,