Holiday Trimming

MA, AXP, STP, CTRP, GRMN, AGN, ATK, PEIX & MON

Dear Bottarelli Research Member,

As we look to cap off another successful week of trading, I’d like to take a moment to outline some investing themes I’ve been researching — as these ideas could equate into new plays come early next week. With the market trading sideways on this Thursday afternoon, I though it would be an appropriate time to discuss some potential plays I have brewing on the horizon.

I’d also like to trim down our portfolio by closing off some of the positions that are simply not moving as decisively as I’d expect. But I’ll get to that in a moment. First, let’s start with by looking at everyone’s favorite 2006 IPO MasterCard Incorporated (MA – NYSE).

Without question, MasterCard has been on a terror this year, going from $50 in August up to current levels around $100. That’s a double in just the last four months! This high degree of upside volatility is clearly seen in MA’s options string, as the MA January 100 Calls (MA AT) currently trade for $6.40 per contract (keep that number in mind when you read the next few sentences).

On the other hand, a name that you haven’t heard too much about lately is American Express (AXP – NYSE).As you can see by the AXP chart, the stock has also been participating in a very nice up-trend, but the success of MA has made AXP virtually no-noticed across Wall Street.

With AXP hitting a new 52-week high today at $60.05, I’d say the stock has just as much upside potential as MaserCard — but none of the notoriety. For early investors like you and me, this could be a good thing. Take, for example, the AXP January 60 Calls (AXP AL), which are trading between $1.20 and $1.25 per contract. That’s a full 412% less than what the January at-the-money calls trade for in MasterCard.

Sure MA is a $100 stock and AXP is only a $60 stock, but the price premium difference is still an eye-opener, especially when both stocks are exhibiting similar upside tendencies. Come next week, a longer-dated upside play in American Express could be in the cards, as AXP options are trading at a drastic discount to MA options. We’ll look to use this variance to our advantage.

Another potential play for next week comes in the form of Suntech Power Holdings (STP – NYSE). Headquartered in Wuxi, China, Suntech Power Holdings manufactures photovoltaic (PV) cells, which are used to provide electric power for residential, commercial, industrial, and public utility applications worldwide. As you can see by the chart, the stock just recently broke through its recent high at $31, which points to continued upside into January. STP could be a possible trade opportunity for next week.

Sticking with the China theme, there’s a little stock called Ctrip.com International (CTRP – NASDAQ) that’s an interesting deal. CTRP is basically a glorified travel agency that specialized in trips to China. Whether its hotel reservations, air ticketing, packaged tour services or other transportation and accommodation duties, CTRP basically plans out your entire China trip for you. After hearing that description, I’d think the stock would be a dog. After all, the explosion and ease of online travel has made retail travel agencies in the United States a dinosaur of an industry. But consider this.

Over a 52-week period, CTRP has gained 108.68% despite a Forward P/E ratio of 43.99 and a price/sales ratio of 20.10. When you look at those numbers, something doesn’t add up. Absurd price multiples within a disappearing business segment, yet the stock gained 108%? What’s going on? Here’s my take:

CTRP has carved out the one remaining niche in the travel agency market that looks to be a sustainable winner — and it’s positioning itself to capitalize on that niche better than anyone else. If I were traveling to China, for example, I’d want someone who knows their stuff making all the arrangements for me. That means I’d use CTRP. The stock’s high multiples make it a “who cares” stock, which is a situation where the market forces drive the stock higher based on a small float and quick-trigger short sellers. We had a similar situation with Crocs (CROX) and made 44.8%. If CTRP finds support at the $54 level, nervous short covering could spark another rise past $60.

Another downside gift gap that I may have missed comes in the form of Garmin (GRMN – NASDAQ), maker of the market’s best navigational technology. As you can see by the chart, the stock experienced a severe gap-down in early November — but has since recovered nearly 75% of that loss in the following months.

Today’s downside tick in GRMN found support exactly at the 50-day moving average, which could point to further upside to come — especially when GRMN expects to have big holiday sales. Look for the possibility of GRMN calls next week as well.

Also don’t lose sight of Allergan (AGN – NYSE), the maker of Botox and other age-related products for women. As I mentioned before, I expect the stock to be breaking out to new highs soon, as Botox is becoming even more popular. In some circles, it’s becoming customary to give Botox as Christmas presents and have Botox parties! My original view that the stock would find support at the 50-day moving average around $115 has proven to be correct, so I’d look for further upside in AGN next week as well.

Now let’s address some of our current positions. First up, our play on ATK January 75 Puts (ATK MO) officially hit our stop loss today at $0.65, as the maker of ammunition called the $76 level support and has rallied up to $79. If you haven’t already done so, close this position off.

Also close off your MON January 50 Puts (MON MJ), as the market’s inability to move lower has enabled MON to avoid the $3 to $4 breakdown that I was expecting. Let’s also trim down on our PEIX January 17.5 Calls (PFQ AW). Although this position has been both up and down, PEIX has been unable to put together consecutive upside days — which has kept our calls from making the upside push I was looking for. There’s better ways that our money can work for us, so let’s explore those early next week.

And finally, it may be time to re-up our insurance policy, which is what I’m calling our DIA December 120 Put (DAW XP) hedges. As you know, these puts act as our protection against a major market downturn. Holding them enables us to play the market’s upside via calls without any major directional risk. In other words, we can play a number of call positions without worrying about a sudden market breakdown. Tomorrow may be the time to sell our December puts and buy January puts, but I’ll give you the details when it’s time to act. Until then…

Lock and load!

Sincerely,