3:00pm (EST)

1.  Market Summary

2.  RIMM’s Bright Earnings Prospects             

3.  Adobe (ADBE) Looks Undervalued, Ready to Beat Estimates

4.  Patriot Coal (PCX) Covered Call Update

5.  Special Offer from Momentum Options Trading     

6.  Week Ahead

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1. Market Summary

The bulls managed to take the market higher on Friday after spending much of the session drifting around the breakeven line.  The day was pretty much going like the entire week had went, as the major indexes hovered around the flat line and stayed in a tight range.  We felt there was a slight chance the bulls would break and hold resistance but they lacked a catalyst as we went to press and we thought we would have to wait until this week.  Well, the bulls got a gift, as both General Electric (GE, $17.72, up $0.59) and Honeywell (HON, $51.98, up $0.64) announced dividend increases shortly after our update which helped push the Dow higher along with the other indexes.

The Dow jumped 40 points, or 0.4%, to finish at 11,410.  For the week, the bulls made it 2-in-a-row as the index added 23 points, or 0.3%.  We have been calling for a close above 11,400 (again) and we finally got it.  We told you once we broke this level back in early November there would be some consolidation and a test back towards support before we headed higher and the bulls will now target 11,600-11,700 by yearend with a push towards 12,000 in 2011.  Support remains at 11,200-11,000. 

The S&P 500 added 7 points, or 0.6%, to settle at 1,240 and at fresh two-year highs.  For the week, the index popped 16 points, or 1.3%.  The index closed just below 1,230 on Wednesday and we said the next stop would be a run to 1,250 on a close above this level which we got on Thursday.  A move above 1,250 should clear the way for a test to 1,275-1,300.  There is strong support at 1,220-1,200. 

The Nasdaq chipped in with a 20 point advance, or 0.8%, and went out at 2,637.  The index is on a 3-week winning streak as it gained 46 points, or 1.8%.  We have been calling for a run into the 2,600-2,700 area and it was the index’s first weekly finish north of the 2,600 level since January 2008.  Specifically, a close above 2,660 would be very bullish and would open the doors for a trip to 3,000.  Support is strong at 2,500-2,450.

The Christmas rally has been a windfall for our subscribers since October (16 out of 20 winning trades) but we still see plenty of opportunities for trades as we close out 2010 and head into next year.  The current winning trades we have profiled are showing gains of 200%, 196%, 60%, 43%, 28% and 20%, respectively, and we still think we can squeeze more out of them.

We told you last week we have locked in half profits on some of these positions but we still feel the market is going to end the year at its current highs or new ones.

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2.  RIMM’s Bright Earnings Prospects

Research In Motion (RIMM, $62.15, up $0.86) reports earnings this Thursday, December 16, after the closing bell.  Wall Street is looking for $1.64 a share on revenue of $5.4 billion.  There is a good chance the company will beat analysts’ estimates but a lot has to happen to pull it off.   

The company’s main product line is its stream of Blackberry smartphones, but hype has been surrounding its Playbook, its first tablet computer, which comes out in January 2011.  However, since the Playbook won’t affect this quarter’s earnings, we will leave it out besides a short paragraph at the end of this article.

Looking at the numbers, the stock appears cheap at a trailing price-to-earnings (PE) ratio of 11.80 and a forward PE ratio of 9.70.  This is about half of Apple’s (AAPL, $320.56, up $0.80) PE and a little lower than that of Microsoft’s (MSFT, $27.34, up $0.36).  Even Nokia (NOK, $9.81, up $0.05), RIMM’s other major competitor, has a higher PE ratio. 

Research In Motion’s price-earnings to growth ratio (PEG) ratio is a scrawny 0.69 and the company has zero debt with $1.5 billion in cash.  The company has a market cap of $32 billion and is small enough to continue growing when compared to Apple’s $295 billion market cap.

Shares of RIMM have risen from $45 to $62 in the past three months, giving it momentum to go higher, but it is still off its 52-week high of $76.95.  The stock is well of its 2008 all-time high of $145 so it has tremendous room to grow if the trend continues and the 52-week high and the pre-crisis high are used as resistance levels. 

In its previous quarter, RIMM said Blackberry shipments grew more than 45%, versus its previous quarter, and said they have shipped 115 million Blackberries year to date.  Thus, there is still high demand for the Blackberry.  However, we have been telling you for over a year the company was losing a lot of market share as they dragged their feet on making improvements to their lines smartphones.   

The chart below clearly shows that the BlackBerry is losing ground to the iPhone, Android and other smartphones when looking at Verizon’s market share.  It is very likely that this trend will continue and could level off at some point in the future, probably at 10% based on the trend lines below.  This assumes HTC getting up to 20% of the total market share, LG 13%, Samsung 7%, with Motorola and Apple taking 50% of the pie.

Many corporations chose to stay with the Blackberry because of its reliability and security is well-known after years of use.  Thus, the corporate market share has become crucial to the Blackberry’s survival.  However, with the iPhone having been out for over two years now, some companies have accepted Apple’s security and have been allowing employees to use the iPhone and iPad at work.  Also, the introductions of the Droid and Andriod have broken into some corporate businesses, hurting the Blackberry’s market share.

Research In Motion has responded somewhat by expanding into new markets, such as India and China, which will help keep the Blackberry afloat and sales growing, but eventually it will level off and start declining as the smartphone market becomes saturated, and there are no more places to grow.  This is a long ways off and we don’t view this happening anytime soon but it’s something worth mentioning.

As far as the current quarter, the company forecast third-quarter earnings of $1.62-$1.70 on revenue of $5.30 -$5.55 billion.  The upper range is higher than the consensus estimate of $1.64 on $5.39 billion in revenue.

From the chart below, you can see the company grew revenues by $812 million, or 24%, from the same period a year ago in the first-quarter of 2010 (FY 2011).

Repeating this for the other quarters for both revenue and earnings and doing the calculations for the consensus estimates yields:

So, in order for RIMM to meet estimates, it would have to grow third-quarter revenues by $1.47 billion or 37% and earning $0.53, or 48%, from the same period a year ago.  This is not impossible considering that both percentages are lower than the previous growth percentages.  Specifically, 37% is lower than 41%, and 48% is lower than 58%.  Thus, the growth rate declined in each case, increasing the odds that it does meet or beat revenue consensus.  But more importantly, how much did growth decline versus other quarters? 

In the first-quarter, growth declined 29% from 2009 to 2010 (53% – 24%).  In the second-quarter, growth declined 6%.  And in the third-quarter, growth declined 4%.  This tells us the trend is that growth in the quarter compared to the same period a year ago also declines going from first-quarter to the third-quarter (29% to 6% to 4%).  The last 4% is about 2/3 of 6%, while 6% is less than 1/3 of 29%.  If everything were the same, growth for the third-quarter should be 2% (1/3 of 6%), but it is 4%, higher than the theoretical 2%, meaning that the possibility of meeting or beating revenue consensus is very likely and that revenue should come out higher.

Using the same methodology for earnings per share will also very likely meet or beat consensus.  RIMM’s earnings growth jumped in the second-quarter, and they predict a decline in the third-quarter.  The decline is greater (10%) than that of the first-quarter (8%) but nothing really indicates why their earnings growth should decline that much.  If growth stayed the same as that in second-quarter, the earnings should be higher. 

Looking at the Verizon market share, the rate of decline was the same in the first, second, and third quarters.  This does not seem to be affecting earnings, as stated by the number, which means most likely RIMM is gaining customers as they continue expanding (but still losing market share).  There does not seem to any evidence that explains why earnings will be so low, especially $0.09 lower than the second-quarter.  Lastly, third quarter seems to be one of their biggest months of the year, with Christmas sales probably helping to drive up revenue and earnings.  So why would earnings fall in the third-quarter?

Of course, now that we have mentioned all of this, it may not matter.

The biggest factor that will affect RIMM’s stock price when it announces earnings will not be if they meet or beat expectations, but what their forecast is going forward.  As mentioned above, the Playbook, which RIMM calls the “first professional tablet,” will be a big driver of their earnings forecast. 

Existing Research in Motion costumers will probably buy the Playbook as part of their brand loyalty.  Plus, with a lot of hype, some new costumers may want to test out the new tablet.  Some bloggers mention Playbook’s speed and high performance and that it uses Adobe’s Flash.  Apple’s iPad doesn’t use Adobe, choosing to use its own flash player.  Some bloggers report that speed is three times faster than the iPad. 

So, for the near term, Research in Motion’s prospects look good, despite the fact that it is losing market share to competitors.  Brand loyalty and a rapidly expanding smartphone market will support its shares in the foreseeable future but an earnings miss could push the stock back below double nickels ($55).

We aren’t sure if we will play an options trade on RIMM this week, but we are looking at one.

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3.  Adobe (ADBE) Looks Undervalued, Ready to Beat Estimates

Adobe Systems (ADBE, $28.71, up $0.11) reports earnings Monday, December 20, after the bell.  Analysts are expecting earnings $0.52 a share on revenue of $989 million.  The company is known for its flagship Photoshop, which currently has little competition, and it’s Flash Player.  Adobe’s PDF has become the standard for sending and displaying files.  A simple analysis can tell that the company may be undervalued and that earnings estimates are low.

Looking at the numbers, the stock does not appear cheap at a trailing PE ratio of 32, more expensive than that of its top competitors, Apple and Microsoft, who have trailing PE’s of 21 and 12, respectively.  Adobe has a forward PE ratio of 13.5, more expensive than Microsoft (forward PE of 10) but slightly cheaper than Apple (forward PE of 14).  Adobe’s trailing PE is even greater than the industry trailing PE of 25.50. 

The stock’s PEG ratio is a 1.18, lower than the industry PEG of 1.33, but higher than the PEG’s of its top competitors, Apple and Microsoft, who have ratios of 0.84 and 0.98 respectively.  Using these metrics, the stock does not look like a good buy.  However, the company, at $15 billion, is still small enough to continue growing. 

Shares are very volatile and have slipped from its 52-week high of $38, mainly due to Apple’s refusal to use Adobe’s Flash Player in the iPad, deciding instead to use its own Flash Player.  However, Adobe’s Flash is still used in most iMacs and PCs, plus, the company is working with Apple to improve its Flash Player. 

Adobe’s main source of revenue is from subscriptions and purchases of developer tools like Photoshop and Dreamweaver.  Flash Player is part of what it calls “Platform” and makes up only 4% of quarterly revenues.  Even dating back to 2006, the Platform segment has always made from 4%-6% and a few times reached 7%, thus, the stock decline on its Flash Player business may be overdone. 

The company forecast earnings of $0.48- $0.54 a share on revenue of $950 million to $1 billion back in September and the upper range is slightly higher than the consensus estimate of $0.52 a share on revenue of $989 million we mentioned earlier.

The chart below shows data provided from their earnings press releases:

The chart below shows calculations for the growth from prior quarters with earnings estimates for the fourth-quarter of 2010:

From the above table, it is interesting that revenue for the third and fourth-quarter growth is estimated to decline in 2010 after increasing dramatically in 2008 and 2009.   The same is true for earnings.  However, the fourth-quarter is often the best quarter for many companies, so the estimates seem a little low.

The chart below shows calculations for the growth from prior years:

The table clearly shows that 2009 was a bad year, with revenue and earnings decreasing from the prior year but increasing again from 2009 to 2010.  The exception would be first-quarter 2010 earnings, in which earnings continued to fall.  Again, maybe estimates should be a little higher.

As far as the future for Adobe’s Flash, Research in Motion’s Playbook, unlike the iPad, uses Flash and may help buoyant Flash revenue when it comes out in January or next year.  However, as noted earlier, Flash is less than 6% of Adobe’s revenue, while the stock has fallen much more than 6%. 

The last time the company reported earnings, we felt shares would move 10% or more and we used a strangle option trade to play the move because we weren’t sure of the direction.

The stock was at $33 before the announcement, but fell below $26 (-20%), after the company missed its revenue forecast for the quarter just ended.  Wall Street was looking for over $1 billion back then so if Adobe sand-bagged their numbers last time out and revenues come in over $1 billion then shares could fly.

The straddle option trade we recommended (and can be viewed in our 2010 CLOSED trade portfolio) returned our subscribers 200% as the calls options made over 525% while the puts expired worthless.  There may be another trade next week in Adobe and we have the stock and the OPTIONS we want to play on our Watch List.

If you are not a current subscriber to our daily newsletter, there is still time to take a look at this trade, but you need to act quickly and sign up with us by the end of next week.

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4.  Patriot Coal (Covered Call) Update

Patriot Coal (PCX, $17.30, up $0.29) (COVERED CALL)

January 19 call (PCX10122C00019000, $0.63, up $0.05)      

Entry Price:  $17.80 (12/6/10) – sold January 19 call @ $0.95

Exit Target: $20

Return: 3%

Stop Target: None

Action:  Patriot Coal opened at $17.51 last Monday and shares were at $17.80 around 10am (12/6/10).  The 2011 January 19 call could have been sold for 95 cents.  This lowered the cost basis to $16.85.

If shares are above $19 by mid-January, we would be “called” away and our return would be 13% in a little over a month.  If shares retreat and don’t make $19, we will sell another option to lower our cost basis.

Here is our other, current, covered call trade, which we recommended in our daily newsletter.  This trade will be moving to the Weekly Wrap once we launch as a premium service in January.

Dendreon (DNDN, $37.65, up $0.17) (COVERED CALL)

December 40 call (DNDN101218C00040000, $0.15, flat)

Entry Price:  $41.96 (9/13/10) – sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75

Exit Target: $45

Return: -3%

Stop Target: None

Action:  We will be looking to SELL another call option on Dendreon in a week or two.  This will lower our cost basis even further.

Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.  If the stock gets “called away” from us by mid-December then we make 3% in 3 months.

Dendreon will be a $60 stock in 2011 so we aren’t worried about the current 3% loss.

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5.  Special Offer from Momentum Options Trading  

Folks, we have made the Weekly Wrap a free publication for 3 years.  It has been a popular read for many of you but our goal is to get you involved in the market.  Many of you know we have spent the last 2 years writing an option trading manual “How to Trade Options on Momentum Stocks” and it has been a huge success.

We are also doing videos that are included with the course and we have gotten great feedback as many of our subscribers are starting to do their own trades.  This has been our ultimate goal but we have been trying to find a way to incorporate both the Weekly Wrap and our option trading manual, together, while at the same time keeping the price low.

We have decided to make the Weekly Wrap a paid newsletter and it will be available only on a 1-year subscription basis starting in January.  However, we have been trying to figure out how to make it a “free” newsletter so here is what we have come up with.

The cost of our option trading manual is $599 which will also be the cost of the Weekly Wrap.  If you purchase a option trading manual NOW, your membership will be free for a year to the Weekly Wrap.  We are not “advertising this deal” and if you have already purchased our option trading manual, don’t worry, you will also get the Weekly Wrap for free next year.    

We will have more details over the next few weeks but we really would like to have you on board.  We are excited about 2011 and we think there will be a ton of opportunities to find some undervalued stocks that look primed for covered call writing.

To read more on our options trading manual and what a great Christmas gift it will make, please go here:

http://MomentumOptionsTrading.com/momentumoptionstradingcourse.html

Remember, if you sign up now for the “course” which includes ongoing videos on current market conditions and possible trade setups, the Weekly Wrap will be free for you (a $599 value) next year.  We really hope you will join us as we head into 2011.

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6.  Week Ahead

We will be back Monday morning at 9am (EST) with all of the current trade updates for the daily newsletter and a full update on the companies reporting earnings and economic news for the week.    

Tags: AAPL, call option, how to trade options, momentum options trading, Momentum stocks, MSFT< ADBE, NASDAQ: RIMM, NASDAQ:AAPL, option picks, option stock picks, options alerts, options newsletter, options track record, put option, Research in Motion, RIMM earnings, stock options trading, volatile options

This entry was posted on Sunday, December 12th, 2010 at 3:16 PM and is filed under Market Analysis, Market Commentary, Weekly Wrap. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.