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10:30pm (EST)
1. Market Summary
2. Potash Gets Takeover Offer
3. Figuring Out FedEx
4. Earnings
5. Week Ahead & Other Tidbits
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1. Market Summary
The bears were looking to take the overall week and were doing a good job as they had the Dow reeling triple-digits at halftime on Friday. We mentioned in our morning update there wouldn’t be any major economic news to trade and the bulls seemed a little nervous opening new positions over the weekend. Although the bulls cut their losses in half by the closing bell, the major indexes finished mostly lower for the day and mixed for the week.
The Dow fell 58 points, or 0.6%, and finished at 10,213. Hewlett-Packard (HPQ, $39.85, down $0.91), one of the Dow’s 30 blue-chips, fell 2% after lackluster earnings results and accounted for 7 of the 58 points. For the week, the index fell 90 points, or 0.9%, and settled just above our 10,200 target. There was a huge battle on Tuesday and Wednesday at the 10,400 level but the charts have been telling us a test to support was coming. Resistance remains 10,400 and the bears will target 10,000 this week. A break below 10K could lead to a little panic selling which would bring Dow 9,800 into play.
The S&P 500 slipped 4 points, or 0.4%, to finish at 1,071 and also closed right near our target of 1,070. The index fell 8 points for the week and traded to a low of 1,063 on Friday. The 1,100 level remains a brick wall for the fragile bulls and the latest drop should clear the way for a test of 1,050 and then 1,000. The May 6 “flash crash” low was 1,065 and the July low was 1,010 for the S&P. The writing is on the wall for a test lower unless the bulls hold.
The Nasdaq actually finished the day fractionally higher (0.81 points) and closed at 2,179. For the week, the index added 6 points, or 0.3%, but continues find resistance at the 2,200 level. Our near-term target has been 2,150 and the index touched a low of 2,155 on Monday and 2,159 on Friday. A break below these levels should pave the way for a test to 2,050.
Although the momentum has favored the bears over the past few weeks, we must remember we could still stay stuck in this trading range. Right now the major indexes are nearing their lower channels of this range so it will be important to watch to see if the bulls can hold these levels.
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2. Potash Gets Takeover Offer
Potash (POT, $149.67, up $0.83) caught wind last Tuesday after BHP Billiton (BHP, $67.44, up $.09) submitted a bid for the company for $130 a share. Potash closed at $110 on Monday and ran to $142.95 after the announcement. Now, beyond the obvious fact that investors believe BHP’s bid is too low, this kind of stock movement far beyond the asking price of a proposed takeover is worth a little more research.
First, let’s look at Potash itself. If BHP decides they want this company, they will almost certainly have to pay more for it than where the stock sits now. The rumor mill has put a price tag of $160 for a deal getting done but shareholders (and its CEO) will point to the fact that shares have reached a high of $241 (a “double top”) in June 2008. Whisper numbers go as high as BHP paying up to $200/share to get Potash. Other bids may come as the company has said it was open for a bidding war. However, there are few companies that can do $35+ billion deals and there are some who say BHP should walk away.
So why does BHP want to buy a fertilizer company?
Potash the fertilizer is used to increase crop yields and there aren’t many substitutes for it. To dumb it down, there aren’t a lot of potash mines around the world and it takes 4-7 years to get a new one producing, so barriers to entry are high. The price of potash has also been going higher, it tends to run in three year bull cycles, and we could be at the beginning of a huge pop in prices thanks to some crop issues we discuss below.
One of the major reasons for the increase in potash prices is the incredible 75% climb in the price of wheat since July. This is not just a commodity spike that will soon die. The wheat crops and many other crops have been devastated by droughts and floods this year to an extent not seen in decades. Fires in Russia have forced them to ban wheat exports, and the country is a major wheat exporter.
And there could be more trouble on the way. Supplies are very tight and getting tighter, the winter wheat crop hasn’t gone into the ground yet and conditions are so bad there is a threat wheat might not get planted in Canada. What this means is U.S. farmers will be planting a lot more wheat since the price is going to remain elevated for at least the next 6 months. Farmers will need more potash to get the best yield but they should get great prices if supplies remain low and will continue to buy lots of potash.
This also means less corn will be planted, which will drive the price of corn up, and cause the corn farmers to use even more fertilizer to get better corn yields since corn takes a lot more potash than wheat. In addition, because grain prices have been low the last few years, many farmers have skipped putting down potash, and they now need to play catch up.
All of this distress in grain prices means that not only is there a play on potash, but there could be an across the board movement in the Agricultural sector as well. Let’s take a look at a few stocks we have on our Watch List and our comments.
First, the other players with their fingers in the potash pie, include Mosiac (MOS, $56.64, up $0.08), which we will be profile next week, Agrium (AG, $68.71, up $.27), Intrepid Potash (IPI, $23.72, down $.33 ) CF Industries Holdings (CF, $90.01, up $1.16) and for those who want to invest way overseas, Sociedad Quimica Y Minera (SQM, $43.12, up $.16).
Other stocks that could be on the move:
Deere (DE, $65.13, down $0.58) is an obvious play. If farmers are making more money, they are spending more money, and nothing boosts production like the latest big green machine from this company.
Monsanto (MON, $57.73, up $0.56) makes seeds designed to tolerate drought and increase yield. Shares are well off their 52-week high of $87 and yields nearly a 2% dividend.
Bunge (BG, $53.64, down $0.43) is a little more off the beaten path. The company has some fertilizer, it does some storage, and it is tied to soybeans, another crop that may see a rise in prices.
Andersons (ANDE, $35.87, down $0.47) does a lot of wheat storage and is in the transportation business as well. They are also involved with ethanol. If corn prices go up, ethanol should go up.
Syngenta AG (SYT, $47.48, down $.52) is in the seed business too.
The Agricultural sector is heating up and could be entering a secular bull market. This simply means a sector doesn’t always trade with the overall market and, given the current conditions, these stocks might continue to get second and third looks.
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3. Figuring Out FedEx
FedEx (FDX, $81.23, down $0.35) is one of the largest package delivery holding companies in the world. They operate 4 units: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The company has already closed the books on 2010 with revenues of nearly $35 billion (their 2011 year began in June).
The 52-week range on the stock is $66.29-$97.75, which at current levels, represents a 17% discount from its high. So, are shares attractive at $81 or are they going lower? It’s hard to say because FedEx always confuses Wall Street with their earnings, the Dow Jones Transportation Index (DJTA) is looking weak, and, the economy is still sputtering.
When the company reported earnings in mid-June of $1.33 a share, they matched analysts’ expectations, but, the stock got clobbered because they projected 1Q earnings that were deemed too low. Over the next two weeks, FedEx dropped from $83 to just under $70 which was strong support.
We often say you can learn a lot from listening to conference calls or reading transcripts but what tripped us up at the time was this. In their update, FedEx said it was pulling planes out of storage to keep up with demand. This is not a cheap process and the very savvy executives at FedEx would not be doing that unless they were seeing good growth and they were confident of that growth going forward.
When you combine that with their earnings beat, it is easy to surmise that they may have been sandbagging their numbers. Sure enough, in late July, FedEx came out and raised both their 1Q and yearly revenue numbers as well as reinstating their 401k match. Shares jumped 6% that day and moved back into the $80’s before “double topping” at $87 earlier this month.
So, why did FedEx adjust its numbers again a month later? They got jealous.
A week before FedEx raised its numbers, United Parcel Services (UPS, $65.10, down $0.32) came out with their earnings. UPS also beat the Street but they raised their guidance. FedEx got a lift that day as these companies are virtually identical from an investor perspective. Both companies are very well run, give a good snapshot on the health of the economy, and they generally move in tandem.
At current levels, FedEx shares are right near the levels they were at when they raised guidance and they will report earnings in mid-September. The missing piece of this puzzle will be the August numbers. If they are good, or better-than expected, then FedEx should match or beat expectations.
However, the DJTA and FedEx are showing bearish charts so be careful if you are thinking of going long and strong in a sector that could be weakening.
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4. Earnings
MONDAY - Cninsure (CISG, $23.79, up $0.14), Focus Media Holding (FMCN, $18.11, up $0.28), Kensey Nash (KNSY, $22.86, up $0.37) and Sanderson Farms (SAFM, $43.16, up $0.13).
TUESDAY – Avago Technologies (AVGO, $20.43, down $0.08), Big Lots (BIG, $31.80, up $0.72), Burger King Holdings (BKC, $16.45, down $0.27), Bank of Montreal (BMO, $55.78, down $0.35), DSW (DSW, $25.74, up $0.73), Medtronic (MDT, $34.77, down $0.71), VeriFone Systems (PAY, $22.6, up $0.26) and Trina Solar (TSL, $23.01, up $0.16).
WEDNESDAY – American Eagle Outfitters (AEO, $13.05, down $0.05), BHP Billiton (BHP, $67.44, up $0.09), Brown Shoe (BWS, $12.84, down $0.16), Canadian Imperial Bank of Commerce (CM, $65.12, down $1.20), Cyberonics (CYBX, $22.81, up $0.25), Guess (GES, $39.31, up $0.63), JDS Uniphase (JDSU, $10.42, up $0.05), Jo-Ann Stores (JAS, $38.03, down $0.27), OSI Systems (OSIS, $27.56, down $0.11), Raven Industries (RAVN, $30.97, down $0.55), rue21 (RUE, $22.12, up $0.37) and Shoe Carnival (SCVL, $17.71, up $0.47).
THURSDAY – Aruba Networks (ARUN, $16.67, up $0.10), Bio-Reference Laboratories (BRLI, $19.10, down $0.02), Dollar Financial (DLLR, $15.67, down $0.53), J. Crew Group (JCG, $34.41, up $0.62), OmniVision Technologies (OVTI, $21.23, up $0.24), Patterson Companies (PDCO, $26.93, down $0.13), Regis (RGS, $16.98, down $0.05), Royal Bank of Canada (RY, $49.05, down $0.46) and Signet Jewelers (SIG, $27.95, up $0.14).
FRIDAY – Frontline (FRO, $28.72, down $0.55) and Tiffany (TIF, $43.30, up $0.09).
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5. Week Ahead & Other Tidbits
Economic News:
None on Monday.
The National Association of Realtors will release existing homes sales for July on Tuesday. The figures are likely to show a decline of 4.3% from June. The Commerce Department will follow that report with new homes sales for July on Wednesday. Wall Street is looking for a rise of 2.4%. Durable goods orders for July will also be out on Wednesday.
Thursday (as usual) the market gets another look at the weekly new jobless claims, which was terrible last time out.
As for other economic data, there are a couple of big ones on Friday. The Commerce Department will provide an update on 2Q gross domestic product (GDP), and the University of Michigan will update its consumer sentiment index for August. Wall Street is looking for GDP numbers to show 1.4% growth, down from 2.4%.
Crude oil closed at $73.46 per barrel and fell 2.6% for the week.
Gold ended at $1,228 per ounce after adding 1% for the week.
We expect a pivotal week so make sure you stay updated by reading our daily 9am and 1pm (EST) updates. On that note, we will be back Monday morning with a fresh outlook on the market and all of our current trades.
MomentumOptionsTrading.com Weekly Wrap for 8/29/10
Sunday, August 29th, 2010
11:45pm (EST)
1. Market Summary
2. Mosaic Showing Strength
3. VMWare Could Hit Par ($100)
4. Earnings
5. AutoTrade With Us
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1. Market Summary
The bulls and bears put on quite a show Friday as both sides dug deep into their artillery and dropped a couple of huge bombs on each other. Futures were pointing towards a slightly higher open before the bell but all eyes were focused on what Fed Chairman Ben Bernanke had to say.
The bears used the Intel (INTC, $18.37, up $0.19) news, which lowered revenue guidance for the current quarter, to drive the market to fresh lows for the week, about 30 minutes into the session. However, moments later, the markets reversed course and surged higher after Big Ben Bernanke said the Fed was prepared to do whatever it takes to keep the economic recovery in place.
The Dow hit a low of 9,925 but rebounded and added 165 points, or 1.7%, to finish at 10,150. Hewlett-Packard (HPQ, $38.00, down $0.22) was the Dow’s lonesome loser as the company got locked-up in a bidding with Dell (DELL, $11.89, up $0.14) over 3Par (PAR, $32.46, up $6.43) all week.
Despite Friday’s triple-digit advance, the index finished the week on the south side as it lost 63 points, 0.6%. We mentioned in our 9am update that resistance would come in at 10,100-10,200 and the bulls split the difference. A break above 10,200 could lead to 10,400 and put is right back in a trading range.
The S&P 500 gained 17 points, or 1.7%, to finish at 1,064 but touched a low of 1,039. For the week, the index lost 7 points, or 0.7%. Our near-term targets have been 1,050 and then a possible trip below 1,000 but the bulls will need to break through 1,070 and then 1,100 before we say they have the momentum back.
The Nasdaq advanced 35 points, or 1.7%, and settled at 2,153 which is right above our target or 2,150. The index reached a low of 2,099 and fell 26 points, or 1.2%, for the week. We were looking for a drop to the 2,050 region and resistance should come in at 2,200-2,250 if the bulls run Monday morning.
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2. Mosaic Showing Strength
Mosaic (MOS, $58.27, up $0.48) had a good day as shares were up over 4% on Friday. We mentioned last week in our Potash (POT, $147.73, up $2.91) article that the stock could be on the move but it is volatile and will probably remain that way as rumors and acquisition news circulate.
The company is a major potash and phosphates producer and recently closed the books on 2010 as they are currently in the first quarter for fiscal year 2011. For 2010, Mosaic reported revenue of $6.8 billion, and earned a profit of $827 million, or $1.85 a share. This was a considerable drop from their 2009 numbers of $10.3 billion in revenue and a profit of $2.35 billion, or $5.27 a share.
Wall Street is looking for the company to earn $3.57 for 2011 on revenue of $8.25 billion. These numbers are a little conservative if you ask us because the industry is recovering which was evident when Mosaic topped estimates by 2 cents back in July.
Going off the aforementioned numbers gets us a P/E ratio of 15.4 going forward for Mosaic. When you compare that to the 19.9 times 2011 earnings Potash is currently trading at, you can see why we get excited about this stock. If we apply the same multiple, we get Mosaic being valued at over $70+ a share. However, Mosaic shares have reached an all-time high of $163 and Potash has traded up to $241 in the past.
Take out the acquisition talk and the long term growth of this company still looks good. Remember, if major companies are bidding up a natural resource company, it is only because they expect the price of that commodity to go much higher. We covered a few of the agricultural woes that are afflicting the world in our last Weekly Wrap and the factors increasing the demand and price of potash fertilizer. Here are a few more.
Cotton prices have doubled over the last twelve months, and the crop in Pakistan is almost completely wiped out due to flooding. Arabica coffee beans just hit an all time high on the spot market. We have talked before how the price of sugar has gone up. Beef prices are up 9% in the last three weeks and wholesale pork hit a record because companies are stocking up in the belief that major input costs to meat production, namely grains, are going higher. Bacon prices are sizzling.
A couple of years ago, the price of potash had gotten very high due to the increased crop demands of a growing world population and the addition of 400 million people to the middle class. World food demands were rising back then, and despite this recession, the basic premise on potash as a fertilizer hasn’t changed. No new production has come online in the last two years, and the recent destruction from Mother Nature has caused farmers who have under-fertilized to go into overdrive.
For all of these reasons, we believe shares of Mosaic have more room to run over the next few months and could easily break above $70 on fundamentals alone.
The company will announce earnings again in October and will be worth a second look as far as an option trade at the end of the month.
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3. VMWare Could Hit Par ($100)
VMware (VMW, $79.27, up $1.12) continues to trade near its 52-week high of $83+ and has nearly doubled from the low $40’s since the beginning of the year. So why are shares hot and look headed to $100 over the next 6-12 months?
The company is the dominant player in the virtual computing space. Its virtualization suite of solutions is used by over 900 companies to cut costs and improve efficiency. That is music to the ears of corporate executives with $2 trillion in cash on the balance sheets and an economy that can’t decide which way it wants to go. Executives are willing to shell out money to improve productivity without having to add to payroll and the company has benefitted from that trend.
VMware has projected revenue of $2.8 billion for 2010, a 40% increase over the $2 billion they had in 2009. Some analysts are on record saying the firm will do $3.6 billion in revenue for 2011. This kind of growth during a recession would be pretty amazing but the stock is pricey at current levels. With projected 2010 earnings of $1.39, the P/E ratio is a little high at 56 times earnings, and a forward P/E of 46 in 2011.
VMware has also been a rumored takeover target thanks to the ridiculous bidding war that has gone on over 3 Par, a company with somewhat similar products. However, there would be some obstacles to overcome if another company decided to make a bid for VMware.
VMware was spun out of EMC (EMC, $18.37, up $0.32) in August 2007 at a price of $29, and it ended its first day of trading at $51. EMC is a pretty well run company and they still own 85% of VMware.
Despite the fact that we think shares are fairly valued, the future for this company is bright and there is a chance analyst’s raise their estimates down the road. The stock can easily move 5% on any given day and we are watching for a possible option trade in the near future depending on the trend.
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4. Earnings
MONDAY – Dollar General (DG, $28.09, down $0.41), Donaldson (DCI, $43.36, up $1.10), Jos. A. Bank Clothiers (JOSB, $38.11, up $0.27) and Partner Communications Company (PTNR, $16.25, up $0.09).
TUESDAY – ABM Industries (ABM, $20.24, up $0.64), Applied Signal Technology (APSG, $19.85, up $0.66) and DSW (DSW, $24.32, up $0.55)
WEDNESDAY – Brown-Forman (BF-B, $62.10, up $0.89), Express (EXPR, $13.97, up $0.14), Greif (GEF, $58.22, up $1.47), HJ Heinz (HNZ, $46.85, up $0.65), Joy Global, Inc. (JOYG, $56.83, up $2.94), Martek Biosciences (MATK, $21.50, up $0.30), Oxford Industries (OXM, $20.47, up $0.75) and SAIC (SAI, $15.31, up $0.15).
THURSDAY – ArcSight (ARST, $39.66, up $3.03), Blyth (BTH, $40.81, up $2.51), Cascade (CASC, $32.12, up $1.86), Calavo Growers (CVGW, $20.18, up $0.98), Del Monte Foods (DLM, $13.12, up $0.21), Esterline Technologies (ESL, $47.43, up $1.41), Finisar (FNSR, $12.73, up $0.15), Layne Christensen (LAYN, $25.32, up $0.57), Toronto-Dominion Bank (TD, $68.03, up $2.84) and UTi Worldwide (UTIW, $14.38, up $0.25).
FRIDAY – Campbell Soup (CPB, $37.47, up $0.52)
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5. AutoTrade With Us
Here is an update on our AutoTrading program which has been a hit with subscribers who may be too busy to follow the market every day. For those of you who have thought about using our services but may have been worried about opening and closing the trades we do, this program is a perfect fit. We have chosen TWSF which has done a great job of getting our fill prices as soon as we send out our alerts or trade updates and here is their deal:
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Our full range of benefits include:
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We will be back in the morning with a fresh look at what the week will bring and an update all of our current trades and what to expect going forward.
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