Buy Alert: October 11, 2012

Marcus Haber | October 11, 2012

Buy Alert: October 11, 2012

Trade Details

Buy SkyWest (SKYW) November 2012 $10 Calls for $0.95 or better

Why?

It’s earnings season again so be prepared for a lot of overreactions by investors. That’s a good thing for us -overreactions often provide excellent opportunities for trades.

That being said, this SkyWest trade is due to yesterday’s overreaction in the stock- although, this particular trade has nothing to do with earnings. In fact, the stock plunged 6% yesterday because of slightly worse than expected September passenger numbers and a downgrade from Merrill Lynch.

SkyWest’s passenger boardings actually increased 5.3% in September to 4.8 million. Plus, revenue per passenger climbed 1%. Apparently, investors had higher expectations. So let me get this straight – a regional airline is seeing revenue and passenger growth in a sluggish economy, and investors want more?

Looks like a clear overreaction to me.

And Merrill’s downgrade? They don’t like the valuation of the company. Did I mention SKYW shares are trading at just 8.2x projected earnings? What, does Merrill want the company to just give away shares?

SKYW is oversold in the short-term. Let’s grab some cheap at-the-money (ATM) calls before investors come to their senses. (Keep in mind, we usually buy out-of-the money (OTM) calls but the next strike higher is 12.5 – that’s too far away for a stock this price.)