Trade Summary: July 28, 2014
July 28, 2014
Trade Rationale
Ever since the Fed singled out certain sectors of the market as being overvalued, the financial media has been talking about bubbles nearly non-stop. Perhaps social media, biotechs, and small cap stocks were in danger of becoming bubbles (the sectors pointed out by the Fed). However, that doesn’t mean the rest of the market is overvalued or is near any sort of correction.
Nevertheless, the word is out, and investors are predictably looking for safer places to park their money. That being said, it’s times like these when value investors really hone in on overlooked, underpriced equities.
When investors start dumping money into safety stocks, bonds, and gold, some really good companies often get left out in the cold. However, now’s the perfect time to find some of these names trading at rock-bottom prices… and bet on the long-side. What’s more, this is not a good time to jump into stocks with extremely high valuations.
We’re going to buy calls in two super cheap companies and grab puts in an overheated stock.
First off, we’re going to buy calls on Outerwall (OUTR). OUTR is mostly known for its ubiquitous Redbox kiosks. The stock is down big this year as consumer shift to streaming video rather than using DVD/Blu-Ray. However, there’s still a big market for physical movie rentals, and Redbox is a much cheaper alternative than streaming, and often has a bigger selection. At just 7x earnings, OUTR is trading at dirt-cheap prices.
Next, we’ll grab calls on Deere & Company (DE). DE, a well-known farm equipment company, is down on lowered guidance and grains prices. However, agricultural commodities seem to have bottomed out in terms of pricing. The sector is due for a rebound. Moreover, DE is trading at just 9x earnings and 0.9x sales. No matter how you slice it, that’s cheap.
Finally, we’ll take the opposite approach and buy puts on Shutterstock (SSTK). SSTK is one of those internet companies trading at an extremely lofty valuation. The company provides an online marketplace for commercial digital imagery. But, for a company selling pictures online, it trades at over 100x earnings and nearly 11x sales. That sort of valuation can’t be sustained, especially in this environment.
Keep reading for the details of each trade.
Trade Details
#1) Buy Outerwall (OUTR) September 20th 55 Calls up to $2.75
In this case, we’re looking for a higher move in OUTR. Our first profit point for conservative traders is at $60. For aggressive traders, you can hold up to $65. For risk control, the conservative exit level is $50. $47.50 is the final exit level for aggressive traders.
#2) Buy Deere & Company (DE) September 20th 87.50 Calls up to $1.75
Like OUTR, we want DE to go higher. Our first exit point for conservative traders is at $90. For aggressive traders, you can hold to $92.50. For risk control, the conservative exit level is $80. And, $75 is the final exit level for aggressive traders.
#3) Buy Shutterstock (SSTK) September 20th 65 Puts up to $2.75
For SSTK, we’re looking for a lower move. Our first profit-taking exit point for conservative traders is at $65. For aggressive traders, you can hold down to $60. For risk control, the conservative exit level is $82.50. $90 is the final exit point for aggressive traders.
Category: AOA Trade Summary
