Trade Summary: March 24, 2014
March 24, 2014
Trade Rationale
Up until recently, some of the biggest winners this year in US equities came from the Internet group. Investors have held a fascination with Internet stock since the dot com bubble at the turn of the century. There’s just so much allure with the immense growth prospects of anything web-related.
However, over the last couple of weeks, the big momentum stocks from last year are giving way to newer and safer companies. Investors seem to be getting worried that equities have run their course for the near future. After all, we’ve set record highs in all the major indices. And, several Internet stocks have been the ones to lead the way higher.
Nevertheless, global macro concerns are causing some to second guess this record setting bull market. It’s not that investors believe a major correction is about to occur. On the contrary, volatility (as measured by the VIX) remains at moderate to low levels. Instead, stock owners are rotating into safer sectors. Basically, people still want their exposure to stocks – just less risky stocks.
As such, we’re going to purchase calls on two companies that should thrive regardless of global political or economic concerns. And, we’re going to take a bearish position on a former momentum company that will lose investors as the rotation into safer stocks continues.
First off, we’re going to buy calls on the ultimate consumer goods stock Procter & Gamble (PG). From deodorant and razors to laundry detergent and batteries, consumers always spend on the type of good that PG sells. It’s one of the best, safest stocks on the planet – and makes a perfect addition to our portfolio on the long-side.
Next, we’re purchasing calls on one of the strongest brand names in the US, Starbucks (SBUX). Have you ever been to a Starbuck’s when there isn’t a line? That’s because people need their coffee (and other drinks) regardless of economic conditions. And it’s not just regular coffee – it’s often the $5.00 Frappuccinos that consumers are addicted to… day in and day out. Moreover, the company is offering a greater selection of food items and is even starting to sell alcohol at some locations. In other words, there’s plenty of growth potential ahead.
Finally, we’re taking the opposite view on Salesforce.com (CRM). It’s not that CRM isn’t a good company, it is. However, CRM has traded at a very high multiple for a very long time, and investors and insiders alike are starting to cash in. I expect this stock to travel down to its 200-day moving average around $50 and perhaps even farther down.
As always, keep reading for a breakdown of the trade specifics including conservative and aggressive exit points for each position.
Trade Details
#1) Buy Procter & Gamble (PG) June $80 Calls up to $2.00
Remember, we’re looking for PG to move higher. Our first profit point for conservative traders is at $82. For aggressive traders, you can hold up to $85. Regarding risk control, the conservative exit level is $75. $72.50 is the final exit level for aggressive traders.
#2) Buy Starbucks (SBUX) May 17th $77.50 Calls up to $2.35
Like PG, we want SBUX to trade higher. Our first exit point for conservative traders is at $79.50. For aggressive traders, you can hold up to $82. For risk control, the conservative exit level is $70. And, $66 is the final downside exit level for aggressive traders.
#3) Buy Salesforce.com (CRM) May 17th $55 Puts up to $2.75
In the case of CRM, we want it to trade lower. Our first profit-taking exit point for conservative traders is at $52.50. For aggressive traders, you can hold to $50. For risk control, the conservative exit level is $61.50. $64.50 is the final exit point for aggressive traders.
Category: AOA Trade Summary
