The way I see it, there are essentially two trades facing
investors right now: whether to chase winners or look for
opportunities among unloved growth names.
On the one hand, we have low-risk stocks like utilities, drug
makers, and consumer-product companies--the ones you hear
constantly touted for being "high-quality" and paying "big
dividends." On the other, we have many companies that are trading
near 52-week lows that seem to be bottoming out, especially
industrials and certain technology names.
American investors have grown so paranoid about things that go
bump in the night--European debt blowups and Chinese economic
data, for example--that we have been forced into stocks with
extreme safety. They have sought investments that resemble bonds
as much as possible because they have little risk and pay income.
These safety names essentially amount to little more than
"high-beta" Treasuries, and I believe that they need to be
understood as such. If Treasury yields start to rise and risk
appetite returns, companies like Consolidated Edison, Altria, and
Kraft will slow down or reverse. The focus will then shift to
beaten-down growth names that stand to benefit from a stronger
At the same time, certain industrial and material stocks have
been sitting and waiting for the last couple of months. Most of
them, including Ingersoll Rand, U.S. Steel, and Terex, have been
nudging their way higher since October but remain trapped against
their 100-day moving averages. If sentiment improves and risk
appetite return, these could really run.
One potential strategy is a
on X: You could buy one January 31 call, sell two January 33
calls, and buy one January 35 call, for a total cost of $0.09.
This strategy will start making money in a hurry if X pushes
above $31, with a maximum profit of more than 2,000 percent if
the stock closes at $33 on expiration. (See our
The trade has a big potential reward but low probability of
success because X is currently around $26, so would have to rally
more than 25 percent for the maximum profit to be realized. The
reason that I suggest it is that, when a stock like X starts to
move, a 25 percent gain in a single month is completely possible.
The steel giant is always a good name for a complex strategy like
a butterfly because it trades a ton of options and therefore has
tight bid/ask spreads. Always remember that the more pieces a
trade has, the more it will cost you in both commissions and
Ford looks similar to X and has been pushing higher since October
while trying to break its 100-day moving average. It also has
tight option spreads.
A few others worth checking out include:
- Huntsman (HUN): This stock has been holding support around
$9.40 and beat expectations the last time it reported on Nov.
- NXP Semiconductor (NXPI): It has seen bullish call buying
in recent sessions, with a potential catalyst from Google
- Rite-Aid (RAD): The company's turnaround seems to be
gathering steam and management raised guidance on Dec. 15.
- Clearwire (CLWR): It recently signed a new contract to
provide networking services to Sprint Nextel and raised
capital. That takes bankruptcy off the table. Shares are stuck
at their 100-day moving average, but a 50 percent move to $3
looks imminently doable.
- Las Vegas Sands (LVS): This name has spent all of 2011
consolidating after a big move in late 2010. Look for it to
make a higher low above $40, then go to its 52-week highs
around $50 and consolidate, followed by a breakout and new
- Goldman Sachs (GS): I have hated the financials for a long
time, but this one looks like it's done going down. It's
probably not ready to rally yet, so I would wait for its
100-day moving average to come down to the stock and then look
- Whirlpool (WHR): This stock trades for less than book value
and will benefit from better housing and employment. But it's
probably not ready to move yet. Like GS, you want to wait for
the 100-day to come down and then look for the stock to break
Overall, the boring safety names may continue to lead early in
2012, so it could make sense to wait for pullbacks in those in
the near term. But at some point sentiment will return to growth.
Be ready for that shift to occur, because when it does the picks
identified here could strongly outperform.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Dec. 28.)
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