My Quick Trade On An Undervalued Stock Is Already Up 30%
While reviewing some major indexes recently, I saw an important signal in the Baltic Dry Index.
The Baltic Dry Index (BDI) is an index of shipping costs that shows the cost of moving materials in large ships. These are the ships used to move coal and steel, and changes in the index can offer insights into the state of the global economy.
A recent jump in the value of my Profit Amplifier Momentum (PAM) indicator caught my attention.
The recent increase is a surprise because many economists are warning of an economic slowdown. For example, just recently, the International Monetary Fund reduced its estimate for growth in global GDP to 3.3% from estimates of 3.5% in January and 3.7% in October.
To explain the cut, the IMF noted increased "trade tensions and tariff hikes between the United States and China, a decline in business confidence, a tightening of financial conditions, and higher policy uncertainty across many economies."
Still, after this estimate was released, we have since seen reports of decreased tension with China and a delay in Brexit that could reduce global uncertainty.
How I Got In The Aircraft Business
The rapid changes in economic news contributed to the "buy" signal I saw in Air Lease Corporation (NYSE: AL).
AL is an airplane leasing company. That's an economically sensitive industry, and the downtrend in the stock reflects the lower outlook for economic growth. But the stock offers significant value and trades at just 82% of its tangible book value. The company's assets include passenger airplanes that should increase in value as Boeing faces increasing delays with delivering new planes.
In addition, AL is well managed and consistently increases cash flow from operations, which allows it to increase the number of aircraft under lease without taking on excessive amounts of debt. The company's debt-to-sales ratio has consistently been near 75% as revenue climbed more than 150%.
The chart shows the PAM "buy" signal and the recent break above resistance. The price is still close to resistance but a few cents above the important level.
The blue line in the chart shows the 200-day moving average, an area where additional resistance is likely. I'm looking for a quick gain as prices rally towards that level.
How We're Trading AL
Now, most investors who see the value in AL may simply think about buying the stock outright. But that's not what we did over at Profit Amplifier...
When I originally recommended this trade to my readers, AL was trading around $36.85. Rather than buying the stock outright, I recommended buying call options with a $35 strike price that expire on May 17th. For this trade, we would need to pay a premium -- and in this case, I recommended limiting our premium to between $2.40 and $2.80.
Now here's where the appeal of our strategy comes in... Since each contract controls 100 shares of the underlying security, this trade will only cost about $280. But with just a slight rally in the shares (the company reports earnings in early May), we can make as much as 50% by expiration on May 17. (In fact, we're currently already up about 30% on this trade as I write this.)
That's the power that options can have on your portfolio -- but only if they're done the right way.
You can make trades like this, too. In fact, I just released a new report about another strategy that's very similar... In short, it explains a third way to extract income from the stocks you own by pressing the "repeat" button on profits throughout the year. If you're only banking dividends and capital gains, you're missing out... Discover how easy it is to extract income from stocks you already own right now...
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.