Until two years ago, this used to be a great momentum stock due to its consistent performance in top and bottom line. But as valuation got overextended, the stock has been digesting gains for past two years. The stock currently trades at slightly less than 22 times 2010 earnings, which are expected to grow 22% YOY. This compares to 23 times earnings for its peer group, which is expected to grow 14% YOY. So, on a valuation basis, the stock is certainly cheap. From a technical standpoint, $45 used to be stiff resistance going as far back as early 2008. After long consolidation from July to Dec 09, the stock finally broke out above $45. The only caveat is it did so on decent but not impressive volume. I can't call this a bullish breakout or a bear trap, but the longer it spends time above $45, the stronger the chances that this is about to fly.
Recent actions and opinions:
- Jan 22, 2010 Stephens initiated the stock with an Overweight and $60 price target
- Jan 14, 2010 MKM Partners upgraded the stock to Buy
- Jan 11, 2010 the company reiterated expectations for 20% EPS growth in 2010
- Jan 11, 2010 Morgan Keegan upgraded the stock to Outperform
Earnings come out on Feb 8 and I think we could see sparks to the upside just like we saw with Panera Bread recently. The volatility skew is already starting to build up, but it could be even better as we get closer to earnings date. Nevertheless, I like June/Feb calendar spread:- Buy to open June $50 strike calls
- Sell to open Feb $50 strike calls
The trade is going for a net debit of $2.10. I want to buy the long options in June as it buys me a little more time if it is a failed breakout. It also allows me to see one more earnings reports in April if I decide to hold longer. Feb IV is currently at 44, while June is at 37.
Good luck!
