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 relatively 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 and has held that level very nicely.
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
The volatility skew is very attractive with Feb IV sharply elevated at 64 and March at 42. I am neutral going into earnings and want to play it safe with the following double diagonal calendar spread:
- Buy to open March $50 calls
- Buy to open March $45 puts- Sell to open Feb $50 calls
- Sell to open Feb $45 puts
I just filled the order for net debit of $1.45. If you look at the P&L chart, it creates a very wide range from $42.3 to $53.5. As long as the stock remains between those points, the trade remains profitable. The stock will have to make greater than 11% move in either direction before the trade turns into a loss. I like the odds here.
Good luck!
I just filled the order for net debit of $1.45. If you look at the P&L chart, it creates a very wide range from $42.3 to $53.5. As long as the stock remains between those points, the trade remains profitable. The stock will have to make greater than 11% move in either direction before the trade turns into a loss. I like the odds here.
Good luck!
