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Weekly Newsletter, Sunday, 02/27/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Jekyll and Hyde Markets

After starting the week off with a post expiration -174 point drop the Dow has rallied off those lows to close at a new high for the year at 10841. The S&P also closed at a new high at 1211. The Nasdaq however is still dragging with a respectable +40 point bounce off the lows but well below its highs for the year by about -130 points. The big cap techs, MSFT, CSCO, DELL along with the Internets AMZN, GOOG, YHOO and EBAY are barely off their lows and in the case of MSFT and CSCO they are threatening to break strong support. We are definitely seeing a tale of two markets where energy stocks, commodities and homebuilders are pushing the upper limits and the tech sector can't find any traction.

The entry on Toll Brothers last weekend worked out well. The Tuesday dip to $81 let any procrastinators get in a little cheaper if they saw the gap down in the markets and waited. The good news from homebuilders all week pushed it back to $90 and our other builder play Ryland tagged along and posted a new closing high at $71.40 on Friday. With the record low inventory level of homes as we head into the buying season these stocks should continue higher.

Unfortunately the energy stocks just keep rocketing higher as though they were burning their own fuel. The XLE closed just over $44 on Friday and another new high. This is great for our XLE play but terrible for trying to get long some other energy stocks. I keep hoping the March demand slump will give us an entry but it would come at the cost of the XLE profits. I am going to start moving the stop tighter to prevent much giveback on a retreat.

EBAY is holding in a very tight range and was hampered by the downgrades on the other net stocks this week. GOOG, YHOO and AMZN pushed to new lows and their weakness kept Ebay from gaining any ground. It did however hold its own and I am going to add it in as a new play today despite it not reaching either of our targets. The flat line performance for the last week has compressed option premiums and the close at $42.25 on Friday is just about perfect for an insurance put at $40.

RIMM finally imploded once it broke support at $74 and ended up dropping -9 for the week. We were stopped out at the open on Monday and did not have to endure the -9 point drop but it was still painful. New competition was given as the reason for the decline.

On the bright side PCAR finally got it kicked into high gear and soared off to close at a two-month resistance high at $75. It was looking grim last weekend but the view from $75 is a lot better

I am still hesitant to add any new plays given the weakness in the Nasdaq. The stocks that I would like to buy are too high and need to pull back and the tech sector is still telegraphing weakness ahead. I will continue to be selective until the time is right and then back up the truck.


Changes in Portfolio

New Plays
EBAY 
$42.24
Ebay Inc.

Dropped Plays
RIMMStopped at $72.00 
ELNNon performing drop at $26.85 

New Watch List Plays Triggered
None  

Portfolio Listing & Top Picks

[Portfolio chart]

New Plays

Most Recent Plays

EBAY - $42.47 ** No stop **

EBAY traded sideways all week with only a little dip on the Tuesday downdraft. There was a slight uptick as the week closed suggesting it was trying to shake off the weight of the downgrade on the other net stocks. There is resistance just under $44 but a break over that level could start a strong uptrend again.

Ebay is the only net stock that will consistently continue to improve earnings long term. Their model is self perpetuating and will continue to grow and expand as they move into other countries. Ebay dropped in January when they said they were going to spend more money on expanding their business. As an investor that is what I would want them to say but the massive profit accumulated in the stock over the last year was too much for traders to risk. There was a substantial drop from which Ebay is just now beginning to recover.

Ebay split 2:1 on the 17th of February and there was very little post split depression. I believe the retail traders picked up the slack and were happy to buy Ebay at $42 rather than the $100+ from early January.

Buy 2006 $45 LEAP Call YRL-AI currently $5.00
Buy 2007 $45 LEAP Call OYI-AI currently $8.50

Insurance put:
Buy APRIL $40 Put XBA-PH currently $1.25

Entry $42.24 (02/28)


 

Play Updates

Existing Plays

TOL $89.72 Toll Brothers ** No Stop **

Toll Brothers blew away earnings and raised estimates and the entire sector benefited. The entry from last week worked out well and we are already profitable with the spring buying season just ahead. I am sure we will see some profit taking from this spike but we are in a good position already to weather any storm.

Toll Brothers is unique in that it does not just build homes. This gives them a broader revenue base than many other builders and should insulate them from any softness ahead.

Toll Brothers overview: Source - company press release.

Toll Brothers, Inc. is the nation's leading builder of luxury homes. The Company began business in 1967 and became a public company in 1986. The Company serves move-up, empty-nester, active-adult and second-home home buyers and operates in 21 states.

Toll Brothers builds luxury single-family detached and attached home communities, master planned luxury residential resort-style golf communities and urban low-, mid- and high-rise communities, principally on land it develops and improves. The Company operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, landscape, cable T.V. and broadband Internet delivery subsidiaries. The Company also operates its own lumber distribution, and house component assembly and manufacturing operations.

2006 $85.00 LEAP Call YKW-AQ @ $11.60

Insurance put
March $80.00 Put TOL-OP @ $2.25

If we have a negative earnings surprise we should be protected and we can make a hold or exit decision next week.

Entry $84.10 (02/20)


 

RYL - $71.55 Ryland Group ** No stop **

Ryland broke out to a new high at $71 on Friday on the strength of the TOL/PHM news. Hopefully this will start a new move higher and the consolidation of the last two weeks is behind us.

Ryland is one of the countries largest homebuilders and was recently added to the S&P-500. Ryland currently builds in 27 markets across the country and also acts as a mortgage lender. Net income has increased +400% over the last four years and estimates are continuing to increase but RYL trades at a PE of only 10. Ryland sold 16,880 homes in 2004, which was an increase of 1,683 over the prior year.

They recently announced 13 new planned communities around Las Vegas, currently the fastest growing market in the U.S.

Ryland will be presenting at the Wachovia Securities Consumer Growth Conference on Feb-17th in Florida.

2006 $70 LEAP Call YRX-AN @ $7.90

Insurance put
Mar-$60.00 Put RYL-OL @ $0.80

Entry $65.00 (02/11)


 

PCAR - Paccar Inc $74.98 ** Stop loss $71.00 **

PCAR has risen to strong resistance at $75 and a breakout here could easily see a run to even strong resistance at $80. Two months of consolidation appear to be over and a positive Nasdaq next week could do wonders to bring back the faithful.

PCAR dropped below $70 on Tuesday but gapped up at Wednesday's open to $71 and moved higher from there. The instructions were to enter the March $70 put as insurance if PCAR moved below $71 on Wednesday or later. No puts for that strike traded on Wednesday so it appears nobody took out the insurance with PCAR moving higher. The puts were trading in the 60-95 cent range.

Paccar is the number two maker of heavy-duty trucks with two of their major brands being Peterbilt and Kenworth. Paccar produced a company record of 124,000 trucks in 2004 as healthy freight volume pushed demand. Earnings were announced on Feb-1st and revenue increased +44% and earnings +52%. The company said sales continue to be strong with an expected 15% jump in total truck sales in the U.S. in 2005 and a +5% jump in Europe. Market share in North America increased to +24% on heavy-duty trucks and 9.4% on medium duty vehicles.

Paccar had risen from $52 last January to $81 at the close of 2004. Like all the other winners they were hit hard by profit taking and knocked back to $68.50 on Jan-28th. After two weeks of sideways consolidation they have started to move higher once again. This is a stable company with very strong earnings and growth and should be a target of fund managers once the techs move into overbought territory. $70 appears to be holding as support and hopefully a launching point.

2006 $70.00 LEAP Call YYQ-AN @ $8.80
2006 $75.00 LEAP Call YYQ-AO @ $6.30

Stop loss $68.50 This will be below the January dip.

Entry point $71.80 (02/07)


 

ADSK - Autodesk Inc $29.97 ** Stop loss $27.50 **

Autodesk finally found a bid but failed to clear its congestion range for the last month. Until we move over $33 we are still at risk. The profit taking should be about over but the lagging Nasdaq is not instilling confidence in traders.

Autodesk is the worlds biggest software design maker and the stock has made quite a few investors a lot of money. In 2004 the stock rose from $12 to $39 for a +209% gain. Needless to say the company was hammered once the calendar expired and it dropped to a low of $26 on profit taking. On January 24th, the low for the current market and after a 33% January drop the company was downgraded on valuation my Banc of America. BAC was late to the party but ADSK saw another -12% drop on the news. Smith Barney retaliated that the concerns over share price had already been factored in with the January selling and suggested there was upside potential.

In November ADSK raised guidance for 2006 above analysts estimates and nothing has change from the company. A string of positive press releases continue to paint a picture of business is booming. Earnings are Feb-22nd so we do have event risk but I would like to think the risk is to the upside. The 100-day average has proved to be support in January as is did last August.

Autodesk does not have leaps. Since the normal time in a leap trade is only about two-three months I decided to enter the play with the July $32.50 call instead at $3.20. It is cheaper than a leap and plenty of time to play. The July $30 call is only $4.40 and it is already $1.33 in the money.

I am not going to recommend an insurance put because of the cheap calls. The closest strike at $30 makes the March put $1.60. I can't see paying $1.60 to insure a $3.20 position.

July $30.00 Call ADQ-GF @ $4.40
July $32.50 Call ADQ-GZ @ $3.20

No insurance put

Stop loss $27.50

Entry point $31.33 (02/07)


 

DGX - Quest Diagnostic $99.43 ** Stop loss $96.00 **

Quest dipped back to $97 on Tuesday's big drop but was back to resistance at $100 before the week was out. I heard several analysts giving buy recommendations on DGX last week and a break over $100 and long term uptrend resistance should motivate buyers.

Quest announced a +21% increase in earnings in January and soared from $89.50 to just over $96 in a week. Instead of consolidating those gains it just keeps moving higher. We entered DGX on Jan-21st as it was moving lower and touched support at the 100-day average at $90. Three days later the rocket ride began from $89. The trick now is to stay far enough away from the price to keep from getting stopped but not give back all of our gains.

Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff.

Quest Diagnostics is also the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. (Source DGX)

2006 $95 LEAP Call YFK-AS @ $6.40

Insurance put
Feb-$85 Put DGX-NQ @ 50 cents expired worthless.

Entry $91.00 (01/21)


 

ELN - Elan Pharma $26.65 ** Dropped **

I am dropping Elan as a non performer after it failed to hold its gains from last week. It is trading in a range and showing no potential for a move higher.

Elan is a neuroscience-based biotechnology company that is focused on discovering, developing, manufacturing, selling and marketing advanced therapies in neurodegenerative diseases, autoimmune diseases and severe pain.

In neurology, Elan is focused on building upon its breakthrough research and extensive experience in the area of neuropathology-based disorders. In addition to Alzheimer's disease, Elan is also studying other neurodegenerative diseases, such as Parkinson's disease.

On December 28, 2004, the U.S. Food and Drug Administration approved Prialt for the management of severe chronic pain.

On November 23, 2004, the U.S. Food and Drug Administration approved TYSABRI, formerly referred to as Antegren, as treatment for relapsing forms of multiple sclerosis (MS) to reduce the frequency of clinical relapses.

2006 $30 LEAP Call WTB-AF @ $5.30, exit $3.40, -$1.90

Insurance Put - added Jan-23rd
Feb $25 Put ELN-NE @ 90 cents - expired worthless.

Stop Loss ELN $25.50

Entry $28.50 (01/11)


 

IBM - IBM $92.70 ** No Stop **

IBM continues to follow the Nasdaq lead although the end of week rebound was weak. We are well protected and we just need to ride out the tech storm. The current range of 91.50-95.00 is getting a lot of traffic. A Dow breakout next week could attract some buyers but we are in that time of the year when reasons to buy are slim.

If the market did decide to reverse IBM could find buyers as a safe big cap with increasing earnings. I think we are safe from any material loss and have plenty of upside potential if the market turns around.

IBM is moving strongly into even more areas of system and software services and maintains a huge backlog of orders.

IBM is the world's largest information technology company, with 80 years of leadership in helping businesses innovate. IBM Software offers a wide range of middleware and operating systems for all types of computing platforms, allowing customers to take full advantage of the on demand era

2006 $100 LEAP Calls WIB-AT @ $5.00

Insurance put
April $90 Put IBM-PR @ $1.40

Entry $94.00 (01/13)


 

ADBE - Adobe Systems $61.47 ** Stop $60.00 **

Adobe continued to be weaker than I had expected but kept from dropping to our stop at $60 despite the Tuesday haircut. It appears to be holding at support but I am keeping the stop in place just in case. If we are stopped on the LEAP maintain the March $60 put and we will try to recover some profit with our insurance.

Adobe is the king of the document and image business and continues to announce new products. The company announced earnings in December that rose +33% and beat estimates. Income for the year rose +69% on a +29% increase in revenue. Adobe affirmed guidance for 2005 and the stock has been beating the Nasdaq in percentage gains. In 2004 the stock rose +60%. Since they have already announced earnings we have very little event risk over the next month.

I recommended the February $55 put as insurance at 80 cents. That gave us six weeks for the Q1 earnings to cycle and for ADBE to pick a direction. If we are not profitable by Feb-18th expiration we will close and take our lumps.

Jan-06 $60 LEAP Call WAE-AL @ $7.50

Put Insurance
Feb-05 $55 Put AEQ-NK @ 80 cents - expired worthless

Add new insurance on Feb-22nd
Mar-05 $60 Put AEQ-OL @ 75 cents.

Stop loss $60.00

Entry $58.78 (01/09)


 

RIMM - Research in Motion $65.31 ** Stopped $72.00 **

RIMM imploded on news of potential increased competition from Microsoft and Nokia. We were stopped at the open on Tuesday one day after our Feb-$70 put expired worthless. I discussed this possibility last week that support at $74 was likely to break and had I closed the play on paper last Sunday the results would have been the same due to the gap down open.

Jan-06 $80 LEAP Call WLJ-AP @ $12.40, exit $9.60, -2.80

Insurance put
Feb-$70 Put RUP-NN @ $3.50 expired worthless.

Entry $74.30 (01/09)


 

SYMC $21.65 Symantec - Veritas ** no stop **

SYMC is holding its ground but showing no signs of a rebound. I am still not worried despite the confirmed downtrend because of our in the money April $22.50 put. Put this one on the back burner and forget it.

We have a good position here with strong support at $20 and an April $22.50 insurance put. Very little risk and plenty of potential.

I believe that the SYMC/VRTS merger is a match made in heaven and analysts will come to that view as more plans are announced. The companies have no overlapping products but all their products are perfect fits for the others. With one company having anti-virus, data security, backup, recovery and storage management it puts the other stand-alone companies in a very difficult position. EMC and QLGC both fell in the storage sector and Mcafee was crushed in the anti-virus sector.

There is no stop on this position. With the 2007 LEAP Call any minor dips will not result in a material drop in the leap. The April $22.50 insurance put will protect us from any potential disaster. For me this is a buy and forget play.

2007 $25 LEAP Call OBL-AE @ $6.30

Insurance Put
APR-2005 $22.50 PUT SYQ-PX @ $1.15

Entry $25.37 (12/19)


 

XLE - S&P Energy SPDR $44.14 ** Stop loss $42.00 **

Unbelievable! The XLE continue to make new highs almost daily and we are $10 away from our insurance put at $34. I would consider that a lost cause but well worth it. If profit taking ever appears it could be VERY sharp. With oil rising I am going to keep tightening the stop in order to take us out on the next dip.

I instituted a stop because the March insurance put at $34 is so far away from the current price. We are up +$6 on the 2006 LEAP and I don't want to give it back. The $34 put is now worthless and I have no hopes of it ever being close to the money again. I consider it insurance well spent.

The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that helped push the SPX to the current levels with the rise in oil over the last year. In fact the XLE has far exceeded the SPX in performance over the past year.

2006 $35 LEAP Call WHA-AI @ $3.60
2007 $40 LEAP Call ORJ-AN @ $2.65

Drop insurance: March $34 Put XLE-OH @ $1.00

Entry $35.55 on 12/12


 


Leaps Trader Watch List

Dropped Entries
AAPL

New Watch List Entries 
COP
Conoco Phillips
OXY
Occidental Petroleum 
SUN Sunoco 
WMBWilliams Companies 
CVXChevron Texaco 
FDXFederal Express  
SMHSemiconductor Holders 
NPRJJuniper 
XMSRXM Satellite 

The oil stocks are listed for reference because the actual prices are so far away from where I would like to get an entry. I am hoping for a sharp correction when it comes and the spring demand slumps.

COP - $112 Conoco Phillips

Conoco is my first choice for an oil stock once the current trend eases. I would like to get an entry around the 100-day average now at $90 but rising. This has been a good support level in the past.

OXY - $71.35 Occidental Petroleum

OXY would be my next choice with the same 100-day average as an entry point. That is currently $59.

SUN - $98.49 Sunoco

Sunoco has a very nice chart with a slow and steady upward climb. I would hope to get an entry around $85 but it could be several weeks away.

WMB - $19.28 Williams Companies

Williams would be my cheap leap candidate due to its low price. Target a drop back to $16 and the 100-day average.

---

FDX - $98.49 Federal Express

Target $96.00 for an entry on the next pullback.

2006 $100 LEAP Call WFX-AT currently $7.80, target $6.50

SMH - $34.45 Semiconductor Holders

Target $35.50 as a breakout entry

2006 $35.00 LEAP Call YRH-AG currently $3.70
2006 $40.00 LEAP Call YRH-AH currently $1.70

JNPR - $21.63 Juniper

Watch Juniper for an entry at $20 but no strikes yet. We want to see a base built or at least some evidence it is not going lower.

XMSR - $28.72 XM Satellite

Strong support at $25. We will look for a bottom to form before deciding to enter.


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