New Watch List Entries

EQR - Equity Residential

TRV - The Travelers Companies, Inc.


Active Watch List Candidates

DAL - Delta Air Lines

GE - General Electric

UPS - United Parcel Service


Dropped Watch List Entries

NOC and RHT both graduated to our active play list.



New Watch List Candidates:

Equity Residential - EQR - close: 81.59

Company Info

The S&P 500 just delivered its worst yearly performance since 2008 with a -0.7% decline for 2015. EQR outperformed the broader market with a +13.5% gain last year. More importantly shares look poised to breakout and hit new highs in 2016.

EQR is part of the financial sector. According to the company, "Equity Residential is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top U.S. growth markets. Equity Residential owns or has investments in 393 properties consisting of 109,540 apartment units."

Traditional wisdom says that you don't want to own big dividend paying REITs in a rising rate environment. REIT.com published an article challenging this very idea. In the article, titled "Misconceptions about REITs and Interest Rates", the author says, "Asset prices [REITs] often decline as the immediate response to a rise in interest rates because higher interest rates reduce the present value of future cash flows, including bond coupons and stock dividends. If future cash flows are not expected to rise, then increasing interest rates would have a clear negative impact on asset values, including the share prices of stock exchange-listed Equity REITs." They go on to discuss how rising interest rates due to stronger economic growth is good. A growing economy usually means more business spending, hiring new employees, more consumer spending. This leads to better occupancy rates for REITs and rental growth and overall better business fundamentals. You can read more about it here .

Barron's also published an article suggesting REITs are not an automatic sell if rates are rising. You can read it here .

The Federal Reserve did raise rates in December for the first time in almost a decade. It's widely anticipated that they will raise rates three or four more times in 2016. Yet shares of EQR ended 2015 near all-time highs. The threat of rising rates does not seem to scare away REIT investors.

The company's most recent earnings report was October 26th. They beat estimates on both the top and bottom line and raised guidance. Research firm CoreLogic is also bullish on rental demand. They recently published their outlook for 2016 and believe that this year should see about 1.25 million new households formed. Most of them will want to rent even though rents are high with vacancies near 30-year lows.

Technically EQR has been showing strength. Last week the point & figure chart produced a new triple-top breakout buy signal that is forecasting at $107 price target. EQR does have major resistance near $83.00. That's why a breakout past this level would be very bullish. Tonight I am suggesting investors wait for EQR to close above $83.00 and then buy calls the next day with a stop loss at $76.45.

Please note that readers may want to limit their position size to reduce risk. Last August (2015) the stock market experienced a sharp correction lower. The stock market plunged on August 24th. Shares of EQR experienced their own private little flash crash with the stock trading in a $20 range. There is no way to predict if and when something like that might occur again.

*Small positions to limit risk*

Breakout trigger: Wait for EQR to close above $83.00
Then buy calls the next morning with a stop loss at $76.45

BUY the 2017 Jan. $90 call (EQR170120C90) current ask $3.80

Option Format: symbol-year-month-day-call-strike

Chart of EQR:
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Originally listed on the Watch List: 01/03/16


The Travelers Companies, Inc. - TRV - close: 112.86

Company Info

TRV was founded over 150 years ago. It looks pretty good for its age. Shares gained +6.6% in 2015 versus the S&P 500's -0.7% decline. Furthermore TRV is only about -2.5% from its all-time highs set in November.

TRV is in the financial sector. They are in the insurance business. The company runs three divisions: business and international insurance makes up the biggest chunk of revenues (almost 60%), personal insurance (think automobile and home insurance) makes up nearly one third of sales, while bond and specialty insurance make up the rest. According to the company, "The Travelers Companies, Inc. is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $27 billion in 2014."

TRV has beaten Wall Street's earnings estimates the last four quarters in a row. They have beaten revenues estimates the last two quarters. Earlier in 2015 they raised their dividend and their stock buy back program.

One of the biggest stories last year was the U.S. Federal Reserve's conundrum to raise or not raise interest rates. The Fed finally raised rates in December 2015 and is poised to continue raising rates throughout 2016. Normally investors think of banks as being beneficiaries of rising rates but insurance companies win as well.

Brett Owens wrote an article for Forbes.com discussing the impact of rising rates for insurance companies. Owens said, "Insurance companies are constantly investing the premiums they collect in, among other things, government and corporate bonds, and yields on those bonds rise with the federal funds rate. Those higher yields fatten insurers' net interest margins, or the difference between investment returns and claims paid out to policyholders, resulting in higher profits."

Last week the latest AAII investor sentiment survey showed a surge in neutral sentiment. Investors are cautious heading into 2016. That could drive money into safe-haven trades like big, liquid, dividend-paying insurance companies and TRV certainly fits the bill.

Shares have been consolidating sideways in the $110-116 zone the last couple of months. Right now the stock is right in the middle of this range. The $110 level is support and if the market continues to sink we want to take advantage of the weakness. Tonight I am suggesting a buy-the-dip trigger to buy calls on TRV when shares hit $110.50. We'll try and limit our risk with a stop loss at $104.65. More conservative investors will want to consider a much tighter stop loss.

FYI: TRV does have earnings coming up on January 21st. They report before the opening bell. More conservative investors may want to wait until after we see TRV's earnings results before initiating positions.

Buy-the-dip trigger: Buy calls on a dip at $110.50
Start with a stop loss at $104.65

BUY the 2017 Jan $120 call (TRV170120C120) current ask $5.90

Option Format: symbol-year-month-day-call-strike

Chart of TRV:
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Originally listed on the Watch List: 01/03/16



Active Watch List Candidates:


Delta Air Lines - DAL - close: 50.69

Comments:
01/03/16: Airline stocks encountered some profit taking last week. DAL is dipping toward the $50.00 level and its 50-dma. I don't see any changes from last week's new play description.

Trade Description: December 27, 2015:
The XAL airline index is down -13% for 2015. One air line stock outperforming many of its peers is Delta (DAL), which is up +6% year to date and poised to rally into 2016.

DAL is part of the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 327 destinations in 57 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 800 aircraft."

One of the biggest stories of 2015 was the drop in oil prices. This has been a major tailwind for airline profits as fuel is a huge expense for the industry. Yet instead of soaring on oil's weakness the airline stocks have struggled because investors were worried the industry would overbuild capacity, which would create too much supply and bring down air fares. Overall the industry has managed to keep capacity relatively in check. The last several weeks have seen some lowered guidance for PRASM from several airlines. PRASM is an industry metric for Passenger Revenue per Available Seat Mile. DAL was not immune and lowered its Q4 PRASM several weeks ago. Fortunately the outlook has improved following the company's investor day on December 17th.

A few of the highlights from their investor day include +36% earnings growth forecasted for 2015. They previously guided Q4 PRASM down -2.5% to -4.5%. Now they have adjusted that to -2%. Capacity growth is expected to be relatively flat in 2016. Management said that fuel prices are down about 35% from a year ago. They are forecasting about $3 billion in fuel savings next year. 2016 earnings should grow about +24%.

Following this investor day presentation a couple of analysts raised their price targets. One new target is $62 while another is $68. Currently the point & figure chart is bullish and forecasting at $65 target.

The stock has been showing relative strength, especially against many of its peers. Today DAL is trading near all-time highs and is poised to breakout. Tonight we are suggesting a trigger to buy calls. Wait for DAL to close above $53.00 then buy calls the next morning.

FYI: DAL will likely report earnings in mid to late January

Breakout trigger: Wait for DAL to close above $53.00
Then buy calls the next morning with a stop at $47.75

BUY the 2017 Jan $60 call (DAL170120C60)

Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 12/27/15


General Electric - GE - close: 31.15

Comments:
01/03/16: GE displayed relative strength last week. The stock also flirted with our suggested entry point but never quite made it. We have been waiting for GE to close above $31.35. Last week shares were finding resistance at $31.50. Tonight we are adjusting our entry trigger. Wait for GE to close above $31.55 and then buy calls the next morning.

Trade Description: December 20, 2015:
Tonight we are going old school with our new watch list candidate. GE has been slowly drifting higher since the 2009 market lows. Most of 2014 and 2015 the stock was stuck churning sideways. The situation changed in early October this year after a big activist investor got more involved. It's making a difference. The S&P 500 is down -2.6% year to date. Yet GE is up +20% in 2015 and should continue to outperform in 2016.

GE is in the industrial goods sector. According to the company, "GE is the world's Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the 'GE Store,' through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. www.ge.com"

One of the biggest changes at GE has been the company's long-term transformation to get rid of its financial assets that have been an albatross around its neck for so long. Management is focusing on the company's roots, which is industrial products and innovation.

The company recently held their annual meeting with analysts. The year ahead brings a lot of challenges. The global market is still struggling. The U.S. economy is limping along at +2% growth. Plus the strong dollar hurts sales outside the U.S. In spite of these headwinds GE's CEO Jeffery Immelt is bullish on 2016.

Management is forecasting 2016 earnings to rise +15% on revenue growth of +2% to +4%. That is impressive for such a massive company like GE who does so much business overseas. They also foresee paying investors $8 billion in dividends and spending $18 billion on stock buybacks in 2016. GE provided a long-term 2018 earnings forecast of more than $2.00 per share compared to $1.30-1.20 a share in 2015. They expect to return $55 billion to shareholders in dividends and buybacks between now and 2018. That sort of investor-friendly action could help GE weather any market volatility in 2016.

The stock has been showing relative strength the last few months. The stock held up pretty last week too during the market's volatile moves. GE tagged multi-year highs on Wednesday. The point & figure chart is bearish and forecasting a long-term target at $53.00.

The action in GE's stock over the last few weeks is either a new top or it's a new base. We are betting it is the latter. Tonight I am suggesting investors wait for GE to close above $31.35 and then buy calls the next morning.

FYI: GE is scheduled to report Q4 earnings on January 22nd.

Breakout trigger: Wait for a close above $31.55
Then buy calls the next morning with a stop at $29.40

BUY the 2017 Jan $35 call (GE170120C35)

01/03/16: Adjust entry trigger from a close above $31.35 to $31.55
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 12/20/15


United Parcel Service - UPS - close: 96.23

Comments:
01/03/16: The recent bounce attempt in UPS appears to be failing. Shares are down two weeks in a row and the stock is poised to break down under short-term support at $96.00. I am still expecting UPS to drop toward long-term, major support near $94.00.

Our suggested entry point is an intraday dip to $94.50.

Trade Description: November 29, 2015:
Black Friday has grown from a one-day sales event to a four-day weekend sales bonanza. Nowadays the theme of Black Friday holiday sales starts before Thanksgiving. Unfortunately the initial impressions from retailers this year is that crowds were smaller than expected. That's because more and more consumers are shopping online. One retail research firm is estimating that online sales will grow +8% this year versus the +5.8% we saw in 2014.

One way to play the growth of online shopping is the delivery business. UPS is in the services sector. According to the company, "UPS is a global leader in logistics, offering a broad range of solutions including transporting packages and freight; facilitating international trade, and deploying advanced technology to more efficiently manage the world of business. Headquartered in Atlanta, UPS serves more than 220 countries and territories worldwide."

Smaller rival FedEx (FDX) is forecasting a +12% surge in deliveries this holiday season (to 317 million packages). The U.S. Postal Services is forecasting +11% growth to nearly 600 million packages. UPS, the largest delivery company, is projecting +10% growth this holiday season. They expect to handle more than 630 million packages between Black Friday and New Year's Eve this year.

The combination of low gasoline prices and rising online shopping should be a bullish combination for UPS. I wouldn't be surprised to see online sales surpass the +8% growth estimate. More and more companies are trying to develop their online sales. Plus, following the tragic events in Paris this year, there is a heightened sense of wariness that could keep some consumers out of the malls this year.

The last few weeks have seen shares of UPS consolidating sideways in the $102.00-105.50 zone. We want to buy calls if UPS can breakout from this trading range. Tonight I am suggesting investors buy calls if UPS can close above $105.50.

Buy-the-dip @ $94.50, use a stop at $91.45

BUY the 2017 Jan $100 call (UPS170120C100)

12/13/15 Entry Point Strategy Update = adjust to a buy-the-dip strategy. Use buy-the-dip trigger at $94.50. Move the option strike to the 2017 January $100 call. Move the stop loss down to $91.45.
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/29/15