New Watch List Entries

DAL - Delta Air Lines

NOC - Northrop Grumman

Active Watch List Candidates

GE - General Electric

RHT - Red Hat, Inc

UPS - United Parcel Service

Dropped Watch List Entries


New Watch List Candidates:

Delta Air Lines - DAL - close: 52.26

Company Info

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) current ask $3.85

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

Chart of DAL:

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

Northrop Grumman - NOC - close: 190.11

Company Info

Defense stocks have come a long way from the sequestration fears from a few years ago. Back in 2011, politicians in Washington created massive defense spending and entitlement cuts in their sequestration budget cut threats. It was supposed to be a goad to provoke their peers and rivals to getting a budget deal done. It didn't work. The sequestration cuts were put into place in 2013 but instead of crushing the defense industry stocks the group has thrived.

NOC is in the industrial goods sector. According to the company, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." They focus on four business sectors: aerospace systems, electronic systems, information systems, and technical services.

One reason the major defense names have done so well was their focus on gaining new clients overseas. If the U.S. was going to cut back on spending (more like cut back on the pace of spending) then military contractors focused on generating new business with allies overseas and it worked.

NOC has beaten Wall Street's earnings estimates the last four quarters in a row. They've delivered better than expected revenue numbers three of the last four quarters. Plus, NOC management has raised guidance three of the last four quarters. As of their most recent earnings report on October 28th, NOC's backlog was about $36 billion.

NOC has been in a heated battle with rivals Boeing (BA) and Lockheed Martin (LMT) over one of the biggest defense contracts of all time. That is the Air Force's new Long Range Strike Bomber contract. Aerospace giants Boeing and Lockheed had teamed up together to win this deal. Some were calling it a David-versus-Goliath story. NOC was the underdog and surprisingly the U.S. government gave the contract, worth a potential $80 billion, to NOC in late October this year. BA and LMT have since chosen to protest this decision so the ultimate decision has yet to be finalized but it's a bullish development for NOC investors.

The LRSB contract has two parts. The engineering and manufacturing and development portion of the contract is worth more than $21 billion. Once it's finally developed the planes are supposed to cost the government $564 million apiece. Altogether the defense department could spend up to $80 billion on the program.

Another bullish tailwind for defense contractors like NOC is the ongoing global battle with radical Islamic terrorists and ISIS. The U.S. will likely boost its defense spending as it turns up the heat on this threat. Meanwhile after the terrorist attacks in Paris, analysts believe that NATO could generate an additional $100 billion in defense spending as they beef up their military might.

JPMorgan recently upgraded shares of NOC from "neutral" to "overweight" and gave the stock a $212 price target. They like NOC and believe it is a place of "safety and steadiness" in a volatile market.

The stock has shown significant relative strength this year with a +28% gain in 2015. The last few weeks have seen NOC consolidate sideways beneath resistance at $190 but with a bullish trend of higher lows as investors keep buying the dips. The stock looks ready to break out. Tonight we are suggesting investors wait for NOC to close in the $191.00-193.00 zone and use that as a bullish entry point to buy calls.

Breakout trigger: Wait for NOC to close inside the $191.00-193.00 zone,
Then buy calls the next morning with a stop loss at $184.35.

BUY the 2017 Jan $220 call (NOC170120C220) current ask $6.60

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

Chart of NOC:

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

Active Watch List Candidates:

General Electric - GE - close: 30.83

12/27/15: GE has rallied toward the top of its trading range. The stock looks like it could break out any day now.

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."

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 $31.35
Then buy calls the next morning with a stop at $29.40

BUY the 2017 Jan $35 call (GE170120C35)

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

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

Red Hat, Inc. - RHT - close: 81.74

12/27/15: The volatility in shares of RHT continued on Monday. Shares essentially filled the gap from Friday morning and bounced. RHT is still consolidating sideways below resistance near $83.00. Let's give RHT more time to push higher.

Trade Description: November 29, 2015:
Consistent earnings and revenue growth have helped power RHT shares to new multi-year highs. The stock has also shown relative strength with a +19% gain in 2015, outperforming the NASDAQ's +8% gain.

RHT is in the technology sector. According to the company, "Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As a connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT."

I mentioned that earnings have helped drive RHT's stock higher. The company has beaten Wall Street's estimates on both the top and bottom line the last four quarters in a row. Their most recent earnings report was their Q2 results announced on September 21st.

Analysts were expecting a profit of $0.44 a share on revenues of $494 million. The company delivered earnings growth of +15% with a profit of $0.47 a share. Revenues were up +13% to $504 million. Management raised their Q3 and 2016 guidance above analysts' expectations. RHT does do a lot of business overseas so the strong dollar has had a negative impact. On a constant currency basis their results are even stronger.

Technically shares are in a bullish trend of higher highs and higher lows. The point & figure chart is bullish and forecasting at $109 target. RHT's bounce from its November low has stalled just below short-term resistance near $83.00. Tonight I am suggesting bullish positions if RHT can close in the $83.00-84.50 range.

Breakout trigger: Wait for RHT to close in the $83.00-84.00 range,
Then buy calls the next morning with a stop at $77.35

BUY the 2017 Jan $100 call (RHT170120C100)

12/17/15 RHT reports better than expected earnings
Option Format: symbol-year-month-day-call-strike

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

United Parcel Service - UPS - close: 97.34

12/27/15: UPS underperformed the stock market with traders selling the rally attempts. Investors could have been worried that deliver companies like UPS and FDX would blow it again and fail to deliver a lot of Christmas presents on time. That seems to be the case for rival FedEx (FDX) who struggled to keep up with demand and was still delivering packages on December 25th and the 26th.

UPS' underperformance last week might also be a reflection of growing worries that seems to be reducing its dependence on the company. Amazon accounts for almost 40% of online sales. That is a HUGE amount of packages to be delivered around the world and UPS gets a lot of that business. UPS investors might be worried over recent headlines that Amazon has been building up its fleet of trucks and is now looking at buying more cargo planes.

We are not giving up yet on UPS. The $94.00 level is still major support. 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