Retail Stocks Are on Sale

The loss of 2.6 million jobs and declining home and retirement fund values have squeezed consumer spending. Retail sales dropped for the sixth consecutive month as consumers cut spending to save for the future, according to the U.S. Commerce Department. The decline is the longest since comparable records began in 1992 and there is still no end in sight as the economy continues to deteriorate.

Retailers have been struggling with this lower spending after one of the worst holiday seasons in history. Sales are down sharply as consumers shied away from stores while margins were pressured by steep discounts offered across the board. Unfortunately, these measures were necessary to get rid of large inventories built up when the economy was on track six months ago.

These losses may begin to curtail as pricing stabilizes and inventories are emptied. Shoppers accustomed to bargain prices now may find those gone within a month or two as retailers scale back and revamp their pricing to meet with market demand. This action should help stabilize margins, reduce losses, and create the grounds for a recovery in the troubled sector.

While consumers may be hard pressed to find deals at stores, investors will then have plenty of bargains to choose from among retail stocks. Earnings multiples are already near record lows for many stores while some have fundamental prospects that are enviable for any public company. And with inventory gone and pricing restored, they might just be stable enough to buy.

Some retailers like Wal-Mart [[WMT]] saw their first quarterly declines, but may end up being the strongest players going forward. Others like Target [[TGT]] are sitting on strong assets that hold substantial value when the market recovers. Finally, those clothing retailers that have seen discretionary spending disappear may begin to move upwards from their depressed levels.

Investors looking to get involved with these trends early on without putting a lot of capital at risk may want to consider using long-term options called LEAPS. These options give investors the right, but not obligation, to purchase shares anytime over the next one or two years at a fraction of the cost of buying the stock outright. This equates to reduced risk and increased leverage.

See “What are LEAPS Options?” for an introduction to these securities or check out “Using LEAPS as a Stock Substitute” for more information on this strategy.

Three Great Covered Call Opportunities

Writing a covered call is one of the most common options strategies for long-term investors. Investors can make a profit by simply agreeing to sell shares at a certain price within a certain number of days. The profitability of covered call trades are measured by the return on investment – that is, the call option’s premium divided by the stock’s current market price. We’ll show you three covered call plays that offer a large return on investment and introduce a new spin on the strategy!

Sequenom, Inc. [[SQNM]] is a biotechnology firm that has been having a great year as the rest of the market suffered. While the stock has been performing well, the options may represent the true opportunity for traders and investors. The $22.50 February 2009 calls are currently trading with a bid price of $4.20 while the stock is trading at $23.02 per share. The subsequent return on investment is nearly 16% with only about a month until expiration.

Cypress Bioscience, Inc. [[CYPB]] is another biotechnology firm that has had a great few weeks. The stock is up nearly 40% from its near-term lows, but the options also present a great opportunity. The $10 February 2009 calls are trading with a bid price of $1.15, which gives it a 15.67% return on investment with only about a month until expiration. Again, this is a very attractive annualized return for investors already looking to get involved in this stock.

UAL Corporation [[UAUA]] shares have been flat over the past few months, but its options also present a great opportunity. The parent company of United Airlines saw its $12.50 February 2009 calls rise to $1.85, which gives it a 15.11% return on investment with only about a month until expiration. Like the stocks mentioned above, UAL corporation’s options also present an opportunity for those investors bullish on the airline’s prospects.

Investors looking to take on less dollar-risk and increase their returns may want to consider using LEAPS options as a stock substitute and creating a diagonal spread. Since the long-term purchased options can be converted into the stock (potentially required) to deliver on the shorter-term written options, the position is allowed without requiring any special permission from brokerages. Meanwhile, the lower cost to establish the position equates to a higher return on investment.

See “A Better Covered Call Alternative” for more information on this strategy or our Tools & Products section for more ways to profit using LEAPS.

Four Stocks to Teach the Markets a Lesson

What happens when no more jobs are available? For many Americans, it’s the perfect time to go back to school. That means Apollo Group [[APOL]], DeVry [[DV]], Corinthian Colleges [[COCO]], Career Education [[CECO]] and other educational providers could benefit despite the global economic crisis. So, what’s the best way to play these trends and profit in a tough market?

The Apollo Covered Call

Apollo Group recently announced fourth quarter profits that nearly doubled from a year ago. Management believes that it will see higher starts/enrollments while it aims to cut costs to improve the bottom line. Analysts are also decidedly bullish with Credit Suisse raising its target to $88 from $75 noting demand for the educational institution’s services continues to benefit while management streamlines expenses.

Apollo’s options also present a compelling play for conservative investors looking to establish a position. The $75 January 2009 calls are trading at a premium of $5.50 per contract, which means investors writing a call at today’s price would receive a 5.35% return on their investment in just under ten days. Higher returns can be realized by using long-term options as a stock substitute.

The $70 August 2009 options, which don’t expire for another 225 days, are trading at a premium of $18.10 per contract. This means that investors can establish a position for $1,810 that they can then write $550 worth of short-term options against. The return on this trade is 30.3% in under ten days. The downside is that you may have to sell the stock or close the position and accept any downside.

Essentially, investors are purchasing $1,810 worth of rights, transferring the rights for a 30% return, or being stuck with the stock if all else fails. Options premiums are almost always high for a reason, but investors looking to establish a long-term position either way can’t go wrong! See “A Better Covered Call Alternative” for more information on this strategy.

An Easy Way to Leverage

Investors looking to build a leveraged position in the sector without buying stock on margin may also want to consider using long-term options, called LEAPS, as a stock substitute. These options offer investors the long-term right, but not obligation, to buy shares at a preset price. Since the required capital is lower, a more diverse set of companies can be purchased while losses are capped at the premium amount.

Career Education – The $10 January 2010 LEAPS calls are trading with an ask price of just $9.50, which means that investors can purchase the right to 100 shares anytime over the next 372 days for just $950 versus buying the stock for $1,783. The breakeven point is then $19.50 per share.

Corinthian Colleges – The $7.50 January 2010 LEAPS calls are trading with an ask price of just $9.60, which means that investors can purchase the right to 100 shares anytime over the next 372 days for just $960 versus buying the stock for $1,597. The breakeven is then just $17.10 per share.

See “Using LEAPS as a Stock Substitute” for more information on this strategy and check out our Tools & Products for more strategies that can help you profit in any market.

Top 3 Trends for 2009… and the Stocks to Profit

The global economic crisis made 2008 a year that many investors would like to erase from their memory. A sharp rise in mortgage defaults caused banks to tighten lending for both consumers and businesses. Consumers stopped spending, businesses stopped producing, and raw material prices dropped sharply. The result was a rough 2008 that may pave the way for a solid recovery in 2009. Here are the top three trends that we see in 2009 and the top three stocks to go along with them…

The first big change in 2009 will be a new president that has promised to bring change. Barack Obama has petitioned Congress to pass an economic stimulus plan that could top $1 trillion. The plan will increase spending on public infrastructure in order to create more than 3 million jobs while improving the quality of life for Americans. The plan will also create opportunity for a few public companies.

Vulcan Materials Company [[VMC]] is a construction company that stands to benefit from these trends. Obama’s infrastructure plan will focus on building roads, bridges, modernizing schools and creating a clean energy infrastructure. Vulcan, a producer of construction aggregates, sees more than half of its sales come from these road and highway construction projects and stands to benefit.

A second big trend in 2009 will be the increase in oil prices as the biggest plunge in crude oil prices on record may be setting us up for a rally later this year. The so-caled forward curve of futures contracts suggest that oil prices will rise 28% to $60.00 per barrel by December. The increasing amount of supply going offline is also setting the stage for a potential shortage when oil demand rebounds.

Teekay Tankers Ltd. [[TNK]] is one indirect beneficiary of higher oil prices that pays out a large portion of its income. The oil tanker owner and operator is structured as a Master Limited Partnership (MLP) and therefore has to pay out the majority of its net income. Currently, the stock is trading so low that the dividend yield on this payout is in excess of 30% despite strong fundamentals.

A third big trend in 2009 is alternative energy – a combination of the two previous forecasts. Obama’s new plan calls for increased spending on alternative energies while higher oil prices will also reignite demand for such products by private industry. Combined, this is good news for the solar industry in particular as it is one of the largest alternative energy segments.

LDK Solar Co., Ltd. [[LDK]] is a premier solar energy play that could benefit from these trends. The firm has a strong contract backlog for 2009, but expects to see some delayed shipments in light of the current global economic crisis and tight credit markets. Meanwhile, the firm continues to show a solid cash position and unused credit facilities totaling more than $380 million and $850 million, respectively.

Looking for a way to leverage your returns on these stocks? Check out “Using LEAPS as a Stock Substitute” for information on how LEAPS can help. Also, see our Tools & Products sections for e-books, software and other tools to help you boost your returns.

Time to Buy Drybulk Shippers?

The dry bulk industry may be on the decline with lower asset valuations and tumbling freight prices, but some investors believe that the record-low valuations may spur some positive action. Dry bulk shipping rates have plummeted more than 90 percent since last summery while the net asset values of the ships have dropped 70 percent in some cases. The result has been record low valuations for the owners of those ships – those companies operating in the dry bulk industry.

The Baltic Dry Index, which measures day rates for dry shipments, recently moved below 800 signaling the worst pricing since around 2002. These lower day rates are the result of reduced demand due to slowing economies around the world. Less iron ore shipments need to be made given the slower construction in both the United States and growing economies like China. However, many important players in the market are predicting a recovery.

DryShips (DRYS) is one stock that has nearly tripled from its 52-week lows on speculation that things will improve. Chief executive and 34% owner George Economou believes that the company will be able to weather the storm over the long-term. These sentiments have even led to speculation that that billionaire shipping mogul would take the firm private at its cheap valuation and take it public in a few years to yield several times the return.

Many experts believe that the current Chinese iron ore negotiations are moving in favor of dry bulk shippers. Jefferies & Co. said in a research note that a successful downward adjustment to iron ore prices in China could spur demand for the dry bulk market by increasing the number of shipments. Meanwhile, much of the capacity expected to go online has been canceled and fuel / labor prices have also decreased over the past several months.

Unfortunately, many dry shippers are highy leveraged. The risk is that dry bulk owners will simply default on their payments, go into bankruptcy, and emerge under a new name after cleaning out shareholders. It wouldn’t be anything new for DryShips, which was created from the bankruptcy of predecessor Alpha Shipping. That entity was also owned by Economou and went bankrupt in 1998 and resulted in 37 cents on the dollar being paid to creditors and most of the fleet under his ownership.

Safe bets within the sector may be those dry bulk carriers with low debt, few new builds, and limited spot market exposure. These companies include names like Eagle Bulk Shipping (EGLE), Genco Shipping & Trading (GNK), and Star Bulk Carriers (SBLK). Unfortunately, even some of these companies are struggling with Star Bulk already defaulting on a $106,500 a day long-term contract after its client filed for bankruptcy and killed the contract.

So, how can investors get involved with these companies with limited risk? One way may be through long-term options call LEAPS – or long-term equity anticipation securities. These options provide investors with the upside of stock ownership without the risk of owning the stock. Investors can purchase the right to a set number of shares at a fraction of the cost of owning the underlying shares.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or see our Tools & Products section for products to help you invest with LEAPS.

Top 3 Retailers for a Tough 2009

Retail stocks have had a rough year that just keeps getting worse with last month’s drop in consumer spending being the largest since the data began to be tracked in 1947. Unfortunately, things do not look much better for 2009 with some 44 percent of consumers saying that they would further cut spending after the holidays, according to a study conducted by America’s Research Group. However, some investors see opportunity for strong retailers that can weather the storm…

Many investors looking at the retail sector will find no shortage of value in the form of low multiples, but relative value is no longer a valid measure in today’s environment. Investors should instead look at brand strength, asset valuation, cash flow generation and debt load to find retails that will be able to not only survive but thrive in the economic crisis. So, without further ado, here are our top three retail stock picks for 2009:

Wal-Mart Corporation (NYSE: WMT)

Wal-Mart’s stock has continued to perform well throughout the economic crisis as consumer sought lower prices. The discount retailer has also attempted to reinvent its image to include quality along with price while expanding its presence internationally. Combined, these changes have resulted in a 9.4 percent jump in third quarter net sales with the international segment leading growth.

Despite a modestly lower guidance for the full year, Wal-Mart continues to be one of the strongest retailers in the United States given its strong value proposition to customers. Meanwhile, the retailer’s efforts to reinvent itself as a quality retailer may end up paying dividends down the road when the economy recovers and consumers open up their billfolds, especially against rival discount retailers like Target Corporation (NYSE: TGT) and Macy’s (NYSE: M).

Investors interested in taking advantage of Wal-Mart shares over the long-term may want to consider purchasing long-term options called LEAPS (or long-term equity anticipation securities). Currently, investors can purchase $55 January 2011 LEAPS calls for $12.95 per contract. This means that investors can buy the right to 100 shares at $55 anytime over the next 764 days for only $1,295 compared to $5,519 by purchasing the underlying stock.

Target Corporation (NYSE: TGT)

Target has recently been the target of activist investor William Ackman’s Pershing Square. The hedge fund noted the fact that the retailer owns the real estate under the vast majority of its stores and estimates that it could be worth roughly as much as the company’s current market capitalization. As a result, Pershing Square recommended that the firm spin-off the land portion of the real estate into an REIT that would lease-back the property to the stores via a ground-lease.

Theoretically, this plan would unlock tremendous value for Target shareholders. The new REIT would be forced to trade at a reasonable valuation given its massive size and security (having Target stores as collateral in the unlikely case of default). Meanwhile, Target’s strong cash flows and balance sheet make it one of the best tenants that any real estate owner could desire. Finally, Target would be unencumbered with many of the costs associated with purchasing land for new stores (now covered by the REIT.

Investors looking to take advantage of this situation may want to consider a pair trade between Target and the retail ETF (NYSE: XRT). One Target LEAPS call and one retail ETF LEAPS put with the same dollar amounts will create a situation where investors will only profit when Target outperforms the retail sector. This means that no losses will be incurred when the retail sector declines, only when Target sees its value unlocked or comes to value.

Aeropostale Inc. (NYSE: ARO)

Warren Buffett chose to invest in this specialty retailer for a good reason: Aeropostale has no debt, strong cash flows, and an easy to understand business. Shares may be down some 32 percent over the past year, but the firm’s fundamentals remain very strong. Return on equity stands at a huge 54 percent while operating and profit margins remain strong despite the uncertain economy. Finally, the firm’s $100 million in free cash flow generation certainly has many investors interested.

Investors looking to make a bet on this stock may also want to take a look at long-term LEAPS options. Currently, investors can purchase $20 January 2011 LEAPS calls for just $6.60 per contract. This means that investors can have the right to 100 shares at $20 per share anytime during the next 764 days for just $660 down compared to $1,747 for the underlying stock.

See “Using LEAPS as a Stock Substitute” for more information.

3 Gold Stocks Set to Rally in 2009

Randgold Resources Ltd. (NDAQ: GOLD), Gold Fields Limited (NYSE: GFI), Kinross Gold Corporation (NYSE: KGC) and other gold stocks rallied as investors looked to hedge against inflation. The U.S. dollar weakened against other currencies after the Federal Reserve lowered interest rates to help encourage economic activity, which led to a rally in many commodities including gold.

Investors purchase gold for their portfolios in order to hedge against inflation and a declining dollar while also using it as a safe-haven during times of instability. Prices have also been helped by a fall in mine supply, a slowing of central bank sales, ongoing de-hedging by producers, firm demand from ETFs, and a likely recovery in jewelry demand. Meanwhile, banks taking major short positions on the Comex market in New York may also be forced to cover their positions after the market’s recent rally.

Many analysts are also very bullish on the prospects of gold going forward. Goldman Sachs raised its near-term gold forecast on expectations for a weaker dollar and as interest in the precious metal as a safe-haven from risk continues to keep prices moving higher. The bank raised its three-month forecast to $700 an ounce from $690 while also raising its full-year prices to $795 from $710 an ounce. Studies at the bank have shown that gold moves opposite the dollar 90 percent of the time.

Companies like Randgold Resources, Gold Fields, and Kinross Gold could benefit from the rise in prices as it will both increase the value of its current reserves as well as provide funding for future exploration activity. Of course, higher prices also help increase revenues, drive profits, and improve the balance sheet. Moreover, bigger miners like the companies offer a combination of safety and profitability given the fact that they are well-capitalized and trading at near-record low price to net present value multiples.

So, how can investors leverage their position while taking on less risk? One way may be to purchase long-term options called LEAPS (long-term equity anticipation securities). While not available on all securities, these options enable long-term investors to purchase rights to a stock at a set price and time in the future for a much lower upfront payment than purchasing the underlying stock outright. See “Using LEAPS as a Stock Substitute” for more information.

Top 3 Chinese Stocks for 2009

The United States may have been in a recession with negative economic growth since December 2007, but China still expects to hit its economic growth target of 8 percent in 2008. Meanwhile, the country joined with leaders of South Korea and Japan in the first Asian economic summit designed to explore ways to help the region play a role as the center of world economic growth.

Despite the positive growth, the Chinese stock market has plunged more than 60 percent so far this year compared to a 39 percent drop in the U.S. stock market. China may not have experienced single digit economic growth for six years, but the country’s economy is still quickly expanding as many western economies head into recession. So, how can investors take advantage of this differential?

China Mobile Ltd.

With over 399.5 million subscribers, China Mobile Ltd. (NYSE: CHL) is the largest provider of mobile telecom services in China with service in 31 Chinese provinces, autonomous regions and directly administered municipalities in Mainland China and Hong Kong. Currently, the firm is trading at a price-earnings multiple of 13.87x despite posting 44.7% quarterly growth, according to Yahoo! Finance.

Surprisingly, the earnings multiple for China Mobile is lower than that of U.S. counterpart Verizon Communications (NYSE: VZ) despite a sharply higher growth rate, high profit margins, and larger potential market. In fact, the majority of Verizon’s mobile growth in recent times comes from its recent acquisition of regional mobile provider Alltel while China Mobile’s growth is primarily organic.

Baidu.com, Inc.

The internet search boom may have been put on hold in the United States, but Chinese online search (and internet usage) is just getting started. The state-run China Internet Information Center reported earlier this year that China had surpassed the United States as the nation with the largest number of internet users. In fact, China increased its internet users in one year by 73 million while the total number of U.S. users is estimated to be just 215 million.

Baidu.com (NDAQ: BIDU) dominates the Chinese search market the way Google (NDAQ: GOOG) dominates the U.S. market. The firm has over 60% market share and even Google admits it would be difficult to compete. Google’s Kai-Fu Lee noted, “Gaining share against a well-established supermajority competitor is a difficult proposition because there is a certain critical mass, eonomy of scale and word-of-mouth effect that one has to overcome.”

Baidu.com is currently trading with a price-earnings multiple of just 27.79x despite its strong 91.4% quarterly growth, according to Yahoo! Finance. This compares to Google’s 19.87x earnings multiple with quarterly growth of just 20.6%. China also has a positive economic growth, which comes in sharp contrast to the United States where Google operates.

iShares China ETF

Investors looking to place a bet on the broader Chinese economy may want to take a look at the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) ETF. The fund holds the top 25 largest Chinese companies, including China Mobile, PetroChina, China Construction Bank and other large names. Currently, the entire index has a price-earnings ratio of just 8.42x despite continued growth in the Chinese economy.

Investors looking for a relatively safe leveraged bet on the Chinese economy may want to take a look at long-term options on the ETF known as LEAPS. Currently, investors can purchase $30 January 2011 calls for just $8.40 per contract. This means that investors can pay just $840 now for the rights to 100 shares of FXI at $30 per share anytime during the next 760 or so days.

For more information see “Using LEAPS as a Stock Substitute”

Top 3 Oil Stocks to Weather Any Storm

Goldman Sachs analyst Argun Murti warned that oil could hit $200 a barrel last May as crude prices hit the $123 mark for the first time. Now, University of Calgary professor Philip Verleger is predicting $20 per barrel oil as the global slowdown eats into demand while destroying anticipated supply. The lesson here is that nobody really knows where oil prices are headed, but that doesn’t mean investors should avoid the oil sector. Rather, investors should build a well balanced portfolio to weather any storm.

The first thing taught in university investment courses is the concept of diversification. The best way to reduce risk is to diversify holdings across many different sectors. Similarly, the best way to diversify risk within one sector is to choose different types of businesses within the sector. This ensures that even if one sector falls, the others will rise to make up for it. The result is smoothed portfolio performance during even the roughest of economic times.

The oil sector has several different players:

• Drillers – These are the companies that take the oil out of the ground, either on land or under the sea. One of the best oil driller plays is Petroleo Brasileiro (PBR), also known as Petrobras, which discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.
• Shippers – These are the companies that take the oil from Point A to Point B by shipping it across the ocean. One of the best oil shipping stocks is Frontline (FRO), which is trading at a very low earnings multiple with a high dividend yield.
• Refiners – These are the companies that take crude oil and refine it into gasoline and other usable substances for consumers. One of the best refiners in the business is Marathon Oil (MRO), which has combined exploration with refining to create a strong business.

Owning these three stocks can help investors gain prudent exposure to the oil industry. Higher oil prices can boost prices for drillers, but could put pressure on refining margins and vice versa. Meanwhile, shipping companies rely more on demand than just pricing. Remember, increased supply with consistent demand could lower prices without lessening demand. All in all, diversification, even within a sector, can help reduce risk.

What Does the Bailout Mean for Foreign Automakers?

The U.S. government agreed to a $15 billion plan to bailout the big three automakers, but the package serves as only a temporary measure until a more permanent decision is reached. However, the temporary measures have provided hope for not only the U.S. automakers but also foreign automakers that have remained largely silent during this whole crisis. The big question now is whether or not they will be passed and the industry will be saved.

The proposed bailout package would provide a $15 billion loan to General Motors and Chrysler in order to stay in business while requiring them to restructure their operations to ensure repayment. The legislation would also include protections for taxpayer dollars, including the appointment of a federal official to oversee the automotive industry who could force the companies into bankruptcy if the companies don’t come up with a business plan by the deadline of March 31st.

Foreign automakers like Toyota (TM), Honda (HMC), Hyundai (HYMLF) and Nissan (NSANY) have pumped some $40 billion into 70 American facilities in the last 30 years and are also banking on a bailout. The manufacturers rely on many of these same parts suppliers as the big three automakers and therefore stand to lose out upon any failures. After all, any failures in the automotive industry will likely result in failures among part supplies, which could be disastrous for the industry.

So, will a long-term bailout pass government circles at the end of March? Well, the reasons behind the automaker bailout must be addressed, but few can agree on exactly what the problems really are. Some believe that wage disparity is to blame, but a recent report showed that a lowering of wages would only reduce prices by $800. Instead, many experts insist that the automakers must reinvent their image to the American public in order to spur sales. Whether or not this is possible remains to be seen…

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