Quicksilver Resources

2/25/12

Once a month, I will be putting out two stock recommendations in a week, with one being a pure speculative play that should be at least some part of everyone’s portfolio.  While a spec play is often times a very low priced stock, it doesn’t necessarily have to be.  This week, mine is, and is called Quicksilver Resources (KWK).  Quicksilver engages in the acquisition, exploration, development and production of natural gas, liquid natural gas (LTG) and oil in the US.  They own and operate natural gas and oil fields in Texas, Colorado, Wyoming, and British Columbia, to name a few. 

Now, before I get into the company specifics, it’s important to know that I am calling a bottom in natural gas prices.  Since putting in a low of $2.231 per 10,000 million British thermal units (btu) on January 23^rd, it has since rallied to its current price of $2.54 per 10,000 million btus.  The day we put in a low, the natural gas market put in a bullish engulfing line, engulfing the previous five days of trading.  Natural gas has not traded lower than $2.34 per 10,000 million btu since that time.  While I do expect a retest of the low on this four-year bear market, I think it puts in a double bottom and we continue on our way to $4 natural gas.  To further illustrate my point, it seems there was market capitulation on the low as volume on January 23^rd was the highest in the last 365 days.  Additionally, some of the largest natural gas producers in the world, Chesapeake Energy, Conoco Phillips and XTO, are all saying they are going to reduce their production in 2012.  With lower production, you get lower inventories and a rise in prices.          

Now, as for Quicksilver Resources, the stock is trading at an incredibly cheap level of just 2.85x past earnings of $2.13/share.  The stock is down about 61% over the last 52 weeks due to the drop in natural gas prices, giving KWK a negative PEG ratio.  But believing the market has bottomed; that should turn around nicely.  Quicksilver is a small company with just $6.6M in cash on hand and about $2B in debt, and a market cap of just over $1B.  As for the analysts, there are currently 5 buys, 18 holds and 4 underperforms on the stock, with an average price target of $6.46 and the high target of $11.  What really makes this stock a speculative play is there is currently an astronomical 24% short interest in this name, so any rally will turn into a short squeeze.      

Not only is it a very cheap stock, but I also believe the bottom is in at $4.14 back on February 1^st.  That day the stock put in a big hammer, followed by a bullish engulfing line.  February 1^st saw record volume indicating capitulation as over 20M shares traded hands, compared to an average of just over 4M/day.  Since January 18^th, the stock has built a picture perfect inverted head-and-shoulders and has since rallied through the 50 day moving average of $6.08, which happens to be the closing price and great entry point on Friday.  Drawing an upward trendline from the 52 week low of $4.14, the stock has since traded down to the line five times and has yet to break through, showing strong support for the stock.  While I don’t expect KWK to reach it’s 52 week high of $15.98, I think about a 60% return could be in the cards as the next real level of resistance should be the 38.2% Fibonacci retracement at $8.66, but I’m looking for a big rally up to the 50% retracement at $10.06. 

Quicksilver reports earnings on Monday before the bell so you won’t be able to get in beforehand, which could be good or bad depending on if they can beat the $0.01 EPS that analysts are expecting.  As mentioned previously, the 24% short interest in this stock could spell for a major rally on any good earnings.  If that turns out to be the case, wait for a pullback to get long this name.  Bottom line…this is a great speculative position to have in your portfolio and could set up great turns as the price of natural gas rallies out of the hole. 

             Full disclosure:  I currently am long KWK from $6.09 and plan on adding at $6.93. 

Jeff Lewison

CBOE Holdings

2/25/12

When I look at the financial stocks, I wanted to stay away from all the banks, as they will continue to be negatively affected by problems in Europe, Dodd-Frank laws and Basel III.  However, that being said, there are still some very strong financial plays such as Mastercard, Visa and lately, Chicago Mercantile Exchange.  I think all three of those stocks have already run up too much to invest in, so I looked for a new favorite of mine to have a big breakout to the upside, CBOE Holdings (CBOE).  The CBOE offers a marketplace for options, futures, ETFs and equities.  In simple terms, every option contract that is traded runs through the CBOE.  I think the stock is currently well undervalued with only 2 buys, 13 holds and 2 underperforms.  With the closing on Friday at $27.65, analysts seem to be way off the mark with their average price target being $26.63 (a price the stock gapped above which I’ll talk more about later). 

            CBOE recently reported a record Q4 and FY11 as they saw record trading levels in the SPX and volatility options and futures with 4.8M contracts trading each each day, for an increase of 10% over 2010 (impressive numbers considering the MF Global debacle cut down on trading).  The Q4 saw a record EPS of $0.37 on revenues of $120.2M.  VIX options volume in 2011 rose a record 57%.  Management is very excited about its’ future prospects, as well as myself, as they plan to introduce many new contracts in 2012.  They are rolling out new volatility benchmarks and tradable products including sector ETF and single stock VIX products.  On January 9^th, CBOE introduced new Emerging Markets ETF volatility indexes. 

            While option trading on the floor may be diminishing, electronic trading isn’t.  Every hedge fund in the world is trading options to protect their downside risk on their long positions.  Additionally, Jon Najarian, Options trader and CEO of OptionsMonster recently noted that while equity volumes are not nearly as high as they used to be, options volumes are skyrocketing through the roof, which is all bullish news for this stock. 

            Looking at the financial situation, the CBOE trades at just 15x forward earnings with a PEG ratio of only 1.65.  The company is debt free with almost $135M in cash on hand, paying out a $0.48 dividend (1.70%).  With a payout ratio of below 30% of net income, they have plenty of room to continue to raise the dividend.  CBOE operating margins are an astronomical 47.55% and should continue to expand with high margin products being introduced into the marketplace. 

            From a technical perspective, this stock seems to be on the verge of a major breakout to the upside.  Looking at a daily contract, CBOE has built a perfect inverted head-and-shoulders over the last 52 weeks.  Recently, after reporting their record earnings, CBOE gapped above the neckline, indicating a breakout.  After going three days without filling the gap, the stock should continue to rally away from the gap.  What’s even more interesting, and bullish for that matter, is CBOE gapped above the 61.8% Fibonacci retracement of $26.63 (which as mentioned previously, just so happens to be the incorrect average price target for the stock).  On Thursday, the stock build a bullish engulfing line that engulfed the previous six days of price action, indicating a move down is very unlikely in the near term.  CBOE is currently trading well above the 50 and 200 day moving averages, $26.13 and $25.28, respectively.  With an RSI (Relative Strength Index) of 62, CBOE is not overbought.             

            I think there’s tremendous upside for this stock as I see trading volumes greatly increasing.  With continuous problems in Europe and with a new Presidential election coming up, volatility trading should skyrocket.  I think the new products that CBOE is introducing this year will be received with great fanfare.  If CBOE was able to hit record earnings and revenues on what was slower than normal volumes, it’s hard to imagine the stock going much lower as volume picks up.  Buying CBOE at Monday’s open is a good entry point for this stock ($27.65).  I look at this as being a very long-term play (about a year) and while it could move around a little big, up or down, I see the stock hitting $35 for a 27% gain.  Use the 50% Fibonacci as your downside stop loss at $25.66 for about a 10% loss, but I don’t think you’ll get there. 

             Full disclosure:  I currently am long CBOE from $27.26 and plan to at $28.50. 

Jeff Lewison

Kellogg

2/18/12
It’s been a great run so far in the markets this year, and while I expect a 60 point pullback in the S&P at some point in the near future, I would look for this market to continue it’s upward bull trend as long as the European situation continues to improve.  Having said that, a big part of everyone’s portfolio should be a handful of high quality, high dividend paying stocks.  In this market, I recommend going to about 20-30% income, and part of that should contain my stock of the week, Kellogg (K).  Among its’ many products including various cereals are, Famous Amos cookies, Keebler snacks and Cheez-Its.  On February 15, Kellogg added a game-changing product to their lineup with the purchase of Pringles from Proctor & Gamble. 

While the techincals look very bullish (more on this later), what really attracted me to this stock is the fundamental story.  Kellogg comes with a nice 3.30% dividend and trades at a cheap forward looking multiple of just 13.9x 2012 earnings.  With a PEG ratio of under 2 (a healthy indicator that the stock price isn’t growing too fast), Kellogg looks even cheaper.  On February 2^nd, Kellogg reported their FY11 earnings that were very strong and exceeded analyst expectations, while affirming 2012 guidance.  For 2011, they reported sales of $13.2B, an increase of almost 7% over 2010 and net earnings were up 2.4% to $3.38/share.  Kellogg expects full year 2012 earnings to continue to grow by 4-5% citing a strong, innovative product pipeline and increasing margins due to higher prices. 

While the stock is down almost 1.5% for the past 52 weeks, the stock has been rising steadily since putting in a new 52 week low in late November, up 10% since that time.  While you may think that 10% isn’t that great, you need to keep in mind that Kellogg pays almost 3.5% just to hold the stock.  Now, what’s great about this stock is that it’s put in a clear-cut bottom at the 52 week low of $48.10 on November 29 of last year.  The move confirmed a 5^th wave down on a daily and weekly chart, but the bottom of the 4^th wave, in a 5^th wave up on a monthly chart.  The monthly chart also confirms an inverted head-and-shoulders built since 2008, that was rechecked by that low on November 29. 

The day that Kellogg announced their acquisition of Pringles, the stock gapped up almost 5%, putting in a low of $51.93, just $0.16 above the 38.2% Fibonacci retracement to close at $52.87, just $0.03 off the 50% retracement.  If that isn’t evidence enough that the stock shouldn’t falter much lower than the 38.2% retracement, Kellogg traded at a low on Friday of $51.86, only to rally and close at $52.53, a good entry price for this stock.  There’s a long-term downtrend line that Kellogg is poised to break through at $52.99.  Kellogg has been trading on a 50% increase in daily volume over the last ten days, and I expect volume to continue to be strong. 

As I said, you can enter a buy order for this stock on Monday morning and use a stop loss at $50.37 for small loss.  I am looking for a long-term (Dec 31 at the latest) price target of $60, which would be about a 15% return, excluding dividends.  Being an income stock, you need to have patience and hold for the year to get these solid returns. 

Full disclosure:  I currently am long K from $52.02 and plan to buy more as the stock breaks through its long term downtrend line. 

Jeff Lewison

Wynn Resorts

2/11/12

The stock I am recommending this week is a one that’s been hammered since hitting an all-time high back in July, but I think has been incredibly oversold; Wynn Resorts (WYNN).  Wynn engages in the development, ownership and operation of casinos and resorts, mainly in Las Vegas and Macau, China.  Wynn resorts include auto dealerships, casinos, nightclubs, spas, golf courses and over 2000 suites.  The company recently announced their Las Vegas casino win of $776 million was the largest all-time casino win in the history of Nevada, exceeding the previous record they set back in 2007. 

On February 2^nd, Wynn reported their Q4 earnings, which beat Wall Street’s expectations.  Net income for the quarter Net Income for the quarter rose 67% to $1.72/share, with revenues rising 8.6% to $1.34B.  Analysts were expecting earnings to be at $1.52/share and revenues rising to $1.36B.  This latest quarter marked it’s fourth straight growth in revenues and earnings.  Wynn has continued to increase its operating margins, this last quarter growing to 19%, allowing them to continue to compete in Las Vegas and China. 

Currently Wynn yields 1.80%, so you will get paid while you wait for the stock to go up.  With a $14B market cap, Wynn sports an 18 P/E and a PEG ratio of just 1.15.  With just $3.11B, the company cares almost $2B in cash on its balance sheet, equating to $15.38/share in cash.  There is currently a 6.70% short float on the stock, which is pretty large.  In my mind, all that means is that any rally in the stock, will rocket the price upwards as the shorts will have to cover their positions. 

      Looking at the charts, I believe Wynn has bottomed out.  On a weekly chart, Wynn has put in a confirmed 5^th wave down at a 52 week low of $101.02.  In December, the stock tried twice to break through $100, but failed both times and rallied, never looking back to that level since.  Turning to a daily chart, Wynn has spent more than two and a half months building a nice inverted head-and-shoulder, with the shoulder line bottoming at $107.  Additionally, Wynn has rechecked the long-term downtrend line, drawn from the 52 week high of $172.58.  While it’s been trading against that trendline, Wynn has tried nine times to close below it, yet closed above, every single time. 

Wynn is currently trading at $113.20, which I think is a great entry price for this stock.  I say great upside for the stock, as I’m looking for a move up to $136.80, which is the 50% Fibonacci retracement and a 21% gain from these levels.  While I think the stock will be headed up sharply, I think this mess in Europe could give people a reason to sell off stocks, so give yourself some room here on the downside.  I would use a stop loss at $104.62.

Full disclosure:  I currently do not own WYNN and but am planning on initiating a position once I raise some cash.

VMWare

2/4/12

For a quick recap of my last three stock picks: CLF is up 7% in three weeks, BRCM is up 7.6% in two weeks and POT is down 1% for the week.  If you acted on any of my recommendations, I would stick with all three as CLF closed at its highest level since September and BRCM closed at its highest level since early October.  Additionally, Broadcom and Cliff’s Natural Resources have been up for 5 straight weeks with a lot of momentum.  While I expected Potash to rally with the broader market, I am not worried about it as the chart is still bullish.  

The stock I am recommending this week is a cloud computing play that after being hammered late last year, has really rallied hard in 2012 and has a lot of momentum.  The stock I’m recommending is VMWare (MW).  The company provides cloud-computing software to businesses.  In 2011, VMWare booked record revenues, operating margins and free cash flows.  Revenues increased 32% to $3.8B.  Opearting margins increased 250 basis points and free cash flows totaled more than $1.9B ($4.51/share).  The company recently guided to revenue increases for Q1 being between 20%-23% increase YOY and continue to look for margin expansion as they roll out new products.  To talk about an earnings blowout, VMWare booked Q4 EPS of $0.62/share, while analysts were expecting only $0.43/share, a 44% earnings beat.

VMWare is currently trading at 31x forward earnings with a Price-to-earnings growth ratio (PEG) of only 1.49.  With only $450M in debt, the company has over $4.51B in cash, equating to almost $11/share.  If you back out the cash, VMWare is trading at just 28x forward earnings, with a market cap of almost $41B.  There are currently 7 strong buys, 17 buys, and 14 holds on the stock with only 1 underperform and 1 sell recommendation. 

Looking at the technicals, VMWare is starting to break out, to the upside.  On February 2^nd, the stock broke through its 200-day moving average.  While it was done on low volume, the entire market is trading on low volume so I’m throwing that out the window.  The stock has respected its uptrend line from the December 21^st low, breaking down only once, but gapping up immediately the next day.  VMWare is trading in triangle formation since that December low with the upper range connecting the December 27^th and January 26^th highs.  This type of up-trending triangle formation indicates a breakout is coming, which I see going to the upside.  I see the next major level of resistance coming at par ($100), which is where the downtrend lines comes into play connecting recent highs made on July 20^th and November 14^th.  A move above $100 should beget a move back up to $110, which would almost match the stock’s recent high of $111.43.  The stock has traded higher for the last four weeks indicating great upward momentum.  The stock has an unfilled gap after its most recent earnings beat on January 23^rd and 24^th.   After challenging that gap four times in the last week, it has since broken away.  With VMWare being a key component of the Nasdaq, and the Nasdaq leading this recent bull market, I see continued upside potential for VMWare. 

VMWare is currently trading at $95.58, up 2% on Friday.  That makes for a good entry point into the stock with a stop loss placed at $89.00 (loss of 7%).  My price target for the stock is $110 indicating an upside of 16%, putting the stock up 30% for the year. 

Full disclosure:  I currently do not own VMW and have no plans to buy the stock in the next week since I am currently overweight in technology.

Potash Corporation

1/28/12

This week I’m recommending a stock that is my second favorite in the agriculture segment (my first being CF Industries, which has already run up too much to buy at these levels), Potash Corporation (POT).  Potash produces and sells fertilizers and industrial and feed products in the US and Canada.  Last week they recorded a weaker than expected Q4 earnings report with earnings of $0.76/share ($0.10 less than expectations) and revenues totaling $1.86B ($2.09M expected).  While the quarter fell short, Potash recorded its second strongest year ever, with earnings of $3.51/share on $8.7B in revenues.  What attracted me to this stock is that even with a bad quarter, the stock didn’t drop like it should have, but instead rallied almost 4% for its highest close since November 7^th. 

When looking at this stock, it’s important to look at how the grains are trading (soybeans, corn and wheat).  If you look at all three commodities, they all point to going higher, right into the big growing season in the US.  High grain prices means more people will be farming this year, which translates into a need for more fertilizer and feed for the crops.        

Potash has a market capitalization of $40.64B and is trading at just 12X foreword earnings.  The company is growing quarterly revenues by over 140% year-over-year (YOY).  Potash does pay a small dividend of 0.60%, but you buy this stock based on its long growth potential.  Analysts currently have an average price target of $56, so trading at it’s current level of $47.45, there is a lot of room to the upside.  The stock was down almost 20% last year, but it’s currently up 11% this month, greatly out performing the market. 

Looking at the technicals of Potash the chart looks very strong.  After making a new 52-week low in mid December of $38.42, Potash has built an inverted head-and-shoulders, with the bottom of the right shoulder at $40.02.  The day they reported their earnings, the stock broke through the 23.6% Fibonacci retracement, and is less than $0.50 from the key 38.2% retracement of $48.18/share.  Potash is making big moves to the upside (including a recent break above the 50 day moving average) on very heavy volume, volume not seen since September 22, which is another bullish indicator. 

My advice for trading this stock is two fold.  If you are looking to trade it short term, then buy at the market on Monday and stop yourself out at $44.40, slightly below the 23.6% Fibonacci retracement.  I think Potash will find support there, but in case it doesn’t you’ll be out of the trade, limiting your losses.  If you have a longer-term time horizon, place your stop at $42.50, which is slightly below the long-term downtrend line from the all-time highs made a year ago.  For the upside potential, I see the stock going to $52 in the next three months; with a high target of $58 by the end of the year for a 22% gain. 

Full disclosure:  I currently do not own POT and have no plans to buy the stock since I am already overweight in the agriculture sector. 

Broadcom

1/22/12

Last week’s recommendation of Cliff’s Natural Resources, netted a flat week, but the stock did hit a high of $73.  The fact that it did not pull back indicates a continuing bullish trend and you should stick with it.  This week I’m recommending a stock that I just recently bought, Broadcom (BRCM).  Broadcom designs and develops semiconductors for wired and wireless communications.  They enable voice, media, data and digital content to your phone, tv and tablet.  While not a big part of the iPhone (That belongs to Qualcomm), Broadcom chips are found in most Android powered phones and tablets.  BRCM is closed Friday at $35, which is a great entry point for this stock.  It’s 52 week high is $46.75 and low is $27.59. 

Broadcom has a market cap of just $18.86B, much less than it’s biggest competitor, Qualcomm (QCOM), which has a market cap of $97.04B.  I like Broadcom over Qualcomm for many reasons, among them is BRCM is slightly cheaper, trading at just 12 times forward earnings and a Price-to-earnings (PEG) ratio of a measly .81.  With almost $6/share in cash, the stock is trading even cheaper than its 12 P/E indicates.  With just $698M in debt, Broadcom has over $3B in cash and pays out a 1% dividend. 

From a technical perspective, BRCM has broken out to the upside on almost twice the average volume over the last 10 days.  One of the most bullish technical indicators I’ve seen in the stock is a breakaway gap above it’s 200 moving average of $34.01 on 1/18 with it’s largest volume since late July.  Since then, BRCM traded up to it’s 38.2% Fibonacci retracement of $35.15, which also happens to be where its current downtrend line comes to.  While BRCM didn’t break through that line last week, it ended the week up almost 9%, again, on very large volume.  Additionally, Broadcom built a perfect inverted head-and-shoulders at the bottom of a 5^th wave down on a weekly and daily chart. 

One thing that I’ve been noticing so far this month is there is a movement out of the best of breed and into the laggards.  You see it with US Bank selling off slightly, while Bank of America and Wells Fargo are rallying.  Up until Friday, IBM had been selling off of its all-time highs, while Microsoft was making new 52 week highs.  I think this trend continues where people will look to be selling out of QCOM and into Broadcom.   

Broadcom reports earnings on 1/31, which should be strong, based on what other chip makers earnings so far this season.  Over the next 3 months, I’m looking for a move up to $39.83 (61.8% Fibonacci retracement) and for the year, I expect a move to $42.50 mark, which is where I would look to take profits.  I see very limited downside risk, but being a technology company, give yourself some room to work with a stop loss a little more than 5% at $32.26. 

Full disclosure:  I currently am long BRCM from $34.34 and have been long since 1/19/12. 

Clff's Natural Resources

1/16/12

The stock I’m recommending this week is a favorite of mine since late last year but is ready to break out.  Cliffs Natural Resources (CLF) is a mining and natural resources company and one of the largest producers of iron ore and coal.  Based out of Cleveland Ohio, Cliffs operates iron ore and coal mines throughout the world including the US, Canada and Australia.  With a $10.05B market cap, the company is the largest of it’s kind, larger than it’s closest competitor, Peabody Energy (BTU).     

While I believe the technicals will always trump the fundamentals, both look very strong and should propel the stock price higher.  Fundamentally, the company has a strong balance sheet with $3.81/share in cash, a current ratio of 1.47 and a book value of $40/share.  Cliffs is trading at an astronomically low Price to multiple ratio (P/E) of just 5.5 and a Price to earnings growth rate (PEG) of only .42 (meaning it’s stock price is only growing half as quick as their earnings, which indicates it’s very cheap).  Cliffs is expected to earn $12.53/share for FY11 and $12.51/share for FY12 as the company expects a slow down in production. 

As of Friday’s close, CLF is trading at $70.25, with a 52 week low of $47.31 and high of $102.48.  The company does pay a small but yet increasing dividend of $1.12/share (1.60%).  There are currently 5 strong buys, 11 buys and 4 holds on the stock from other analysts, where I rate Cliffs as a strong buy.

From a technical perspective, Cliffs has broken out and should continue to the upside, with an every improving US economy (yes, the economy is improving).  On January 10, Cliffs put in an breakaway gap at $64.34, re-tested that gap and failed the rest of the week, and then put in another breakaway gap at $67.95.  That gap was also re-tested but never taken out, which is a bullish indicator.  Additionally, the 38.2% Fibonacci retracement is at $68.38, which was broken to the upside on higher than normal volume.  The next level or resistance for CLF should come at $74.90, which is the 50% retracement, which I suspect will be broken after failing the last 3 times.  Cliffs has finally traded above its downtrend line and has stayed there for the last 4 trading sessions, on unusually high volume. 

My price target on Cliffs is $102.48 indicating an upside of about 46%.  I think you can buy a small position at this level and stop yourself out at $66.44, a 5% downside risk.  Again, buy a small position at these levels and add as the price goes up to $75.  A common misconception is to add to a position as the price goes down.  Well in doing so, you’re breaking one of the most important rules of investing which is cut your losers and ride your winners.  Adding to a losing position, usually leads to more losses and then you end up holding on thinking the stock will come back, but never does.  Always add to winners…never add to losers.

Full disclosure:  I currently am long CLF from $61.48 and have been long since 10/25/11.