EOT Position Update – August 6, 2008

| August 6, 2008

August 6, 2008

Market Snapshot

NOTE: I see another trade setting up . . . watch for a new Trade Alert on Friday or Monday.

The Dow Jones Industrial Average just closed at 11,656.  Up slightly from a week ago . . . after a 300+ point gain yesterday.  It seems like a lot of work for little gain.

The big news this week.

The Federal Reserve meeting added some rocket fuel to the rally in the Dow yesterday.  The Fed held tight on the 2% rate for Fed Funds.  The news was received positively despite a mention of a softening labor market, and comments about the inflation outlook remaining “highly uncertain”.

The US Dollar continued to show strength over the last 5 days.  Oil prices continue to fall, this time touching a low of $118 on the NYMEX.

The stock of the week was Whole Foods (WFMI) which missed on earnings and cut their dividend.  The organic and natural foods supermarket chain was caught-up in the softening economy and shifting consumer spending habits.

More bad news this week, this time from WCI Communities (WCIMQ.PK).  The homebuilder filed for bankruptcy protection.  Carl Icahn holds about 15% of the company which he bought at around $19 per share.  After his huge purchase, Icahn was made Chairman of the luxury homebuilder.  Shares are now trading for $0.20 each.

Now for the trade updates.

Position Updates

 CLHB January 2009 $95 Calls (QPBAS)
Today was the big earnings announcement.  See our Parting Shots Section below for a blow by blow on the news.  Don’t jump ship yet on this trade . . . we’re still in the early innings.  Resistance will be found near $85 and $90.  Support will be at $72 and $68.

  GT January 2009 $15 Puts (GTMC)
Goodyear posted strong results in the face of declining auto sales and reduced mileage by US consumers.  The company was supported by strong international sales and high margins from high end tires.  The stock traded well above our resistance level of 20. Real aggressive traders might want to hold a while longer.  Support levels are 15 and 12.50.  Resistance is 20 and 22.

  AHGP October 2008 $30 Calls (AQPJF)
AHGP continued to bounce off the low $30s this week.  Resistance is 32.25 and 35. Support is at 26 and 25.

Parting Shots…

Clean Harbors Earnings News.

Today is a perfect example of needing to have strong convictions . . . and be willing to stand by them.  We were waiting for Clean Harbors (CLHB) to announce earnings today before the market open.  Our expectations were high.  What we got was a great announcement:

“Clean Harbors – RECORD Second Quarter Results!”

But then the stock unexpectedly dropped.  It might seem totally confusing.  Let me explain what happened.  Then I’ll make a few suggestions.

First the results.  As we expected, the second quarter results were nothing short of spectacular.  Profits were $0.70 per share.  Easily beating analyst expectations of only $0.66.  Revenue was up 11% year over year.  And Profits were up 44%!

An outstanding quarter.  But wait it gets better.

The company also updated Q3 and year-end guidance.  And guidance was strong. Management expects next quarter’s revenue to be up 10% to 12% year over year. They also see third quarter EBITDA of $45 to $47 million.  For the year, management expects the company’s growth rate to be at the HIGH END of analyst estimates (between 8% and 10%).

So why’s the stock down?

The brief sell off was a knee-jerk reaction by traders who misinterpreted the earnings announcement.  Look at the early morning trading.  The stock fell from yesterday’s close of 78.50 to a low trade of $68.01.  That’s more than a $10 drop, but it happened during the first 15 minutes of trading.  Volatility like this at the open happens sometimes when earnings are announced before the market opens.

This frenzied selling, however, was way over done.  How do I know the traders overreacted to the news?  Because the stock quickly rallied back up to its support level at $77-$78.  And at one point it was trading over $79 a share.

Then came the second blow to the stock.  A news report by Reuters was released around 1:00 p.m. Eastern Time.  They announced the stock was falling on a “Cautious ’08 Outlook.”  I didn’t see it that way, and I seriously wonder if this journalist even listened to the earnings call.

I did listen to the call.

And I didn’t hear anything cautious about their 2008 outlook.  As a matter of fact, it sounded to me like management was very positive looking forward.  While some traders thought the guidance wasn’t strong enough, I think management was just sandbagging the numbers.

And that’s a good thing for us.  By managing analyst expectations, management sets the company up to beat estimates again next quarter.

Don’t forget that management has beaten analyst estimates now 4 quarters in a row. If the management team is half as smart as I think they are, they’re just under-promising so they can over-deliver on their next earnings announcement.

But can you really call expecting to be at the HIGH END of guidance under-promising?

This is a time when sticking to our guns will pay off.  We’re less than 10 days into the trade.  The stock is in a strong uptrend and despite today’s brief intra-day selloff we’re heading in the right direction.  Give the market a day or two to digest the earnings.  I wouldn’t be surprised if the research analysts are burning up the phone lines in the days ahead talking about the upside in Clean Harbors shares.

And don’t forget the waste industry is a defensive play.  If the economy continues to struggle more investors will look to park funds in recession proof stocks like Clean Harbors.

Obviously, we didn’t get the pop we wanted from the earnings announcement.  But remember we have until January 2009 for this trade to show a profit.  Patience is likely to be rewarded with this one.

Category: EOT Update

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