EOT Trade Alert – July 8, 2009

Corey Williams | July 8, 2009

July 8, 2009

Trade Alert:

Buy EXP October 2009 22.50 Puts at $2.30 or better (EXPVX)

Company Background:

Eagle Materials (EXP) is a manufacturer of basic building materials. They primarily make gypsum wallboard and cement.

Short-Term Catalyst:

It’s all about earnings. EXP is reporting their first quarter 2010 earnings on July 23.

Here’s the deal.

Analysts have steadily revised their earnings estimates lower over the last year. But the stock has rallied on expectations of quick recovery and a rebound in earnings.

Since it peaked in May, it’s been moving steadily lower. A negative earnings surprise should knock the rest of the wind out of EXP’s sails.

I think they’ll fall short of $0.25 EPS. Why? Construction spending is down almost 12% from a year ago. And if construction spending is falling, so will sales of gypsum wallboard and cement.

How are their earnings supposed to rebound when the amount of money spent on construction is still falling? I just don’t see it happening.

We’re taking a position in EXP to profit as their stock sinks back towards its recent low.

Trade Details:

Option Ticker Symbol:	EXPVX
Underlying Stock Symbol:	EXP
Current Bid-Ask Price:	$2.15 – $2.25
Option “Buy Up To” Price:	$2.30
Break-Even On Stock At Expiration:	$20.20
Maximum Risk Per Contract:	$225

Exit Strategy:

EXP is trading at $22.84 per share. Resistance levels will be at $27 and again at $30. Remember, we want this stock to move lower. Support levels will be at $20 and $18. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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