Navistar Call Options Trucking Higher

by Stutland Volatility Group | December 15, 2011 8:45 am

As pessimism grows and stocks slide further, we think that it is time to begin thinking like a contrarian and get positioned to profit from a market recovery with a low-risk, high-potential-reward trade.

If the stock market begins to recover we think that Navistar International Corp. (NYSE:NAV[1]) will be leading the charge. And we are not alone — the average expectation is for Navistar’s stock to appreciate by 60% in 2012.

Navistar is a pure play on the North American truck market. Through its subsidiaries, the company manufactures and markets medium and heavy trucks, school buses, mid-range diesel engines, and service parts.

We anticipate this stock doing well in 2012 because, at a P/E of 12.7 and with earnings growth of 60% in fiscal 2011, NAV is undervalued. Navistar has recently increased its market share by 7.3% in Latin America, a major emerging market for heavy-duty trucks, and should continue to see growth both in the United States and abroad.

Another catalyst that may drive Navistar’s stock growth in 2012 is its status as a takeover target. Navistar’s own board admitted it is a candidate for a merger, and shortly after activist Carl Icahn increased his stake in the company to 10%.

Recently Icahn has suggested merging Navistar with Oshkosh Corp. (NYSE:OSK[2]), a specialty truck producer he has a significant interest in. Should this, or any, deal come to fruition, we expect Navistar’s stock to pop.

That is why we are recommending buying the NAV Jan 40 Calls at $1. By owning a call, you can participate in Navistar’s upside with only $1 risk on the downside. In today’s unpredictable and volatile times, we at Stutland Volatility Group think low-risk, high-potential-reward trades are your best bet for profits.

Here’s a quick summary of this trade idea:

Stock/Index: NAV

Stock Price: $36.50

Next Estimated Earnings: Dec. 21 (pre-market)

Option Play: Long Call

Buy: January 40 Call @ $1

Net Cost: $1 (Long Call)

Breakeven: $41

Max Profit: Unlimited

Max Loss: $1 (Net Cost)

Endnotes:
  1. NAV: http://studio-5.financialcontent.com/investplace/quote?Symbol=NAV
  2. OSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=OSK

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