The Secret of Money-Doublers They Don’t Want You to Know
of getting burned by the market again.
While almost nothing in investing (or life) is a sure thing, we can tell you this: If you sit on the sidelines, you won’t make any money. You’ve
got to be in the game if you want the chance to win — but you don’t have to play it alone.
Our OptionsZone experts are here to help by giving you their top trades for 2010. So start the new year off right with the 10 options trades our experts
see as the best opportunities in the upcoming year.
The Secret of Money-Doublers They Don’t Want You to Know
#1 PowerShares DB Agriculture Fund (DBA) LEAPs
By Chris Johnson and Jon Lewis
Few things appear to be a lock over the next year. However, one thing that most investors accept as a given is the return of inflationary pressures
to the market in 2010. In 2008, investors on the ball were able to profit from the inflation
play in food prices by investing in the PowerShares DB Agriculture Fund (DBA). It’s time
for a repeat performance.
DBA offers a vehicle to participate in the agriculture futures market via a single vehicle, representing a basket of widely traded wheat, corn,
soybean and sugar futures. After peaking in popularity and price at almost $44 in early 2008, DBA was cut in half in the latter half of 2008, as the “crowd” rushed
out of this sector. Currently, DBA presents a neglected investment alternative, just as some fundamental aspects of the agriculture trade may be ready
to kick back into high gear.
Demand for agricultural products is not likely to ebb as the global population grows. In addition, cooler and wet weather in the Midwest caused
late harvests, meaning that winter wheat production will be less than expected. The slightest tip in the balance of supply will likely cause investors
to rush back into the food inflation play. Go long DBA with January 2011 LEAPs, which have potential for long-term triple-digit gains.
The Secret of Money-Doublers They Don’t Want You to Know
#2 Pfizer (PFE) Calls
By Nick Atkeson and Andrew Houghton
As a result of the weaker U.S. dollar, goods manufactured in the United States are less expensive abroad. We combed through the U.S. Census
Bureau’s list of U.S. exports by type and found the largest category of goods we export is pharmaceutical drugs. It is also about the only category
of export that is showing growth from 2008 to 2009 year-over-year. In fact, year-to-date through August, U.S. drug exports were up 17.89%.
Pfizer (PFE) manufactures and exports a lot of drugs. The stock has been out-of-favor for
most of the decade, and even though it has appreciated 60% off its lows this year, it is still up only about 6% year-to-date. Analysts expect the
company to earn $1.97 this year and $2.20 in FY 2010. PFE has about $3 per share in net cash. If the stock were to trade at $20 next year, it would
be trading at a multiple of about nine times earnings and paying a dividend well north of 3%. We believe those metrics are too cheap and the stock
will be well above $20 sometime in 2010. So take a look at PFE call options.
Next: #3 Amazon.com (AMZN) Calls and SPDR S&P Retail (XRT) Puts
The Secret of Money-Doublers They Don’t Want You to Know
#3 Amazon.com (AMZN) Calls and SPDR S&P Retail (XRT) Puts
By Michael Shulman
I was ripped apart for predicting Black Friday would be a bust compared to expectations — and it was. Holiday spending was anemic, and 2010
will be the year people wake up and realize that the “New Frugal” is upon us — permanently. (See 10
Reasons the Economy Will NOT Recover in 2010.) U.S. retailers are typically well-managed, but they cannot fight falling demand and maintain earnings
and their stock prices throughout 2010. Discount retailers will do well while higher-end retailers will struggle.
Another trend that will accelerate in 2010 is cost disintermediation, which, in plain English, means shopping online. The winner will be Amazon.com
(AMZN). I buy everything from books to coffee to Advil on Amazon, and I don’t pay sales tax or
shipping charges (one-time yearly charge of $79). Barring a market crash, AMZN is a long for the foreseeable future, so buy AMZN call options.
With reduced consumer demand and an ever larger part of that demand being satisfied online, another top trade of 2010 will be SPDR S&P
Retail (XRT) puts. The XRT is a broad-based retail ETF, but online retailers comprise a very small
portion of the stocks this ETF tracks. Do not buy the XRT puts now, as the charts are not favorable. But if you’re patient, I think you’ll find this
to be a very profitable trade in the new year.
The Secret of Money-Doublers They Don’t Want You to Know
#4 Northern Dynasty Minerals Ltd. (NAK) Calls
By John Lansing
If you’re looking for the perfect stock to play the long-term bull market in gold, I have just the one for you: Northern Dynasty Minerals
Ltd. (NAK).
Even though we saw a large pullback in gold at the begining of December, NAK actually
went higher. There’s something to be said for a stock that hangs tough in a market as volatile as the gold sector and even outperforms
the actual metal!
The best way to play NAK is with call options. I’d take a look at the May NAK calls, as there are some great bargains to be found.
Gold is headed up in 2010, and you don’t want to miss out on this very lucrative trade.
Learn why gold is The No. 1 Sector to Invest in for 2010.
The Secret of Money-Doublers They Don’t Want You to Know
#5 PNC Financial Services Group (PNC) LEAPs
By Chris Johnson and Jon Lewis
Regional banks have been hammered over the past 18 months as the credit crisis wreaked havoc on the financials. While many stocks deserved the beat-down,
there are more than a few that were victims of being a boat dropped by the falling tide.
From our perspective, PNC Financial Services Group (PNC) falls in the second category,
meaning that the stock should remain a relative strength leader among financials. PNC has been a relatively quiet performer out of the March bottom. The stock is up more than 200%, without the same attention
of the more popular financial stocks. Investing in the stocks that the market has yet to recognize as outperformers is how you beat Wall Street at
its own game.
Check
out the PNC January 2011 LEAPs to get in ahead of what could be a slew of analyst upgrades in 2010 as PNC gets the positive attention it
deserves.
The Secret of Money-Doublers They Don’t Want You to Know
#6 STEC Inc. (STEC) Calls
By Nick Atkeson and Andrew Houghton
STEC Inc. (STEC) has vastly superior memory and data storage technology, and the company
is taking market share at an incredible pace. The stock was a high-flyer this year, climbing to $42.50, but now trades for less than $17.
STEC was crushed primarily because of an overly aggressive order placed by EMC (EMC) If
EMC has excess STEC inventory going into the first quarter of 2010, STEC’s Q1 earnings could be hit hard, as EMC represents 60% of STEC’s sales. Also, Oracle (ORCL) is acquiring Sun Microsystems (JAVA), so customers aren’t buying Sun storage devices with STEC drives for fear that Oracle will discontinue them. Finally, investors were angered when management
sold much of their stock at about $31 per share on a recent follow-on offering just before telling investors about the EMC problem.
However, we like the stock. The company is generating about 70 cents of cash flow per share per quarter. And our guys in Silicon Valley tell us that EMC is not known for holding
onto excess inventory and will try to move it aggressively. STEC will face increasing competition and margin pressure in 2010, but it is currently
running at 60% operating margins, so there is plenty of room for margin pressure while maintaining outsized earnings.
STEC has a hot product in a hot market, not to mention that IBM (IBM) and Hewlett-Packard
(HPQ) are new customers. We believe 2010 will be a great year for the stock after the Q1
revenue uncertainty overhang is cleared. The stock has run up recently, but if it returns to its 52-week high, it will have appreciated about 150% from current levels. And just imagine
the astronomical profits you can make if you buy STEC call options and this happens.
The Secret of Money-Doublers They Don’t Want You to Know
#7 SPDR S&P Homebuilders(XHB) Puts
By Michael Shulman
Not only will there be no sustainable housing recovery in 2010, expectations of one are going to create a great shorting opportunity for contrarians.
Yes, data show there has been somewhat of a bounce — but this bounce is off a very low bottom. Back in the good, old days, the bottom for
the housing sector was when new home starts were at an annual rate of 1 million. We are at less than half a million currently, yet money is coming
into these stocks. Why? The passage of the homebuyer tax credit and a reduction in inventory. Problem is, both are one-off events.
By March, inventory will be surging again as banks start listing for sale the near 1 million foreclosed homes they have yet to put on the market.
These are typically rather new, low-priced homes, and they will compete with brand-new homes. And more foreclosed homes will hit the market from mid-2010
to mid-2011. Too much inventory not only crowds out new homes, it reduces the price buyers are willing to pay for them. I also suspect that the tax
credit will not renewed in April when it expires.
Bottom line: Short the sector when the charts are on your side through put options on the SPDR S&P Homebuilders (XHB).
The Secret of Money-Doublers They Don’t Want You to Know
#8 Ford Motor (F) LEAPs
By Chris Johnson and Jon Lewis
Ford Motor’s (F) ability to avoid a government handout in 2009 should serve it well in 2010.
By toughing it out under difficult circumstances, the company emerged as a star of perseverance. But more than being a good patriot, Ford relearned
how to make reliable, innovative and stylish cars that consumers want to buy. And they did it against brutal global competition.
The signs of a solid 2010 are already showing up. Domestic vehicle sales (outside of the clunker program) have stabilized amid an improving economy.
What’s more, Ford’s gamble to push smaller cars in the United States should win approval both in showrooms and on Wall Street. International sales
are expected to climb as well. Perhaps most important, though, is the fact that Ford is no longer considered an also-ran among automakers around the
globe. The perception of Ford as a builder of quality, economical cars should resonate around the world in 2010.
Ford’s stock price is up more than four-fold so far in 2009. A repeat performance in 2010 is far-fetched, but there’s no reason to believe that
the stock can’t continue its monster run next year. We may just have to settle for a double. But we can leverage those gains with the F January
2011 LEAPs.
Find out how to Use LEAPS to Avoid Value Traps.
The Secret of Money-Doublers They Don’t Want You to Know
#9 Dot Hill Systems Corp. (HILL)
By Nick Atkeson and Andrew Houghton
Dot Hill Systems Corp. (HILL) manufactures low- to mid-range storage appliances that it
sells to companies like Hewlett-Packard (HPQ) and NetApp Inc. (NTAP).
Essentially, these storage appliances are sheet metal wrapped around a redundant array of independent disks (RAID). This hardware holds limited intellectual
property content, so HILL’s gross margins have been low, about 12% to 15%.
In September 2008, HILL bought RAIDcore and NAS (networked-attached storage) intellectual property assets from Ciprico Inc. (CPCIQ).
The acquisition was dilutive initially, but what is interesting about the RAIDcore acquisition is that it enables RAID storage via a software solution
rather than a hardware solution. This means that the functionality of RAID storage can now be purchased for 80% less. On top of this, software gross
margins are 90% to 95%.
In mid-November, NTAP reported better-than-expected earnings, revenues and guidance. Investors know that HILL is a NTAP supplier, so HILL may be
seeing some ripple effect from this. And studies point to improved IT spending in 2010. Additionally, it appears a major company has just qualified
HILL’s RAIDcore product.
Trading for about $2, the stock is basically an option without an expiration. A modest improvement in margins and revenues could cause a major improvement in profitability.
Given the potential for explosive appreciation in this stock that trades like an option, we recommend buying shares of HILL.
The Secret of Money-Doublers They Don’t Want You to Know
#10 UltraShort Financials ProShares (SKF) Calls
By Michael Shulman
Several trends will emerge in 2010 that will dismay the bank bulls. The banking sector is becoming bipolar: Some banks are increasingly self-sufficient,
requiring little or no federal support, while the others are on life support and will continue to be so in 2010.
Some of the banks seem to be “all right” — like Bank of America (BAC) and Wells Fargo
(WFC) — are not. BAC may be trying to pay back TARP money, and it made money this year due
to the old Merrill Lynch trading operation, but the quality of its balance sheet continued to deteriorate in 2009, and it still needs $118 billion
in federal guarantees of its debt to function. WFC will have to put more than $100 billion in what I assume are less-than-pristine assets on its books
in January, has reserved far too little against future losses, and is not even close to paying back TARP funds. And forget about Citigroup (C)
— a walking zombie with $300 billion in federally guaranteed debt, $45 billion in TARP funds and a flailing business. But I think the big surprise
in 2010 will be the weakness in earnings among pretty good banks. The flat recovery or double-dip recession is going to hammer their earnings, and
as the time of rising interest rates draws nearer, operating profit expectations will fall.
So go long the UltraShort Financials ProShares (SKF) — the double-inverse ETF that goes
up about 1.5%-1.6% for every one-point fall in the Dow Jones Financial Index. The high-risk/high-reward trade here is to buy SKF calls.
ready for some quick profits.