As I repeatedly scan the markets for the best opportunities, my searches all seem to lead to two areas. The first is the social technology sector — Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), etc. It contains some great stocks, but most are so heavily bid up that it’s hard to justify an entry here — at least, not until a pullback.
The second, equally exciting area is defense and travel technology. This area is less popular and less understood than social tech, creating more potential value on average. There are several companies that thrive in this genre, but one keeps rising to the top of my list: Rockwell Collins, Inc. (NYSE:COL).
My original thesis was centered on COL becoming more of a “household name,” but both of our recent wins had little to do with Rockwell’s broad recognition as a great company. The first rally was attributed to a boost in the entire defense group (thanks to action from North Korea) followed by a better-than-expected earnings report.
Both of these events are certainly great news for the company, but I still feel that Rockwell’s true value is underestimated and that its recent acquisition of BE Aerospace isn’t getting the credit it deserves. Rockwell is also more than just a defense contractor; its equipment is in nearly every commercial jet in the world!
If this is your first time hearing about Rockwell, you can learn more about the company here.
Underestimated Earnings at COL
Several analysts expect the BE deal alone to add $1.35 to $1.40 to Rockwell’s annual earnings per share (EPS).
So while COL’s forward P/E of 18 is slightly high compared to its 15-year average of 16.7 (yet still lower than the S&P 500‘s average), the BE deal combined with a healthy global commercial aircraft industry and a president who favors military spending could easily push COL’s P/E back to 20 or even 22, where it was before the Great Recession. In the chart below, you can see COL’s forward P/E ratio going all the way back before 2001.
Back then, we didn’t have a potential war looming with North Korea, nor did COL own BE Aerospace, which adds quite a bit of value and cost savings to Rockwell as a whole.
Assuming COL earns just $6.80 in 2018 (consensus average), shares could easily be trading at $142 or more, if we assume the stock gets back to its pre-recession 21-times P/E multiple. By the way, most stocks are trading way above their pre-recession P/E levels, so this feels like a reasonable target.
But the best part is that analysts only expect earnings to increase from $5.42 per share in 2016 to $5.76 for FY 2017. If this BE deal adds what the company and some analysts expect to Rockwell’s bottom line, 2017 EPS should be above $6.77 and closer to $7 or greater in 2018.
In the latter scenario, even if the P/E ratio stayed at the current 18-times valuation, shares would still be valued around $126.
As you can see, both possibilities put shares much higher than current prices just below $104.
Analysts at JP Morgan Chase & Co (NYSE:JPM), Morgan Stanley (NYSE:MS) and Baird all seem to agree with my logic as they recently placed targets on COL at $125, $125 and $127, respectively. Even when we include some of the less optimistic analysts, the consensus price target for COL stock is still close to $116, 12% above current prices.
But as you all know, I’m a probability guy who likes to stack the odds in our favor…
I believe that COL is easily worth the $115 consensus target and even the $125 target that several analysts and I predict given its fundamentals, but shares recently failed to break above $107.57 after its post-earnings rally.
Using that level and rounding to a $108 target, we can still make a sweet potential gain and respect the all-important technicals.
The $108 target is below my two bullish scenarios and the analyst consensus, plus it’s right at technical resistance, increasing the probability of the trade. Keep in mind that this only represents a 5% gain over current levels. Based on how this stock has been moving, even the most conservative trader can see that COL could easily reach this goal by July.
How I Plan To Earn 10 Times As Much As The Price Hike
I’ll start by saying that, out of respect to my Profit Amplifier subscribers, I won’t reveal the details of this trade here. What I can tell you, though, is that we stand to make a 45.5% return if COL is trading above $108 on July 21. If you break it out, that’s 45.5% in 64 days, which works out to an insane 259% annualized return.
Again, every metric is lining up in its favor, so I fully the stock to hit our expected value in time. But even if it doesn’t, we’ll likely still be fine. Currently, COL is trading around $102.50. This trade breaks even if shares rise to $105, only about 2.9% above current prices.
And I’ll be closely monitoring the trade until expiration. If the price takes a plunge for any reason, I’ll immediately update my readers and give them the best option for continuing or getting out of the trade.
That’s the benefit of trading alongside an experienced options trader.
Why I Want to Teach You This Trading Strategy
It may sound corny, but I honestly believe this trading strategy could forever change your financial future. I’ve seen it happen with many people before.
From the studies I’ve seen, roughly 80% of investors don’t do well in the stock market. And over the years, I’ve seen many people struggle. They shouldn’t have to, especially when I know how to help them. In just the first few months of this year, my subscribers and I have already closed some big winners — 35% in six days, 29% in four days, 31% in 10 days and 27% in seven days, just to name a few.
I’ve been teaching Wall Street’s backdoor trading method to investors for 15 years now, and I’ve put together a presentation on it that I’d like to share with you. You can access it here.
StreetAuthority’s mission is to help individual investors earn above-average profits by providing a source of independent, unbiased — and most of all, profitable — investing ideas. Unlike traditional publishers, StreetAuthority doesn’t simply regurgitate the latest stock market news. Instead, we provide in-depth research, plus specific investment ideas and immediate action to take based on the latest market events. Visit us at StreetAuthority.com.