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We are opening a new bullish trade on Emerson Electric Co. (NYSE:EMR). The trade deal with Canada announced yesterday may not be materially different than NAFTA, but relieving that uncertainty is likely to have a positive impact on the market anyway.
Yesterday was a little choppy, but we expect an improved trade outlook to lift stocks — especially industrials — in the short term. This is one of the big reasons EMR is so interesting right now. EMR is a manufacturer known for industrial electrical and HVAC equipment as well as automation hardware for several industries including oil and gas. It has very broad international exposure, including a significant amount of business with Canada.
It also has brands of household appliances and tools. If you have ever bought a power tool at Home Depot (NYSE:HD), there is a good chance you have personally interacted with EMR through their Ridgid Tool brand.
We are frequently asked about stocks in the U.S. that are exporters to countries in the crosshairs of this year’s trade “negotiations.” Some of the easy picks include agriculture and autos, but industrial equipment is one of the most significant U.S. exports beyond agricultural products.
Emerson is a key supplier for electrical and energy transportation projects worldwide, and particularly in Canada. The pipeline for upcoming projects remains very robust — including Asia, where stimulus spending on power infrastructure is already picking up again. With the risk of a trade war in North America reduced, we think the prospects for the company are continuing to improve.
There are still significant concerns about retaliation from China. As a key growth area, worsening conditions there could be a problem for most industrial firms. We view improvement in this area as far more likely now than even a month ago, but traders should be careful.
From a technical perspective, EMR has established short-term support at $76 per share, and we expect that level to hold. However, because we are still somewhat concerned about risks to trade in Asia we are recommending a hedged entry into the stock through a short put. That way, we have a lower breakeven and, if we wind up long the stock, we will be in at a lower price than is available today
‘Sell to open’ the EMR November 2nd $77 Put Write (EMR181102P00077000) for a minimum price of $1.05.
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