The gulf separating growth and value stocks continues to widen. On the index level, you can best see the tale of two markets by comparing the Dow Jones Industrial Average to the Nasdaq. To wit: this morning, the Dow is up 0.76%, and the Nasdaq is down 1.50%. It’s not an insignificant difference. Growth won’t get torched forever, but while it’s out of favor, we’re going to look elsewhere for our top stock trades.
This week, my scanning unsurprisingly found opportunities in retail, home construction and industrials. All three have been on fire this year, providing multiple bullish patterns along the way. Because of the recent consolidation, today’s picks all boasted easy breakout setups for this week. Even better, they’re all triggering in early morning trading.
They’re also seeing powerful follow-through, which suggests buyers are piling in with conviction right now.
That said, here are the picks:
After the usual chart analysis, I’ll share an options strategy well-suited for each ticker.
Top Stock Trades: Best Buy (BBY)
Retail has been front-and-center when it comes to the economy reopening trade. Stimulus-infused shoppers have opened their wallets, sending the share prices of big-name retailers to the moon. Best Buy has experienced some of the tailwind, but its price chart has actually been stuck in a wide range since last September.
In late February, underwhelming earnings pulled the rug out from under the stock, but we’ve since seen an aggressive recovery. A high-volume rally carried BBY directly to the doorstep of a major breakout ahead of the weekend. This morning’s 4.5% gain officially triggered the resistance break and has buyers swarming.
Implied volatility is ramping alongside prices and now sits at the 48th percentile. If you think the breakout sticks, then you can capture a handsome return by selling put spreads.
The Trade: Sell the June $115/$110 bull put spread for 75 cents.
Consider this a bet that BBY stays above $115 for the next month. If it does, you’ll pocket the max gain of 75 cents per spread.
KB Home (KBH)
Real estate has been red hot in the wake of the pandemic. Even skyrocketing lumber prices haven’t been able to dampen demand. Home construction companies have ridden the wave to higher prices. KB Home ran into stiff resistance at $50 and based beneath it for weeks. The silver lining to the pause is it created an easy-to-spot breakout trade.
Friday’s jump officially carried prices through the ceiling, and we’re seeing a solid 2% jump this morning to bring added confirmation. Looking at the history of KBH, it strikes me as a better candidate for a trend trade than a swing trade. The price action has been gradual, requiring patience for bigger profits. For that reason, I like buying time and building a diagonal spread that capitalizes on neutrality if KBH ends up treading water after this breakout.
The Trade: Buy the Oct $50 call while selling the June $55 call for around $5.10.
Top Stock Trades: Cummins (CMI)
With the Dow officially donning a leadership role, there’s no shortage of tasty stock trades in the industrial sector. Indiana-based Cummins is one such company that has capitalized on the market’s newfound love of the industry. CMI designs, manufactures, and services diesel and natural gas-powered engines. Its share price has quietly doubled over the past year.
Over recent weeks, a basing pattern formed between $266 and $252. The initial response to earnings saw a quick trip below support that was rapidly bought. The downside shakeout yielded to a four-day rally that brought prices to the brink of an upside breakout. This morning’s 2% pop is the signal chart watchers have been waiting for.
Implied volatility signals premiums are dirt-cheap. I like bull call spreads here.
The Trade: Buy the Sep $280/$300 bull call for $6.00.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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