Below you can find an example of one of our Trade Alerts. These
are actual trades that were recommended to subscribers back
in April of 2009.
Buy the PWRD Sep 2009 $22.5 Calls @$1.45 or better (QOPIX)
Stock Symbol: PWRD
Option Symbol: QOPIX
Bid/Ask: 0.90/1.15
Stop Loss: 50% below entry point
A couple of months ago we recommended buying call options on Chinese online
video game developer, Shanda Interactive (SNDA). And, boy
were we right. Since then, the stock has rocketed 50% higher and our call
options are up a whopping 416%!
We’re going to continue riding this winning trend with this week’s
recommendation.
Perfect World (PWRD) is a leading online video game developer
and operator in China. They develop 3-D online games based on their proprietary
Angelica 3D game engine and game development platform.
PWRD currently offers one casual game and seven massively multiplayer online
role playing games (MMORPGs). They have a strong pipeline of new games for
2009 and beyond, including seven new MMORPGs.
The company operates most of their games under an item-based revenue model.
Players are allowed to play the game for free, but they must pay for in-game
items. These include performance enhancing items, clothing, accessories and
pets.
What sets PWRD apart from the competition is their expansion into markets
outside of China. The company recently established a subsidiary in the
U.S. to operate their games in North America. They also license their
games to operators in Asia, Europe, and South America. All revenue
generated from these sources is essentially pure profit.
2008 was a great year despite the global economic slowdown.
Total revenue more than doubled to $210 million. This revenue surge was
due to the launch of four new games and market expansion in Asia, Europe, and
North America.
With gross profit margins of 88%, PWRD is a profit making machine. Net
income jumped 79% to almost $95 million or $1.60 per diluted share.
The company’s terrific growth should continue in 2009.
Revenue is expected to rise 24% to over $261 million and earnings per share are
estimated to jump a whopping 29% to $2.07.
Given PWRD’s extraordinary growth rates, you’d expect the stock to carry a lofty
valuation. Lucky for us this diamond in the rough is still largely
undiscovered.
At a recent price of $17.05, the stock trades at just 10.6x trailing twelve
months earnings and 8x its 2009 estimate. Pretty low P/Es for a company
expected to average 28% annual earnings growth over the next five years.
For comparison, Shanda has a P/E of 17.8x and a forward P/E of 15x. Using
a comparable forward P/E of 15x, PWRD is easily worth more than $30 per share.
That’s about 76% above PWRD’s recent price.
Our technical indicators suggest the stock is overbought in the short-term.
The shares have almost doubled off the low set in early March. Usually, a
stock will pull back briefly after a run up like this. However, given
PWRD’s strong growth outlook, we expect the upward trend to continue following
any pullback.
We suggest you establish a position right away in case the stock keeps moving
higher. More experienced traders may want to wait for a pullback to try and get
a lower price on the call options. Just understand a pullback may not
happen and you could miss the trade by waiting.
Remember to take profits when your options double in value. Use a mental
stop-loss 50% below your entry point to limit any losses. Keep an eye on
your position sizing.
Buy the MHK Aug 2009 $25 Puts @$3.10 or better (MHKTU)
Stock Symbol: MHK
Option Symbol: MHKTU
Bid/Ask: 2.65/2.85
Stop Loss: 50% below entry point
Mohawk Industries (MHK) manufactures carpets, rugs, and
hard-surface flooring for residential and commercial use. They sell their
flooring products through retailers, home centers, mass merchandisers,
department stores, and commercial dealers.
The company has been hit hard by the housing crisis and economic recession.
Floor covering sales have fallen off a cliff due to extremely low new home
construction. And, remodeling activity has declined sharply in lockstep
with falling consumer confidence levels as unemployment rises.
Revenue declined 10% to $6.8 billion in 2008 and the company lost a
mind-boggling $1.5 billion or $21.32 per share.
Business really fell off in the fourth quarter. Revenue declined 18% on
double digit sales declines across all business segments and the company posted
a loss of $93 million. They also took a $124 million charge for impairment
to goodwill and a $30 million charge for restructuring.
To stop the bleeding, Mohawk has laid off workers, reduced inventory, and shut
down high cost production lines.
The first quarter of 2009 probably wasn’t any better.
Management predicts sales continued falling due to the housing crisis and
economic recession. They’ve also forecasted a loss of $0.80 to $0.89 per
share for the quarter.
Investors have recently pushed the stock higher on overly optimistic
expectations for an economic recovery. While the economy might be
declining at a slower pace, it is still declining.
Unemployment is up to 8.5% and rising. The housing market is awash with
unsold, unoccupied homes. And, consumer spending is still virtually
nonexistent.
We believe the stock has moved too far, too fast.
After falling to under $17 in early March, the stock has rallied sharply to more
than $32. That’s an 88% move in just four weeks time. We think it’s
due for a sharp pullback. Plus, if first quarter earnings miss already
lowered estimates, the stock could tank back down to the March low.
Our technical analysis confirms our fundamental outlook.
The stock is bumping up against resistance at its 20-week moving average.
The 5-day moving average has turned down. We’ve gotten a cross over above
80 on our slow stochastic indicating the shares are overbought. Also, our
accumulation/distribution indicator shows a negative divergence with the stock
price.
Remember to take profits when your options double in value. Use a mental
stop-loss 50% below your entry point to limit any losses. Keep an eye on
your position sizing.
