Eaton (NYSE: ETN - option chain) shares have soared higher today after Berkshire Hathaway (NYSE: BRK.A) disclosed in an SEC filing Friday afternoon that it has bought 2.91 million shares of ETN over the past six months. Usuall,y when announcements like this are made, investors follow the Oracle of Omaha and send the stock higher. If you think the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ETN.
ETN opened this morning at $42.30. So far today the stock has hit a low of $41.48 and a high of $43.35. As of 12:25, ETN is trading at $43.49, up $2.34 (5.7%). The chart for ETN looks neutral and S&P gives ETN a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $30 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just five weeks as long as ETN is above $30 at December expiration. Eaton would have to fall by more than 30% before we would start to lose money.
ETN hasn't been below $37 at all in the past year and has shown support around $39 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in ETN or Berkshire.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from Alcoa (NYSE: AA) and General Electric (NYSE: GE) kicking things off last week, here's a look at what Wall Street is expecting from many of the companies scheduled to report this coming week.
Analysts surveyed by Thomson Financial are expecting the following companies to report a rise in earnings when compared to the same period of the previous year.
Nucor Corp. (NYSE: NUE): $1.80 EPS (36.6%) on sales of $6.4 billion (+53.0%)
Google Inc. (NASDAQ: GOOG): $4.74 EPS (24.9%) on sales of $3.9 billion (+41.6%)
Nokia Corp. (NYSE: NOK): 56 cents EPS (23.2%) on sales of $19.9 billion (+17.8%)
CSX Corp. (NYSE: CSX): 90 cents EPS (21.1%) on sales of $2.9 billion (+12.8%)
Altera Corp. (NASDAQ: ALTR): 27 cents EPS (18.5%) on sales of $346.7 million (+8.4%)
IBM (NYSE: IBM): $1.82 EPS (+17.6%) on sales of $25.9 billion (+9.0%)
eBay Inc. (NASDAQ: EBAY): 41 cents EPS (17.1%) on sales of $2.2 billion (+18.0%)
After hitting a one-year high of $104.12 in July, the stock hit a one-year low of $66.27 in January. This morning, ETN opened at $87.94. So far today the stock has hit a low of $84.78 and a high of $87.94. As of 11:40, ETN is trading at $84.88, down $3.67 (-4.2%). The chart for ETN looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $100 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in seven weeks as long as ETN is below $100 at August expiration. Eaton would have to rise by more than 17% before we would start to lose money. Learn more about this type of trade here.
TheStreet.com's Jim Cramer says they can't be profitable with this huge cost – it's time to move on.
Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense. That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.
Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.
I have hated the airline stocks ever since 1985 when I recommended Delta (NYSE: DAL) (Cramer's Take) and my clients promptly dropped 50%. I reiterate that after the tremendous declines these stocks have, they are still worth avoiding. Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.
Eaton, a maker of industrial parts and systems, said that first-quarter earnings rose 5% as demand from international markets pushed sales higher. Net income rose to $247 million, or $1.64 per share, beating Wall Street expectations. Sales rose 12% to $3.5 billion. Eaton shares rose $1.09 in trading Monday to $80.39, but slipped 13 cents in after-hours trading.
J.B. Hunt, which provides truckload and intermodal shipping services, said its first-quarter profit fell 18% because of weak demand and a rising fuel prices. The company earned $36.4 million, or 28 cents per share, missing Wall Street estimates. Total operating revenue rose 10% to $878.4 million. Shares fell 31 cents to $29.15 Monday, and continued to fall in aftermarket trading.
Stanley Furniture, which makes wood furniture for the residential market, said its first-quarter profit tumbled 37%, but beat Wall Street's expectations. The company reported income of $1 million, or 10 cents per share. Sales fell 17% to $62.5 million. Shares fell 15 cents Monday, then plunged another $1, or 9.4%, in after-hours trading to $9.59.
Venture capital is flowing, engineers are chomping at the bit and layman sources claim that mechanical components of the Chevy Volt are already being road tested on the streets of Detroit. General Motors (NYSE: GM) is not letting anything get in the way of its plans to place a successful electric car on the streets of America and the world by 2010. A report by RedHerring outlines the broad and powerful collection of top tier companies which are coming together to help GM bring its mission to fruition.
Two new research projects targeted towards electric car development were recently announced by General Electric (NYSE: GE) and are specifically geared towards the needs of the Chevy Volt. GE has been asked to design high density electric capacitors and hybrid drive train components in pursuit of our first generation of truly plug-in electric cars. It would seem that GM, GE and the Department of Energy are not willing to settle for an automobile with simple hybrid status. The goal would appear to be full blown electric automobiles at a price within reach of the public. Once the car is built, add the current advances in solar technology and you'll have an automobile that can be charged from a solar powered battery array at home.
MOST NOTEWORTHY: Viacom, Agilent, AudioCodes and Microsoft were today's noteworthy upgrades:
JP Morgan upgraded shares of Viacom (NYSE: VIA) to Overweight from Neutral as they believe contractual rate increases and distribution of the company's newer networks will drive higher earnings growth in 2008. The firm does not believe this growth is priced into shares.
JP Morgan also upgraded Agilent Technologies (NYSE: A) to Overweight from Neutral and added shares to its Focus List. Shares were upgraded based on its sum-of-the-parts valuation and sees further upside given that strategic buyers are back in the marketplace.
AudioCodes (NASDAQ: AUDC) was raised to Buy from Accumulate at Think Equities, as they expect the company to benefit from the newly acquired CTI squared business, the security gateway business, and traction in the SBC business, with Microsoft's OCS launch of a new driver today.
Goldman added Microsoft Corporation (NASDAQ: MSFT) to its Conviction Buy List, citing valuation and overwhelmingly negative sentiment, and expects shares to trade higher on a better Q1 report.
OTHER UPGRADES:
RBC Capital Markets upgraded Citrix Systems (NASDAQ: CTXS) to Outperform from Sector Perform.
Eaton Corporation (NYSE: ETN) was upgraded to Outperform from Market Perform at Friedman Billings.
Sellers took control at the open and sent the market lower. The Dow Jones Industrial Average got with striking distance of the August 1st low -- down 200 points -- before rebounding to close down only 31 points.
The NYSE had volume of 4.3 billion shares with 1,279 shares advancing while 2,058 declined for a loss of 14.27 points to close at 9,435.04. On the NASDAQ, 3.2 billion shares traded, 1,309 advanced and 1,792 declined for a loss of 11.6 to 2,544.89.
With the market plunging on the open, the options were active. There were 8.8 million puts and 8.3 million calls traded for a put/call open interest ratio of 1.07. Garmin Ltd. (NASDAQ: GRMN) saw heavy volume on the August 45 calls (GQRHI) with over 259,000 options trading. The August 75.0 Garmin calls (GQRHO) moved 121,000 options. Most of this option volume is dividend arbitration in anticipation of the 0.75 cent dividend Monday.
Apple Computer, Inc. (NASDAQ: AAPL) saw heavy volume on the August 130 calls (APVHF) with over 55,000 options trading. Financial Sector SPDR ETF (NYSE: XLF) saw heavy volume on the September 34 puts (XLFUH) with over 234,000 options trading. The other strikes were active as well and they investors were likely trying to protect investments capital. PowerShares QQQ Trust ETF (NASDAQ: QQQQ) saw heavy volume on the September 45 puts (QQQUS) moving 171,000. Put index options can work as an insurance policy against market falls.
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
MOST NOTEWORTHY: The machinery industry, Sohu.com (SOHU), Intuit (INTU), Priceline.com (PCLN) and Expedia (EXPE) were today's noteworthy initiations:
JP Morgan assumed coverage of 5 machinery stocks: The firm assumed Eaton (NYSE: ETN) and Illinois Tool Works (NYSE: ITW) with Overweight ratings and Ingersoll-Rand (NYSE: IR), Parker Hannifin (NYSE: PH) and Kennametal (NYSE: KMT) with Neutral ratings. JP Morgan's top picks in the group are Illinois Tool Works and Eaton.
Pali initiated Sohu.com (NASDAQ: SOHU) with a Buy rating and $41 target and believes the Olympic Games represent the biggest growth catalyst for the company.
Jefferies started shares of Intuit (NASDAQ: INTU) with a Buy rating and $34 target, likes the momentum in TurboTax and QuickBooks and sees potential upside fo FY08 expectations.
Banc of America initiated Priceline.com (NASDAQ: PCLN) with a Buy rating and $96 target and is positive on the company's European positioning given expectations for top line growth and margin expansion. The firm also started shares of Expedia (NASDAQ: EXPE) with a Buy rating and $35 target, positive on the company's strong management, solid competitive positioning and improving fundamentals.
OTHER INITIATIONS:
First Albany assumed coverage of Cougar Biotechnology (OTC: CGRB) with a Buy rating and $29 target.
The domestic automotive business has been beaten and torn by foreign competition for several years now, forcing many auto-parts producers, such as Tower Automotive Inc. and Delphi Corp. (OTC: DPHIQ) into bankruptcy proceedings.
A growing number of auto-part manufacturers are leaving the U.S. automobile industry altogether, divesting auto-related businesses and diversifying into other, more profitable industries. The Wall Street Journalhighlighted the latest companies [subscription required] trying to make the switch to stay alive:
SPX Corp (NYSE: SPW), a North Carolina auto manufacturer that once earned 90% of its revenue from auto-related businesses, now earns less than 3% from auto-related businesses after multiple divestitures and acquisitions. SPX Corp is now an infrastructure-related products and service manufacturer for the global power market.
Pittsburgh-based glass and coatings manufacturer PPG Industries Inc (NYSE: PPG) has put its windshield business up for sale. The company instead will rely on its high-tech coatings business and optical & specialty material segments that offer long-term growth potential.
MOST NOTEWORTHY: Genesit Energy LP (GEL), EnerNoc (ENOC) and Comcast (CMCSA) were today's noteworthy initiations:
Genesis Energy (AMEX: GEL) was initiated with a Buy rating and $40 target at Stanford, as the firm believes the company's affiliation with Denbury Resources and pending acquisition of petroleum products, terminals, and transportation businesses from the Davison family will drive rapid growth.
EnerNoc Inc (NASDAQ: ENOC) was initiated with a Hold rating and $42 target at Jefferies, due to valuation. EnerNoc was also initiated at Morgan Stanley with an Equal Weight rating and $40 target.
Stifel expects Comcast (OTC: CMCSA) to benefit from higher penetration levels of DVR and HDTV set-top boxes over the next several years and initiated shares with a Buy rating and $34 target.
OTHER INITIATIONS:
Select asset managers were initiated at Credit Suisse:
Deutsche Bank initiated Ryland Group (NYSE: RYL) with a Buy rating and $52 target, as well as Pulte Homes (NYSE: PHM) and Meritage Homes Corp (NYSE: MTH) with Hold ratings and a $23 target and $29 target, respectively.
Eaton (NYSE: ETN - option chain) shares have soared higher today after Berkshire Hathaway (NYSE: BRK.A) disclosed in an SEC filing Friday afternoon that it has bought 2.91 million shares of ETN over the past six months. Usuall,y when announcements like this are made, investors follow the Oracle of Omaha and send the stock higher. If you think the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ETN.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from 
Venture capital is flowing, engineers are chomping at the bit and layman sources claim that mechanical components of the Chevy Volt are already being road tested on the streets of Detroit. 
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