5 stocks to watch for this week

Defense industry cuts commence. Dish Network may pull its Clearwire offer. New Jersey approves online gambling. H&R Block and Staples to report earnings.

By MSN Money Partner Mar 4, 2013 11:50AM
Stock index Image Source Getty ImagesBy Michael Fowlkes, InvestorsObserver

1) Automatic defense cuts kick in
What's happening: Defense contractor Lockheed Martin's (LMT) stock sold off sharply during the latter part of January and has been stuck in a sideways pattern over the last month. The entire sector has been in limbo over the scheduled defense cuts that are set to start in March. The cuts were originally scheduled to kick in at the end of 2012 but were postponed until the end of February as part of the fiscal cliff deal that President Barack Obama and Congress reached at the start of the year. It still remains unclear if the cuts will be postponed or eliminated, but for now it appears as though they will begin as scheduled.

Technical analysis: LMT was recently trading at $88.64, down $7.88 from its 12-month high and $8.50 above its 12-month low. Technical indicators for LMT are bearish and the stock is showing signs of a possible trend reversal. The stock has recently seen support above $87.25 and resistance below $91.50. Of the 17 analysts who cover the stock three rate it a "strong buy," one rates it a "buy," 11 rate it a "hold," one rates it a "sell" and one rates it a "strong sell." The stock receives Standard & Poor's 3 STARS "Hold" ranking.

Analysts' thoughts: At the end of 2012, when automatic defense cuts were looming, it appeared as though no one in Congress wanted to see spending cuts. The fear is that the defense cuts could spark another recession due to their ripple effect not just in the defense sector but across many other sectors that are dependent on the military. It now appears as though Congress is not going to step in and take the necessary actions to halt the cuts. While this could be viewed as a negative for Lockheed Martin, it could actually help the stock trade higher. The stock has been stagnant due to the uncertainty surrounding the cuts, but once uncertainty is gone traders will most likely come back into the stock.

Stock-only trade: If you're looking to establish a long stock position in LMT, consider buying the stock when it is below $88.50 and sell if it falls below $79.50 or dips more than 10% or take profits if it gets to $102.00.

Option trade: If you are looking for a hedged options trade on LMT, consider a June 75/80 bull-put credit spread for a 55-cent credit. That's a potential 12.4% return (30.3% annualized*) and the stock would have to fall 9.1% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the September $87.50 call. If LMT rises just 5.2% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.



2) Dish Network could reconsider Clearwire offer
What's happening: Dish Network (DISH) got off to a good start this year but over the last two weeks has experienced some selling pressure. The company recently reported disappointing earnings for its fourth quarter, missing analyst estimates of 50 cents earnings per share by posting just 46 cents per share. The company has been battling with Sprint (S) in an attempt to buy Clearwire (CLWR), but despite making a higher offer it appears as though Clearwire is leaning towards a deal with Sprint, which already owns 51% of the company.

Technical analysis: DISH was recently trading at $34.98, down $3.16 from its 12-month high and $8.86 above its 12-month low. Technical indicators for DISH are bearish and the stock is in a weak downward trend. The stock has resistance below $37.00. Of the 12 analysts who cover the stock four rate it a "strong buy," one rates it a "buy," 6 rate it a "hold," and one rates it a "sell." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analyst's thoughts: I expect that Dish will pull its offer to buy Clearwire this week. Clearwire had the chance to tap into $800 million of financing from Sprint at a rate of $80 million per month. It recently opted to take advantage of this, announcing it would take the funds in March. As a result, Sprint will wind up with an even larger ownership in the company, making it all the more difficult for Dish to acquire it. Dish Network has previously stated that should Clearwire take financing from Sprint it would pull its offer off the table.

Stock-only trade: If you're looking to establish a long stock position in DISH, consider buying the stock when it is below $34.50 and sell if it falls below $31 or dips more than 10% or take profits if it gets to $39.50.

Option trade: If you are looking for a hedged options trade on DISH, consider a June 25/30 bull-put credit spread for a 55-cent credit. That's a potential 12.4% return (30.3% annualized*) and the stock would have to fall 12.7% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the September $33 call. If DISH rises just 10.1% you can pull in a 20% or better profit on the option. However, if the stock moves lower, this kind of trade could lose a significant amount.



3) Staples to report 4Q earnings
What's happening: After a disastrous 2012, shares of office supply retailer Staples (SPLS) have been on the rise in 2013. The economy continues to improve, which should lead to higher spending by businesses and individuals. The company will get its chance to build on its recent strength when it reports its fourth quarter results on March 6. Analysts have forecast fourth quarter earnings of $0.45 per share, up from $0.41 during the same period last year.  

Technical analysis: SPLS was recently trading at $13.30, down $3.63 from its 12-month high and $2.73 above its 12-month low. Technical indicators for SPLS are bullish and the stock is in a strong upward trend. The stock has support above $12.90. Of the 15 analysts who cover the stock six rate it a "strong buy," eight rate it a "hold," and one rates it a "sell." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analyst's thoughts: With the improving economy, I expect to see a decent quarter from Staples, but I remain very bearish on the company long term. The company is struggling to compete against Amazon (AMZN), and its large stores are currently working against it. There will likely be some consolidation in the office supply industry in the next few years, and if OfficeMax (OMX) and Office Depot (ODP) merge as expected, they will be able to compete more effectively against Staples. This is not a company that I would view as a good long-term investment.

Stock-only trade: If you're looking to establish a long stock position in SPLS, consider buying the stock when it is below $13.25 and sell if it falls below $11.90 or dips more than 10% or take profits if it gets to $15.25.

Option trade: If you are looking for a hedged options trade on SPLS, consider a June 8/12 bull-put credit spread for a 45-cent credit. That's a potential 12.7% return (31.1% annualized*) and the stock would have to fall 6.0% to cause a problem.

Speculative call-only trade: At the current time we do not see any call-only trades that we like on Staples. Following its earnings report, we will revisit the situation if it looks as though the stock will continue to show strength.



4) H&R Block to report 3Q earnings
What's happening: Shares of H&R Block (HRB) have been in a strong upward trend since last summer. Since the start of the year, HRB shares have gained a massive 34% and will get the chance to continue trading higher following the company's fiscal third quarter earnings report on March 7. Analysts have forecast a third quarter earnings loss of $0.01 per share, in-line with the same period last year.

Technical analysis: HRB was recently trading at $24.87, $0.36 below its 12-month high and $10.52 above its 12-month low. Technical indicators for HRB are bullish and the stock is in a strong upward trend. The stock has support above $19.50. Of the four analysts who cover the stock two rate it a "strong buy," one rates it a "hold," and one rates it a "strong sell." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analyst's thoughts: Whenever a stock sees huge gains in a short period of time as H&R Block has over the last two months, investors need to be wary. It is easy to look at the recent strength and decide to "follow the herd," but in this case I would advise against that. H&R Block's recent run has resulted in a price-to-earnings ratio of 19.5, leaving the stock with little value at its current price. If the company fails to hit its earnings forecast I would expect to see a quick selloff in shares, but a positive earnings report will most likely not lead to a huge jump due to its recent gains.

Stock-only trade: If you're looking to establish a long stock position in HRB, consider buying the stock if it falls below $24.50 and sell if it falls below $22 or dips more than 10% or take profits if it gets to $28.

Option trade: If you are looking for a hedged options trade on HRB, consider a July 17/22 bull-put credit spread for a 40-cent credit. That's a potential 8.7% return (17.9% annualized*) and the stock would have to fall 10.2% to cause a problem.

Speculative call-only trade: With the recent run-up in HRB, we would not set up a speculative call-only trade on the stock at the current time.



5) New Jersey approves online gambling
What's happening: Shares of Caesars Entertainment (CZR) were in a sharp downward trend during the majority of 2012, but they started to rebound in November and have been trading sharply higher ever since. A recent development that gave analysts reason to be excited about Caesars was the decision made by the state of New Jersey to legalize Internet gaming. The law will allow existing casinos to offer online poker, and Caesars will almost be one of the first to provide a platform for New Jersey residents to use for online poker.

Technical analysis: CZR was recently trading at $12.42, down $3.32 from its 12-month high and $7.90 above its 12-month low. Technical indicators for CZR are bullish and the stock is in a strong upward trend. The stock has support above $10.75. Of the four analysts who cover the stock two rate it a "strong buy," one rates it a "hold," and one rates it a "strong sell."

Analysts' thoughts: Management at Caesars has been struggling in recent years, with the company showing flat revenues and $24 billion in debt. Online poker within New Jersey limits could be the boost that Caesars so desperately needs. While the initial upside is limited by the fact that only New Jersey residents will be able to play against each other, if more states follow suit it could lead to huge revenues for companies that get their platforms up and running first and develop market credibility. Caesars will not be the only casino ready to go as soon as possible, but it will be among the first, which will give it a huge advantage over future platforms.

Stock-only trade: If you're looking to establish a long stock position in CZR, consider buying the stock when it is below $12.25 and sell if it falls below $11.00 or dips more than 10% or take profits if it gets to $14.00.

Option trade: If you are looking for a hedged options trade on CZR, consider an April 7.50/10 bull-put credit spread for a 30-cent credit. That's a potential 13.6% return (57.9% annualized*) and the stock would have to fall 16.9% to cause a problem.

Speculative call-only trade: There are no call-only trades that we like at the current time. The stock's recent jump has priced the calls to a point where we are unable to get the reward we want for the amount of risk the call-only trades posses.


*Annualized returns provided for comparison purposes only

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At the time of writing, Mr. Fowlkes does not have direct ownership in any of the stocks mentioned.
1Comment
Mar 4, 2013 12:14PM
avatar
I'm dumping DISH, as a customer, all the advertising they are doing is covering up the fact that they are raising Rates and therefore losing customers..Paying $70 for a bunch of re-runs, Media outlets with Agenda's that do not coinside with mine, Anti American rants, and Obama supporters has turned me off to their dismial offerings...The number of "info-mercial" and "Sales Channels" outnumber the other Channels and then they want you to pay a premium for watching a movie that I bought in the 5$ bin at WalMart....Bad Mangemen decsions being made here...People are tired of being smucked by Marketing Maggots in business suits claiming to be your friend etc. etc. Liars at the Top..
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