5 stocks to watch for next week

Wal-Mart waits for consumer confidence numbers. Time Warner's 'The Hobbit' is in theaters now. Nike will split its stock. KB Home anticipates new home sales. Sturm Ruger should bounce back.

By MSN Money Partner Dec 21, 2012 11:15AM
Getty ImagesBy Michael Fowlkes, InvestorsObserver

1) Consumer confidence data due on December 27
What's happening with WMT: This holiday season has not been great for most retailers so far, and because of this we have seen retail stocks such as Wal-Mart (WMT) suffer in December. On Thursday, the new consumer confidence numbers will be released, with Wall Street paying close attention to the results. In November, consumer confidence rose to its highest level in almost five years, and we expect to see another strong reading next week as well. A positive consumer confidence reading should help Wal-Mart rebound for its current downward trend. The looming fiscal cliff is also keeping investors wary of jumping into retail stocks. WMT is down 3.8% so far in December, and a strong consumer confidence reading should be enough to push shares back closer to break even for the month.  

Technical analysis: WMT was recently trading at $69.00, down $8.60 from its 12-month high and $11.82 above its 12-month low. Technical indicators for WMT are bearish and the stock is in a weak downward trend. The stock has recently seen support above $67.50 and resistance below $72.70. Of the 21 analysts who cover the stock 11 rate it a "strong buy" and 10 rate it a "hold." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analysts' thoughts: We think two things will work in Wal-Mart's favor. First, we do not think that Congress will let the nation go over the fiscal cliff. It would be political suicide for members of Congress if they are not able to work together and we expect to see a last-minute deal get done. We are also expecting to see another strong consumer confidence reading. If confidence remains high, investors will stick with retail stocks. These two events should help Wal-Mart end the year on a positive note.

Stock-only trade: If you're looking to establish a long stock position in WMT, consider buying the stock when it is below $70 and sell if it falls below $67.50 or dips more than 10% or take profits if it gets to $80.

Option trade: If you are looking for a hedged options trade on WMT, consider a March  60/65 bull-put credit spread for a 65-cent credit. That's a potential 14.9% return (66.5% annualized) and the stock would have to fall 4.9% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the June $60 call. If WMT rises just 3.6% 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) Time Warner begins Middle-Earth journey
What's happening with TWX: Warner Brothers, a subsidiary of Time Warner (TWX) has the hottest movie this holiday season with Peter Jackson's "The Hobbit -- An Unexpected Adventure." The first of three prequels to the highly successful "Lord of the Rings" trilogy hit the big screen earlier this month and had opening weekend box office sales in excess of $84 million. Reviews have been somewhat mixed on the highly-anticipated movie, but the majority of the negative reviews have been in regards to the technology used for making the movie, not the movie itself. A movie as big as "The Hobbit" should have legs for weeks to come, and should continue to pull in big box-office numbers. There are also two more films in the series scheduled for December 2013 and July 2014. These are also expected to be big box-office earners.

Technical analysis: TWX was recently trading at $48.26, nearly at its 12-month high and $14.64 above its 12-month low. Technical indicators for TWX are bullish, with the stock showing signs of a possible trend reversal. The stock has recently seen support above $47.22. Of the 26 analysts who cover the stock 14 rate it a "strong buy," two rate it a "buy," and 10 rate it a "hold." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analyst's thoughts: I expect that "The Hobbit" will be a big draw for moviegoers over the next few weeks. Opening weekend sales figures were strong, but may have been slightly depressed as a result of the Connecticut school shooting on opening day. The shooting brought back the memory of the "Dark Knight" theater shooting earlier this year in Denver, and as a result people may have decided to skip the opening weekend. In addition, people like to go to the movies over the holidays, and this should help keep Hobbit revenues high. Time Warner is currently trading just shy of its 52 week high, but as more positive box office numbers get revealed for "The Hobbit," the stock should continue to trend higher.

Stock-only trade: If you're looking to establish a long stock position in TWX, consider buying the stock when it is below $45 and sell if it falls below $42.50 or dips more than 10% and take profits if it gets to $55.

Option trade: If you are looking for a hedged options trade on TWX, consider an April 38/42 bull-put credit spread for a 30-cent credit. That's a potential 8.1% return (25.3% annualized) and the stock would have to fall 12.3% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the July $43 call. If TWX rises just 4.4% 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) Nike sprints toward 2013 with a stock split
What's happening with NKE: Nike (NKE) shares will execute a two for one split on Monday December 24. After a steep selloff during June, Nike got a nice bounce, and has been in a fairly tight sideways pattern over the last three months. We believe that a big reason for this sideways pattern has due to the looming fiscal cliff on the horizon, and once the cliff uncertainty is behind us we expect to see the investors come back into the stock. When a stock splits its shares, it usually attracts more interest from the retail investors, and we expect to see the same next week once Nike shares split in two. Nike recently reported fiscal second quarter earnings of $1.14 per share, which were well above the $1.00 a share that analysts were expecting to see. Revenue came in a $6 billion, up from $5.73 billion during the same period last year.

Technical analysis: NKE was recently trading at $99.00, down $15.82 from its 12-month high, and $13.90 above its 12-month low. Technical indicators for NKE are bullish, with the stock showing a possible trend reversal. The stock has recently hit resistance below $101.00. Of the 17 analysts who cover the stock seven rate it a "strong buy" and 10 rate it a "hold." The stock receives Standard & Poor's 4 STARS "Buy" ranking.

Analysts' thoughts: Following next week's stock split, we expect the "split effect" to kick in on Nike shares. The idea behind the "split effect" is mainly psychological, but it should be enough to see Nike shares trade higher. After a stock executes a split, it psychologically becomes more attractive to investors. It also serves as a way to reward current shareholders who understand that a stock split indicates strength in the company's underlying business, and leaves them feeling as if they have more wealth, even though they still own exactly what they did before the split. While we understand that shareholder value before and after a split remain exactly the same, research has proven that splits typically lead to a rise in share price immediately following the split.  The strong earnings report will help give Nike an even bigger boost following the stock split. Recent second quarter earnings are a clear indicator that business is good, and will be just one more reason for investors to turn to Nike after they have finished their year-end selling in other stocks.

Stock-only trade: If you're looking to establish a long stock position in NKE, consider buying the stock when it is below $95 and sell if it falls below $90 or dips more than 10% and take profits if it gets to $115.

Option trade: If you are looking for a hedged options trade on NKE, consider an April 85/90 bull-put credit spread for a 50-cent credit. That's a potential 11.1% return (34.7% annualized) and the stock would have to fall 8.6% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the April $90 call. If NKE rises just 4.6% 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.



4) KB Home builds on housing comeback
What's happening with KBH: The improving housing market has resulted in big gains for homebuilders in 2012, and KB Home (KBH) has been one of the strongest. On Thursday, December 27, the market will get new home sales figures for November. While KBH has been strong for most of the year, it did hit a speed bump after reporting better than expected earnings, but lower than expected future orders. For its fiscal fourth quarter, the company reported earnings of $0.10 per share, which was higher than the $0.06 that analysts had been expecting to see. Despite the better than expected earnings the stock traded down as much as 7.3%. The reason why the stock is trading lower is that its expenses rose by 18% in the quarter, and its gross margins were down to 14.2% from 14.7% during the same period last year. Annual revenues were up 18% to $1.56 billion.

Technical analysis: KBH was recently trading at $15.60, down $1.70 from its 12-month high, and $9.43 above its 12-month low. Technical indicators for KBH are bearish and the stock is in a weak downward trend. The stock has recently seen support above $14.50. Of the 16 analysts who cover the stock two rate it a "strong buy," one rates it a "buy," 10 rate it a "hold," one rates it a "sell," and two rate it a "strong sell." The stock receives Standard & Poor's 2 STARS "Sell" ranking.

Analysts' thoughts: Strong new home sales figures for November could be exactly what KBH needs to reverse today's losses. We believe the selloff following its fourth quarter results is overdone, and expect to see buyers come back in over the by the end of the year and take advantage of the selling we are currently seeing. KBH's unit orders were up 4% in the quarter, and the average selling price of its homes rose 14% year over year to $271,000. The housing market is gaining traction across the board, and we remain bullish on KBH.

Stock-only trade: If you're looking to establish a long stock position in KBH, consider buying the stock when it is below $15 and sell if it falls below $13.50 or dips more than 10% and take profits if it gets to $18.

Option trade: If you are looking for a hedged options trade on KBH, consider an April 10/13 bull-put credit spread for a 55-cent credit. That's a potential 22.4% return (70.0% annualized) and the stock would have to fall 13.1% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the April $12 call. If KBH rises just 8.1% 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.

5) Sturm, Ruger & Co. should regain investor confidence
What's happening with RGR: December had already been a tough month for gunmaker Sturm, Ruger & Co. (RGR), but things took a definite turn for the worse following this month's elementary-school shooting in Connecticut. The massacre came just one week after another high-profile shooting in an Oregon shopping mall, and led to widespread cries for tighter gun controls. This sort of debate heats up every time there is a mass shooting, but the fact that this most recent tragedy took place at an elementary school really hit a nerve across the nation. Gun makers saw their stocks get hammered, and RGR traded down 14.5% in the three days following the shooting.

Technical analysis: RGR was recently trading at $43.78, down $16.33 from its 12-month high, and $10.65 above its 12-month low. Technical indicators for RGR are bearish and the stock is in a strong downward trend. The stock has recently seen support above $43.50 and resistance below $49.50. Of the two analysts who cover the stock one rates it a "hold," and one rates it a "sell."

Analysts' thoughts: Initial fears that President Obama would try to force through some measures on gun control following the Connecticut have subsided. Traders are taking the stance that even if Obama does try to use his executive powers, the changes that he can make would not be enough to really hurt gun makers, and any meaningful action would have to go through Congress. This means that there is no real reason to panic about gun stocks just yet and expect to see RGR continue to regain its recent losses. In fact, weapons-related stocks may even get a lift if firearm enthusiasts rush to make purchases ahead of any anticipated legislative proposals.

Stock-only trade: If you're looking to establish a long stock position in RGR, consider buying the stock when it is below $45 and sell if it falls below $400 or dips more than 10% and take profits if it gets to $55.

Option trade: If you are looking for a hedged options trade on RGR, consider an April 30.50/35.50 bull-put credit spread for a $1.00 credit. That's a potential 25.0% return (78.0% annualized) and the stock would have to fall 16.6% to cause a problem.

Speculative call-only trade: For those of you with an appetite for higher risk and bigger returns, consider buying the July $35.5 call. If RGR rises just 6.6% 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.


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At the time of writing, Mr. Fowlkes has a long position in WMT and does not have direct ownership in any of the other stocks mentioned.
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