Don’t Leave Home without Them
12/08/2006 12:00 am EST
While analysts pick to pieces the retail stats from Black Friday, savvy Bryan Perry cuts right to the chase--latching on to the one company that is poised to benefit from the holiday shopping frenzy.
"I'm recommending going long the MasterCard April 70 Calls (MADN ) at market. The company is the purest play I can think of for playing the holiday shopping season. America will be once again using mountains of credit to pay for Christmas, and MasterCard is one of the two 800-pound gorillas to invest in. The other, VISA, remains a private entity at present.
"This company completely shocked Wall Street with its over-the-top fabulous Q3 numbers, setting itself up for an even more monster-like fourth quarter. MasterCard reported earnings of $1.42 per share, 32% higher than the $1.07 Wall Street expected. This follows a 15% upside surprise for the second quarter and shows strong upward momentum in profits going into the current quarter.
"I suppose that if Black Friday is any indication of what we can expect, then MasterCard should be posting earnings in January that are through the roof, taking the stock back to at least $115 per share, which is my near-term price target.
"Needless to say, buying a stock that is $97 per share ties up way too much capital. This leads me to recommend the deep in-the-money calls as a way to leverage the idea and get point-for-point movement with the underlying common stock without paying too much for the five months of time premium. Here are the details of the option trade:
MasterCard (MA NYSE) Current Price: $98.50
Target Price: $115
Cost of Option Trade: $3,150 per contract ($31.50 x 100 shares = $3,150)
Intrinsic Value: $2,850 ($31.50 current price - $70 strike price = $28.50)
Time Premium: $300 ($31.50 call price - $28.50 intrinsic value = $3.00)
Potential Profit Per Contract: $1,350 ($45 price target - $31.50 cost of call option = $13.50 x 100 shares = $1,350)
Potential Gain: 42%
"Shares of MasterCard traded as low at $95.50 recently before getting a pop. We may get another shot down, so consider picking some up some calls here at the $98 level and then dollar cost average in if it drops again. Its 20-day moving average is right at $93, which should provide good technical support for the stock. Usually, stocks test the lows of the day a couple times if the market is on the defensive. This is a good time to work this trade and show a bit of patient timing."