Make money this Labor Day
Posted
Sep 03 2009, 02:56 PM
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InvestorPlace
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This article was written by InvestorPlace's Nick Atkeson and Andrew Houghton.
The adage "Sell in May and go away" certainly did not apply this summer. MarketWatch reports that since 1950, the two worst months in which to invest are August and September.
Well, so far, 2009 has proved to be an exception as we smashed through August with one of the best performances on record. And September may very well disprove the historical data and reward stockholders with another round of hefty gains.
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So, to make your Labor Day labor-free, we've compiled three of the best trades for you here.
Trade #1 -- Office Depot (ODP)
Office Depot (ODP) fell from well over $40 per share to a low of 59 cents during the 2008 bear market. Today, it is around $5 per share, and institutional option investors believe the stock is still too cheap.
On July 27 and 28, in the wake of the company missing earnings and with the stock trading around $4.50, these investors bought roughly 45,000 Jan 5 Calls (ODPAA) and sold roughly 45,000 Jan 5 Puts (ODPMA). This "risk-reversal" trade shows a tremendous amount of conviction that the stock will be above $5 per share in January.
If you believe the corporate world will continue to improve from Labor Day through the end of 2009, ODP appears to have set a downside limit price of $5 combined with uncapped upside potential. With the stock currently trading at about $5, ODP is offering a profit ticket in a better economy.
Trade #2 -- Microsoft (MSFT)
Back-to-school and Windows 7 are two huge drivers for Microsoft (MSFT) heading into the rest of the year. With the summer coming to an end, we are all headed back to work. For most of us, Microsoft is our primary work tool, and many of us will want the latest and greatest. For corporations that are currently running on Vista, Windows 7 can't come fast enough.
We saw evidence of Microsoft's strength during the last week of August as Dell (DELL) reported better-than-expected earnings and talked about some seasonal improvement going forward (80% of Dell's customers are corporate accounts), and Intel (INTC) raised revenue guidance during its mid-quarter update.
Earnings estimates for MSFT for this year and next are $1.70 and $1.93, respectively. The stock is currently trading at 12.7 times the 2010 earnings estimate, which is likely too conservative. If there is one back-to-school purchase you should make, it's MSFT.
(Microsoft publishes MSN Money.)
Trade #3 -- International Paper (IP)
Global production in the pulp, paper and publishing sector is expected to increase by 77% from 1995 to 2020, which is great news for International Paper (IP). Back-to-school shopping and an improving economy are key drivers of paper consumption currently.
With revenues up, IP's management is rapidly cutting its debt burden from a high of $12.7 billion to roughly $9.5 billion by year-end 2009. On July 30, the company reported Q2 earnings per share of 20 cents versus the consensus estimate of 0 cents.
IP and most of the stocks in the paper and paper products group are flying higher. It looks like the sky is the limit. For the stock to return to its historical value over the past five years, it should double from its current level.
ODP, MSFT and IP are poised to be three of this fall's best trades -- click here for details on six more top stocks to buy now.
At the time of publication, the authors held positions in ODP and MSFT.
Image credit: Coolcaesar, GNU free documentation license
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