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Body Central Sets Up For Another Up Leg

Body Central (BODY) is a specialty retailer offering on-trend, quality apparel and accessories at value prices. As of March 8, 2012 the company operated 241 specialty apparel stores with plans of opening 35 additional stores (a 14.5% increase) during 2012.  Same store sales grew by 11.3% in 2011 and operating margins increased to 10.6% of net revenue from 8.2% in 2010. In the latest quarter, BODY reported earnings per share grew by 52% to $0.38 year/year, a penny better than analyst estimates, and revenues rose 20% to $80.7 million compared to $79.7 million estimates. The company issued downside revenue guidance for the next fiscal quarter, seeing revenue  of $343-348 million versus $354 analyst consensus, citing a softening in sales trend. Management expects to resolve the issue with a fresh product mix. Looking forward, analysts see 24% year/year eps growth for 2012. With a forward price to earnings ratio of 19, resulting in a PEG of 0.79, valuation looks reasonable. Management runs a tight ship with return on equity at 28% in 2011.

Assuming management can address the current quarter’s weakening sales trend and manage the hyper growth in new store openings (management has a solid history of handling operating details), the fundamentals for BODY look bright. Mutual funds agree as the number of funds owning BODY has increased for three quarters in a row as follows:  Jun-11 147, Sep-11 167, Dec-11 188, Mar-12 205.

Technically, the stock has been forming a constructive flat base since the end of February.

A trigger buy point would follow a move over the 29.5 area on strongly increasing trading volume with an initial stop loss in the 27 area. The stock trades somewhat thinly so position size needs to be relatively small. Earnings are expected after the market close on Tuesday May 3 which adds to near-term risk in the price movement. The overall stock market environment appears positive and supportive of new stock positions.

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United Rentals May Have More Upside

United Rentals (URI), the largest equipment rental company in the world, has an integrated network of more than 550 rental locations in 48 states and Canada offering such items as forklifts, bulldozers, excavators, welders, and many others. Customers include construction and industrial companies, utilities, municipalities, and homeowners.

In their latest quarter (announced the day before yesterday), the company reported earnings of 0.36/share, $0.30 better than estimates; revenues rose 25% year/year to $656 million versus the $610 million consensus. During the earnings conference call, management was very bullish about the outlook for 2012, expecting significant synergies from their acquisition of RSC holdings — expected to close at the end of April. On valuation, the stock has a forward P/E of 11 on forecast earnings per share growth of 37%, resulting in a PEG of 0.3, a reasonable valuation.

Technically, the stock is breaking out of a flat base after a strong run in the second half of 2011.

While the overall stock market remains in a corrective phase, this stock offers a decent risk/reward with an entry in the 45 area and a stop-loss around 43 (the upper end of the eps-related up-gap in price on April 18, 2012). A way to play it would be to enter half a position now and then wait to see how it holds up versus the rest of the market.

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Apple Top?

I saw this first on Peter Brandt’s blog about three weeks ago. Jesse Livermore might say Apple (AAPL) has a speculative chart with a possible topping formation, as illustrated in C. M. Flumiani’s 1965 book, The Stock Market Secrets of Jesse Livermore. I previously wrote about how Apple was surging over its multi-year trend channel and the action resembled a blow-off top (Apple Inc Is Getting Overbought). 

Fundamentally perhaps competition is finally starting to exact its toll as Apple begins to struggle with the law of large numbers. The common question arises: how fast can a company grow with $128 billion in revenue? Reggie Middleton of BoomBustBlog spells out his negative thesis that Apple is losing market share in iPads to Android devices.

The technical setup shown above creates a decent trade setup. The idea would be to wait for a weak short-lived bounce (from the recent dip) in Apple shares on the daily chart and enter a short position on the first down day with a tight stop at the high of the day. If the original timing is wrong and the trade stops out, it could be worth trying once or twice more (i.e. entering on a down day). The downside target would be the top of the gap formed on January 25 around the 444 level, close to the 200 day moving average.

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Options Income From Dominion Resources

Dominion Resources (D), one of the nations largest producers and transporters of energy, focuses its strategy on electricity and natural gas to customers in the Midwest, Mid-Atlantic and Northeast regions of the U.S., a potential market of fifty million homes and businesses that consumes forty percent of the nation’s energy. Dominion also operates the nation’s largest natural gas storage system with 947 billion cubic feet of storage capacity.

The stock offers a consistent mid-single digit earnings growth rate and a steady stream of rising dividends with a current yield of 4.2%. The stock offers conservative income-minded investors a good place to park some money.

Instead of buying the stock outright, a better play here is to sell the May 19, 2012 50 strike puts for $0.8 for an annualized yield of 19%. If the stock closes under 50 on May 19th, the put seller will own 100 shares of stock for each option sold with the opportunity to generate more income with covered call sales.

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Molycorp Carves A Bottom

Molycorp (MCP), owner of the largest-producing rare-earth mine outside of China,  supplies rare earth metal oxides, metals, alloys and magnets. The company’s products have critical uses in a range high technology products. After a six-fold price increase over nine months following its initial public offering (IPO) in August 2010, Molycorp lost 71% of its value, bottoming in December 2011.

The dramatic rise following its IPO coincided with soaring rare earth metal prices as China, the worlds primary supplier of rare earth metals, announced plans to curb exports of these minerals. Rare earth metal prices softened in 2011 and have leveled-out in recent months, along with Molycorp’s stock price.

On March 9, 2012, Molycorp announced the acquisition of a Canadian rare earth magnet manufacturer, a move toward vertical integration cheered by investors as the stock ramped off its bottom on a surge in volume.

Technically, the stock has formed a constructive five month bottoming pattern and broke out of that pattern on heavy volume at the end of March. The stock is currently testing the breakout area.

From a trading perspective, the overall stock market is in a corrective phase so any new buys should be approached with caution. Nonetheless, Molycorp deserves consideration here and at least a high place on the watch list.

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Weird Weakness In Key Economic Indicator

The weak payroll numbers out this Friday (according to the government, nonfarm payrolls added 120,000 new jobs in March, down from 240,000 jobs added in February and below consensus expectations of 200,000) echo a disturbing trend I’ve been seeing lately in another key economic indicator. The U.S. Energy Information Administration (EIA) U.S. Total Gasoline Retail Sales By Refiners has fallen off a cliff from 40.3 million gallons per day (MGD) in January 2011 to 28.4 MGD in January 2012 (the last available data) — the lowest monthly number ever in the data series, which began in January 1983.  On the surface, the weakness in this number seems to imply significant economic weakness in the United States. However, it is unclear how much of the decline is related to cutbacks at the ConocoPhillips, Sunoco and HOVENSA refineries ahead of threatened permanent closures of these refineries (due to claims of unprofitability and economic unsustainability). The fast rising crack spread –the difference in price between gasoline and crude oil — seems to imply a gasoline supply issue (too little supply) rather than a lack of demand.

Should the crack spread continue to expand, Western Refining (WNR) should benefit. They refine and market crude oil and refined products in West Texas, Arizona, New Mexico, Utah, Colorado, and the mid-Atlantic region. However, I view the closing of major refining capacity in the U.S. as unlikely since the government views a loss of this capacity as a national security threat. But until the government intervenes, the crack spread may continue to rise. The bottom line: the weakness in U.S. Total Gasoline Retail Sales By Refiners may reflect an industry supply issue rather than a weakening economy. This makes Western Refining an interesting speculation.

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