8:30pm (EST)

1.  Market Summary

2.  Take-Two Interactive (TTWO) Could Take-Off

3.  DryShips (DRYS) – Waiting for the Right Moment to Jump

4.  Earnings

5.  Weekly Wrap Portfolio Update  

6.  Week Ahead

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1. Market Summary

We weren’t expecting much on the last trading day of the year and there wasn’t much excitement all last week as the bulls seemed content on locking in double-digit gains while the bears were relieved to put 2010 in the books.  Here is a look at the final numbers and our thoughts: 

The Dow added 7 points on Friday, or 0.1%, to finish at 11,577.  It was the fifth-straight weekly gain for the index as it gained 4 points overall.  For the year, the Blue-Chips jumped nearly 1,150 points, or 11%, and are up 32% over the past 2 years.  Our yearend targets for the Dow had been 11,600-11,700 and we traded into this range during the last week but fell short of closing within this zone.  A break above 11,700 could get the Dow to 12,000 in 2011 while support lies at 11,350-11,200.

The S&P 500 extended its winning streak to 4 straight, although it was close.  The index fell less than a point on Friday to close at 1,257 and for the week the gain was less than a point.  However, the S&P 500 is at a 2-year high after surging over 142 points in 2010, or 12.7%.  Over the last couple of years, the index has surged nearly 40%.  Our target was 1,250 with a possible run up to 1,275 by yearend and 1,300 in 2011.  This is still the case over the near-term with support coming in at 1,220-1,200.  

The Nasdaq had its 5-week winning streak snapped but is at a 3-year high.  The index fell 10 points, or 0.4%, on Friday and slipped 13 points for the week, or 0.5%, and closed at 2,652.  Tech had another amazing year as the Nasdaq popped nearly 384 points, or 16.9%, and is up an astounding 68% since the start of 2008.  We told you the 2,660-2-665 area would be the next level the bulls targeted by yearend and a run past 2,700 could open the doors to Nasdaq 3,000 in 2011.  Support comes in at 2,600-2,550 with further help in the 2500 region.

Last week we mentioned the January Barometer so this week we thought we would throw some more factoids at you. 

Although the jury is still out on President Obama, the third year of a new President has historically been bullish.  The bulls were already on a run before the November midterm elections, but here is the best part about this data.  Since 1948, there have been 15 full presidential cycles, and all of them showed strong stock market gains in the third year.  The average pop has been nearly 18%.

Here is another thing to watch for this week.  The “first 5 days of January” are usually a early warning “system” that Wall Street likes to use to see where the market may end for the year.  If we go back 60 years, the last 37 UP “first 5 days of January” have been followed by full-year gains 32 times.  The 23 DOWN “first 5 days of January” have been followed by 12 up years and 11 down.

These tidbits are nice but the market will get a fresh look at 4Q and yearend results, which will be the real catalyst going forward, starting in 2 weeks. 

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2.  Take-Two Interactive (TTWO) Could Take-Off

Christmas is here, and it’s time to cheer.  And there is no better gift than a new video game to celebrate the New Year.

Ok, well the holidays have gone, but 4Q and yearend results are all about holiday sales for most companies.  With earnings season getting started in two weeks, we thought it would be a good time to take a deeper look at Take-Two Interactive (TTWO, $12.27, down $0.01). 

The company is a leading worldwide publisher and developer of interactive entertainment software and is perhaps best known its hit game franchise Grand Theft Auto (GTA), which is expected to have a great holiday.  Sales are likely to be rosy with general online retail holiday sales and consumer spending up from last year.

Take-Two’s portfolio hosts 29 titles that have each sold more than two million units worldwide.  Besides GTA, its franchises include Sid Meier’s Civilization, Max Payne, Midnight Club, Red Dead Revolver, BioShock, Sid Meier’s Railroads!, Sid Meier’s Pirates!, and Top Spin.  Licensed brands include Major League Baseball, the NBA, and the NHL. 

Here is a brief rundown on their gaming hits:

There is always one more thing you can do when playing Sid Meier’s Civilization, which allows users to create empires, wage wars, discover the new world, and carry out diplomacy.  The franchise sold over 9 million units and is highly regarded as “one of the greatest strategy franchises of all-time.”  The game received a 9/10 score from consumer reports with minor criticism.  The graphics are very, very good.

Max Payne is an award winning third-person shooter franchise with over 7 million units sold. 

Midnight Club is a racing franchise, and Midnight Club: Los Angeles sold 1.58 million units for the Xbox360 so far. 

Red Dead Revolver is a western third-person shooter game and was succeeded by Red Dead Redemption in May of 2010.   As of March, 2008, Red Dead Revolver sold 1.5 million copies, but Red Dead Redemption trumped figures with nearly 8 million units sold so far. 

BioShock has sold 4 million copies as of March 2010, and its second installment BioShock II is expected to reach 5 million units sold.  And NBA 2K11 is currently number 70 for best selling games on Amazon. 

So, certainly the company has a list of some very strong names but bigger hits are coming.  Watch for Duke Nukem Forever this year, a cult classic from the mid-90’s to be a big hit.

Looking a little deeper into the stock, the fundamentals look impressive, as shown below:

Its book value/share is $7.34, not far from the stock’s current price of $12.27.  Revenue/share is $13.87, greater than the stock price, and possibly signaling that the stock is undervalued.  In the revenue table, their revenue in 2010 has increased every quarter from the previous quarter.  Their earnings per share in the table is before GAAP, where as the earnings per share in the Financial Highlights is after GAAP.  That is why they are different.  But the point is that earnings per share also increased every quarter from the previous quarter.  This trend will likely to continue with strong sales of its games.

Below is a comparison of the company and its top competitors.

G%

year over year quarterly revenue growth (%)

P/B

price/book

tPE

trailing PE ratio

PEG

price/earnings/growth

fPE

forward PE ratio

Oper

operating margin

P/S

price/sales

Gross

gross margin

%

percent short of float



 

Gross

G%

tPE

fPE

P/S

P/B

PEG

Oper

%

TTWO

31.09%

273.0

16.80

0.78

1.89

2.01

2.6%

25

ATVI

50.59%

6.0

43.19

15.17

3.31

1.41

1.16

17.8%

5.0

ERTS

58.10%

-19.9

19.50

1.50

2.09

1.57

-2.0%

4.9

MSFT

80.70%

25.3

12.03

10.38

3.62

5.08

1.01

41.5%

1.0

SNE

24.38%

4.3

37.71

19.20

0.41

1.04

0.60

4.7%

5.5

Industry

58.10%

12.3

23.14

1.83

1.33

4.7%

Source:  Yahoo Finance

From the chart, TTWO doesn’t look cheap.  Its short interest of 25% is the highest in the group.  This could put downward pressure on the stock, or it could cause a short squeeze, where those who are short are force to cover.  In the later case, the stock will jump.  This happens if a stock releases strong news such as sales.  It can also happen due to other strong upward momentum.  The latter is very possible given its chart below.

Over the last five months, the stock has followed a nearly straight line upward, trading within a range shown by the two red lines.  Thus, it has a strong upward momentum.  Note the pullback to the lower red resistance line.  Odds are that it will reverse course and move higher, either to the upper red resistance line or somewhere within the band between the two red resistance lines.  But both cases tell that the stock will likely move higher.

Going back to the table of competitors, the metrics that stand out are the year-over-year quarterly revenue growth of 273%, the best in the group, and the price/sales of 0.78, the second lowest in the sector.  This is good, because it says that the company is growing revenue fast and is selling for less than its sales, which can signal if a stock may be cheap.  Further if sales grow, the multiple will get lower, meaning the stock will look cheaper.

Even billionaire investor Carl Ichan has an interest in the company.  His firm, Icahn Associates Corporation, is the largest institutional holder with a 14.4% stake in the company.  Ichan is known for investing in undervalued, depressed shares, so this could be another reason that the stock may be a good buy.

All in all, TTWO may be a steal.  Sales are everything.  They dive revenue.  Profits cannot be made without sales and Take-Two looks like it is going to win the war in sales, especially if they can get even more momentum in their newest titles.

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3.  DryShips (DRYS) – Waiting for the Right Moment to Jump

DryShips (DRYS, $5.49, up $0.12) has been an interesting stock to watch.  It seems to have a lack of direction.  But don’t get too bored, because that is often when a stock breaks out.

From the look of things,  DryShips has started to form an upward trend, oscillating in a trading range between the two red lines of resistance.  However, it is too early to tell, because only one of the troughs along the bottom red line of resistance has been confirmed.

So we zoom into the 14-Period MFI (Money Flow Index) for the last three months to get a better sense of direction.  General consensus says an MFI of 80 is overbought and an MFI of 20 is oversold.


DRYS – (9/30/2010 – 12/30/2010)

Notice that the 14-Period MFI is at the same low it set two months ago, as noted by the black line.  It is unlikely that it will cross this line, meaning that either the 14-Period MFI will stay there or will go higher.  The 14-Period MFI seems to be roughly correlated with the stock price as seen when comparing the graph below with the graph of the same period above.

The technicals point to a higher stock move.  This analysis also correlates with the general concept that DryShips, a dry bulk shipper, will go up as the global economy improves.  The world will always need iron ore and grains to be shipped from mines and farms in one country to production and processing facilities in another country.  And as the economy grows, more of it is needed to feed the world or build everything from building to bridges.  Thus, dry bulk shipping should become more in demand, causing prices to go up, which correlates to higher stock prices.

Plus, DryShips is more than just a dry bulk shipper.  The company owns deepwater drilling rigs and did a 20% private offering for $500 million which makes the rigs worth about $2.5 billion.  This is more than the company’s current market cap of $1.7 billion.  Thus, from this information alone, the shares seem undervalued.

And that doesn’t include the potential drilling contracts.  As oil supplies shrink, oil majors are pushing into deepwater drilling and DryShips has a nice head start because they already have the ships, which take a long time to build.  So expect the major oil companies to sign contracts with the company’s drilling unit.  It fact, it is already happening.

Lastly, a look at DryShips’ numbers and how they stack up against their competitors:


G%

Year-over-year quarterly revenue growth (%)

P/B

price/book

tPE

trailing PE ratio

PEG

price/earnings/growth

fPE

forward PE ratio

Oper

operating margin

P/S

price/sales

Gross

gross margin

%

percent short of float



 

Gross

G%

tPE

fPE

P/S

P/B

PEG

Oper

%

DRYS

74.80%

1.50

26.02

5.23

1.98

0.56

0.57

41.4%

6.6

DSX

76.84%

23.00

7.83

7.86

3.65

0.84

1.47

48.6%

1.4

EGLE

71.22%

75.30

11.94

19.92

1.31

0.46

1.50

30.7%

8.0

EXM

53.30%

7.00

1.68

11.04

1.08

0.27

2.28

14.0%

5.4

GNK

82.46%

27.00

3.34

5.27

1.22

0.46

5.09

4.7%

17

Industry

43.03%

19.50

14.26

1.30

1.50

16.1%

Source:  Yahoo Finance

When compared among its competitors, DryShips has the lowest forward PE ratio, 5.23, and the lowest PEG at 0.57.  It has a very high operating margin, 41.4%, and a very high gross margin, 74.80%.  Its price/book is 0.56, about the average among shippers, but a sign that it is trading below book value.  And the strong margins mean that the business can compete with other shippers.

All this says one thing; DryShips may be ready to pop.

NEW TRADE!!!

We want to take advantage of this situation by buying DryShips and selling call options. 

On Monday, 1/3/11, we suggest buying the stock and selling a LEAP option.  After buying a 100 shares, sell the January 2012 call (DRYS120121C00007500, $0.71, up $0.08) for around 70 cents.  This will lower your cost basis to $4.75.  If shares are over $7.50 a year from now, we would be “called away” and the trade would make nearly 70%.  We like the risk/reward factor with this trade and will be adding it to the Weekly Wrap Portfolio tomorrow.

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4.  Earnings

The companies in BOLD, we are looking at as trades and we list calls and put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week. 

We will try to have a video ready by tonight to give you a better visual, if not, expect a huge video next weekend as we review the upcoming earnings season. 

Monday:  Bank of South Carolina (BKSC, $11.66, up $0.46), Calavo Growers (CVGW, $23.05, down $0.08), Emmis Communications (EMMS, $0.76, up $0.09), Lennar (LEN, $18.75, up $0.14), LiveDeal (LIVE, $6.82, up $0.12), Mistras Group (MG, $13.48, up $0.03), Nobility Homes (NOBH, $8.11, up $0.01), Rocky Mountain Chocolate Factory (RMCF, $9.65, up $0.14), Skyline (SKY, $26.08, down $1.17) and Steak n’ Shake (BH, $410,21, down $10.04).           

Tuesday:  First Security Group (FSGI, $0.90, up $0.01), Landec (LNDC, $5.98, up $0.15), Mosaic (MOS, $76.36, up $0.53) and Sonic (SONC, $10.12, flat).

Wednesday:  Family Dollar (FDO, $49.71, down $0.62), Franklin Covey (FC, $8.59, down $0.21), Richardson Electronics (RELL, $11.69, down $0.02), Ruby Tuesday (RT, $13.06, down $0.24), Worthington Industries (WOR, $18.40, down $0.17) and Zep (ZEP, $19.88, down $0.66).

Thursday: Constellation Brands (STZ, $22.15, up $0.21), Global Payments (GPN, $46.21, down $0.43), IHS, (IHS, $80.39, up $0.03), Saba Software (SABA, $6.12, up $0.04), Schnitzer Steel Industries (SCHN, $66.39, up $0.08) and Shaw Group (SHAW, $34.23, down $0.26).  

Friday:  Azz (AZZ, $40.01, down $0.54), Elmira Savings Bank (ESBK, $18.25, up $1.30), KB Home (KBH, $13.49, up $0.04), PriceSmart (PSMT, $38.03, down $0.19) and Texas Industries (TXI, $45.78, down $0.38).       

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5.  Weekly Wrap Portfolio Update       

 

Seattle Genetics (SGEN, $14.95, down $0.39)

March 17.50 calls (SGEN110319C00017500, $0.70, down $0.15)

Entry Price:  $15.50 (12/27/10) sold March 17.50 calls @ $0.90

Exit Target: $1.40

Return: 2%

Stop Target: None

Action:  Seattle Genetics opened at $15.80 and shares were at $15.50 around 10am on 12/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60.  Continue to hold.  


Patriot Coal (PCX, $19.37, down $0.33) (COVERED CALL)

January 19 call (PCX110122C00019000, $1.20, down $0.13)      

Entry Price:  $17.80 (12/6/10) sold January 19 call @ $0.95

Exit Target: $20

Return: 9%

Stop Target: None

Action:  Patriot Coal opened at $17.51 and shares were at $17.80 around 10am on 12/6/10.  The January 19 call could have been sold for 95 cents.  This lowered the cost basis to $16.85. 

These options were down to 30 cents shortly after we recommended selling them but had another strong week.  If shares are “called” away by mid-January the trade will make 13%.   

If shares don’t and fall back below $19, we will sell another option to lower our cost basis.


Dendreon (DNDN, $34.92, down $0.39) (COVERED CALL)

February 39 call (DNDN110219C00039000, $1.00, down $0.20)

Entry Price:  $41.96 (9/13/10) sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75, (12/20/10) sold February 39 call @ $1.50

Exit Target: $45

Return: -7%

Stop Target: None

Action:  Shares are Dendreon are testing support so it’s crucial they hold $33-$34.  If not, we could see the stock test $30.  This doesn’t worry us because we think over the long-term shares will be at $60 as they bring their manufacturing plants up to full speed.

Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.

On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.

If the stock gets “called away” from us by mid-February the trade will return 5% from when we first profiled it.

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6.  Week Ahead

There will be a few economic reports worth watching this week, starting on Monday with Construction Spending and the ISM Index numbers.

On Tuesday, we get a look at Truck and Auto Sales as well as the FOMC meeting minutes.

Wednesday is busy as Wall Street will digest the MBA Mortgage Purchase Index report, as well as the Challenger Jobs Cuts and the ADP Employment Change updates.    

On Thursday, we get Initial Claims and Continuing Claims which will give us clues on Friday’s Nonfarm Private Payrolls and the unemployment rate.  We also get an update on Consumer Credit.

The employment picture has been looking better and the numbers on Friday could be crucial in determining the market’s mood heading into earnings season.