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Note: Stay tuned at the end of this issue for a bonus trade you can make immediately to turn a 16% stock move into 62% gains in the next eight and a half months. And if you'd like to receive more profit amplifying trades each week, you can sign up here.
| May 1, 2015
Breakout Signals This Internet
Backbone Stock is an Immediate 'Buy'
By Melvin Pasternak
I'll admit it. I'm an online video addict.
I watch video highlights of virtually every Calgary Flames hockey game and hang on every word of Coach Bob Hartley's taped post-game interviews on my computer. When I'm out, I watch live game footage on my iPhone. Back home, before I go bed, I check Yahoo and CNBC for market analysis. When I've caught up on stocks, I turn to geopolitical events.
My appetite for video is diverse and omnivorous. Moreover, I'm far from alone, and that creates a trading opportunity.
One of the best ways to profit from the explosion in online video is Level 3 Communications (NYSE: LVLT).
The company provides one of the largest international Internet backbones and is instrumental in transmitting data, video and voice across the world. It operates in over 500 markets across 60 countries. Nearly 80% of revenue is derived from North America, while about 10% comes from Latin America and 11% from Europe, the Middle East and Africa.
Growth through acquisition has been an important part of the company's strategy. In 2011, it acquired the assets of Global Crossing, gaining access to one of the largest and most sophisticated fiber optic networks in the world. Fiber is used to provide the most rapid mobile and Internet transmission, which is crucial for watching video.
And with its October acquisition of TW Telecom, Level 3 gained an additional 27,000 route miles of fiber, with more than three-quarters of those in valuable metropolitan areas. The combined company now has 200,000 route miles globally and is the largest player in U.S. metropolitan fiber.
Given increasing demand for its core services, there is little surprise that the company has grown sales and earnings.
In the past four years, revenue has nearly doubled, rising from $3.7 billion in 2010 to $6.8 billion in 2014, which was also the year the company reported its first annual profit since going public in 1998. Analysts anticipate a 23% jump in sales this year to nearly $8.4 billion.
The company announced first-quarter 2015 results before the bell on Wednesday. Net income rose 17% year over year to $0.35 per share, beating the Zacks consensus estimate of $0.33. Revenue, however, fell just shy of expectations, increasing 2.5% to $2.05 billion.
Nevertheless, shares advanced 3.7% on the day. What likely sparked the rally despite the mixed results was LVLT's increased full-year guidance. Management projected adjusted EBITDA would increase by 14% to 17%, up from a previously projected 12% to 16%. They also raised their free cash flow forecast significantly to $600 million to $650 million from $550 million to $600 million.
Analysts have been ratcheting up their earnings estimates as well. Ninety days ago, they projected 2015 earnings per share of $1.35. The current number is $1.61, an increase of nearly 19% from previous estimates and a 33% jump from 2014. For 2016, they project profits will grow 46% to $2.35 per share.
Turning to the chart, we see LVLT is in a powerful uptrend.
Shares spent much of 2012 and 2013 going sideways in a range between about $18 and $25. During this time, the $25 level was tested five separate times, but on each attempt the stock met formidable resistance and was turned back.
Finally, in September 2013, shares broke through resistance and began a strong uptrend. In roughly 10 months, they had almost doubled, peaking above $46 in July 2014. As I draw the trendline for this move, it began in June 2013 near $20 and was broken in September 2014.
LVLT then retreated to about $38 in October. From there, it rallied on extremely high volume and tested round-number resistance at $50 in November. For the remainder of the year, shares consolidated in a very narrow trading range between about $47 and $50 before finally breaking through this barrier at the end of January.
The stock advanced to the $55 level before again consolidating in a narrow trading range for the past eight weeks.
On the heels of its Q1 earnings release, the stock finally broke through this narrow shelf of resistance, making a new, 14-year recovery high (shares traded above $120 during the tech bubble).
The trendline from the October low currently intersects the chart near $53. To avoid being whipsawed, I am going to set my stop-loss just below $50 lateral support at $49.79. With no nearby overhead resistance and strong projected earnings growth, I am setting a target of $64.95 by year end, which would yield 16% profits.
Recommended Trade Setup:
-- Buy LVLT at the market price
-- Set stop-loss at $49.79
-- Set price target at $64.95 for a potential 16% gain by late 2015
Generate 62% From a 16% Stock Move
You could amplify LVLT's potential 16% move into a 62% gain by buying LVLT Jan 50 Calls at $9.25 or less.
This call option has a delta of 72, which means it will move roughly $0.72 for every dollar that LVLT moves, but it costs a fraction of the price of the stock.
The trade breaks even at $59.25 ($50 strike price plus $9.25 options premium), which is 6% above current prices.
If LVLT hits Melvin's upside target of $64.95, then the call options will be worth at least $14.95 ($64.95 stock price minus $50 strike price). Once you enter the trade, place a good 'til cancelled (GTC) order to sell your calls at that price.
Profit Amplifying Trade Setup:
-- Buy LVLT Jan 50 Calls at $9.25 or less
-- Set stop-loss at $3.75
-- Set price target at $14.95 for a potential 62% gain in 8.5 months
If you're interested in learning more about options or getting trades like this sent to your inbox each week from a former child prodigy who made $600,000 by the time he was 18 by trading options, follow this link.
-- Profitable Trading Staff
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