Top Takes: DE, CVS, WFMI

The RealMoney contributors are in the business of trading and investing all day on the basis of ongoing news flow. Below, we offer the top five ideas that RealMoney contributors posted today and how they played those ideas.

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1. Deere Continues to Defy
By Sham Gad
8:18 a.m. EST

Deere's ( DE) earnings today reaffirm my views of the multiyear growth cycle in ag/farming that we are starting to see. Earnings blew past all estimates on top of a healthy top-line growth number.

I heard an interesting tidbit this morning on CNBC that the ag space continues to run at 100% capacity -- the only industry doing so in these economic conditions. Indeed Deere is a very uniquely positioned business with a first-rate franchise.

My favorite subsector of the ag business, fertilizer, is running at anything but full capacity. But I believe that over the next three years, this sector will vastly outperform the overall market. And for the momentum players out there, yes, I believe Deere's numbers could single-handedly push the markets higher today -- but please don't bet the farm :).

No positions.


2. Housing Starts
By Tim Melvin
10:03 a.m. EST

From a long-term perspective, the rise in housing starts is horrible news. We have enough inventories. The fact that more is being created was pretty obvious from the delinquencies report yesterday. We do not need a bunch of new houses going up. An annual pace of 591,000 homes, in addition to existing inventory and the potential foreclosures ahead, is going to make it tough for prices to stabilize, in my opinion. Even with rates at historically low levels, mortgage applications fell last week.

In the short term, the housing starts number is being cheered as a sign of new demand. In the long view, I would love to see building just stop and let the market catch up.

No positions.


3. HNP: Buy the Breakout With a Firm Stop
By Robert Moreno
10:25 a.m. EST

Huaneng Power International ( HNP) is China's largest power producer, with 36 power plants in 17 provinces. In 2009, China's electrical consumption rose 33% and HNP saw 10.2% output growth.

HNP Daily
Source: StockCharts.com

The price is pushing up against a resistance line marking the 2010 high and a downtrend line in place since September/October 2009. The RSI and MacD indicators are in bullish divergence to price and suggest that the "mini-cup-and-handle pattern" will break to the upside. The blue histogram overlaid behind the price bars represents the weekly MacD and is making a positive crossover, indicating the beginnings of a longer-term trend. The Force indicator shows very positive volume to the buy side, with the current reading above its 21-period moving average.

The trade is to buy the breakout with a firm stop under the 50-day moving average at $23.28. Note that this is a large company, but average daily volume over the last three months is only 192,629 shares, making it thinly traded and susceptible to large swings and/or gaps.

No positions.


4. Whole Foods Adjustments
By Timothy Collins
TKTK a.m. EST

Whole Foods ( WFMI) has been the big winner today, with the spreads from yesterday showing doubles and triples earlier. I have moved my Feb 30 calls to long Feb 32 calls for a $1.90 credit (sold Feb 30 calls and bought Feb 32 calls). I also bought some Feb 32-34-36 call butterflies for $1.00 to provide a bit of range protection. The plays are protected all the way up to $35 and change currently, so moving the 30s to 32s removes twice as much capital as originally risked. Above $35 there is still risk, so I have covered all naked calls by buying Feb 36 calls for 4 cents to mitigate the vast majority of my risk in this earnings play.

Long WFMI.


5. Favorite Long: CVS
By Robert Marcin
11:32 a.m. EST

Some observe that I have not shared my favorite long ideas as much as in the past. That could be true, as I have thought many stocks were overbought, overvalued or both. But the recent correction has generated some interesting values.

My favorite long has shifted from Medtronic ( MDT) (second favorite) to CVS Caremark ( CVS). At 12 times 2010 and 11 times next year's earnings, the stock is cheap. There is a deluge of high-volume drug-patent expirations happening in the next few years. Drug retailers and pharmacy-benefits managers stand to benefit handsomely from the expirations, as profit margins are 3 to 4 times higher on generics.

As CVS fixes Caremark, the stock's P/E multiple should expand. Other public PBMs trade for around 20 times, and that segment accounts for around 40% of CVS profits. For CVS, business has good high-margin tailwinds and decent P/E multiple expansion potential. A 15 to 16 times P/E on 2011 estimates would generate a share price of $45-$48 in 12 to 18 months, or solid upside.

CVS has little currency exposure, so one need not worry about gyrations in the dollar or euro. Finding high-quality, domestic, defensive growth companies is challenging in today's environment. Check out CVS.

Long CVS, long MDT.


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This article was written by a staff member of RealMoney.com.

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