Profiting off of AT&T and Calgon Carbon

Dear WSE Member,

I hope you enjoyed the weekend. Your humble analyst kept his nose to the grind, filtering the market sands for more opportunities. Today we’ll be looking a bullish & bearish play to help round out any risk we are exposed to in the event that the market rolls over in the months ahead.

Keep in mind that you don’t have to invest in every single opportunity I throw your way. I may have said this in the past, but it’s always worthy of a reminder from time to time. There will be times when my analysis aligns with what you were originally thinking or agree with – and that’s great. There’s nothing like two great minds thinking alike, am I right!? However, once in a while you may scratch your head or lift an eyebrow.

And this is okay too.

Even the best dance partners miss a step or two from time to time — that’s why they practice. And before we get into this week’s recommendation, we’re going to do a little Q&A session:

A question comes in from Joe N. who writes, “Would you still be a buyer of SNDA with this week’s bearish engulfing pattern?”

Yes, in the intermediate to long-term.

Allow me to explain.  The bearish engulfing pattern as you have pointed out recently formed and may place downward pressure on the stock in the short-term. But we have to be careful when it comes to jumping the gun on a single weekly candlestick – it does not make a trend. I’ve seen many instances where a candlestick “reversal signal” becomes the target of another “reversal signal.” In my opinion, the stock overreached ever so slightly outside of its upper Bollinger Band. This to me was a sign that perhaps SNDA would consolidate just a bit further before ultimately breaking upper resistance near $65.

On the flip-side, our protective stop-loss is placed ($49) and other technical indicators (MACD & DMI) still suggest that we hang on to our shares with both fists clenched. On the daily chart, you can see the beginning of what will likely turn out to an Elliot A-B-C “corrective” pattern. The only way we’ll know for sure is if we get a fourth wave down OR a third wave which turns into a one wave up, igniting a new bullish run. We’re pulling for the latter scenario to unfold given all the fundamental and technical arguments I noted in the last WSE write-up.

Now, let’s look into some other plays. Here’s what we’re bullish on:

Calgon Carbon (NYSE:CCC) deals in services, products and solutions for purifying water and air. Furthermore the company is categorized into three segments (Activated Carbon and Service, Equipment and Consumer). This is a great play, especially for those with an interest in this industry. While many “eco-friendly” themed companies run on hype, along comes Calgon with a business model that works quite well.

And it wasn’t too long ago that this company was in the red. In 2005 and 2006, Calgon reported total net income of -$7.42 and -$7.80 million respectively. But then things began to change. Suddenly, in 2007, the company pulled in $15.29 million on higher operating revenue. In 2008, we saw yet another blow-out year with both top-line and bottom-line figures growing at an impressive rate. Revenues came in at $400.27 million, with total net income more than doubling to $38.36 million. In 2009, we only have three quarters of reported numbers to review. And so far, things look okay given the overall economic outlook. As of September 30th, Calgon had reported $25.93 million in total net income with a bulk of the profit occurring in the third quarter.

Things become interesting when we look at the four-year monthly chart (see below). What we have here is a major technical trading pattern known as a “symmetrical triangle.” And you can tell that price is being squeezed to a head. Like a coiled spring, this energy must be released. And when the flood gates open, this stock will move fast.  Although the MACD indicator is about ready to bottom and diverge north, we must take caution.

This means that for this particular play we won’t be jumping the gun. Instead we’ll wait for confirmation when the stock trades “outside” this pattern, hopefully to the upside.

Switching gears, this is what we’re bearish on:

Believe it or not, At&t is not looking so hot these days. In the three-year chart below, the company’s stock price hasn’t recovered all that much from the disastrous year it, and many of other equities, has endured during 2008. And it could be for a variety of reasons. The first being the blitzkrieg of commercials coming out from Verizon claiming that their 3G network coverage is superior, although a bit misleading considering the fact that At&t uses its “Edge” network and the comparison is apples to oranges. The second is the arrival of the iPhone killers. The other service providers are playing catch-up and the Android seems to be picking up speed. Additionally, there has been a backlash among those who subscribe to At&t services when the company came out and said their iPhone users are using too much data. More on this story can be found here:

http://www.betanews.com/article/The-wireless-data-paradox-ATT-asks-you-to-use-less-data/1260827116

Not only is the company testing the loyalty of their subscribers, but the ability of the network to handle further growth and any additional strains comes into question as well. And I’m sure you could probably think of a few more reasons. Do I hear dropped calls anyone? Hello. You there??

Back to the charts again. Using Elliot Wave theory we can see that At&t stock is currently initiating a new downward trend following the corrective A-B-C pattern (green) we’ve seen since the market bottom in March ’09. This alone should give us confidence to take a short position on the stock.

Our Recommendations:

1) Sell Short At&t (NYSE:T) at $26.11 and place a protective buy-stop just above major resistance between $29-$30/share depending on your risk tolerance.

2).  We are also going to implement a Protective Put on the above trade buy purchasing  one AT&T April 2010 26 Call @ $0.90 (Symbol:  TDZ) for every 100 share of AT&T stock you short.  The protective put is a simple and inexpensive way to off set our risk with the short stock position…

3) Purchase Calgon Carbon (NYSE:CCC) if shares break to the upside and trade above $16. When this occurs, place a protective stop-loss at or near $13.50.

Good investing,

Stanley Barnes
Senior Analyst, Wall Street Elite