-=Trader Wizard Ezine - September 5, 2004=-



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BUY or SELL Recommendation on Verizon Communications
	VERIZON COMMUNICATIONS (NYSE:VZ) Sept 3 close:$40.06 RECOMMENDATION: SELL STRATEGY: Buy VZ=MH January 2005 Puts Strike@40 Price to be calculated at the market open September 7 (VZ=MH VZ=MH Sep-03 close @ $2.00) OneChicago Single Stock Futures (VZ1C): VZ1C Z4 (Dec 04) $39.90 Among general reading, here is the material I used to make this decision: EasyStock Interactive charts: Monthly, Weekly, Daily, Hourly, 30-Minute plus Reuters data at Yahoo Finance and the ValueLine study. Also Motley Fool discussion of PEG.

The case for selling:
	1. PEG ratio, which is the company's price-to-earnings ratio compared to its Earnings Growth Rate (EGR), is over 3, which is way too high for a company that has had no growth for 6 years. The P/E (ttm) is 33.7 (and over 15 on a forward basis), while EGR (past 5 years is 4.0, but expected (by ValueLine) to drop to 1.0 over next 5 years. 2. Earnings per share were $3.01 in 1999, $2.92 in 2000, $3.00 in 2001, $3.05 in 2002, $2.62 last year, likely 2.40 this year (Thomson estimates), and just $2.55 next year. Cash flow, too, is headed south, from $8.11/share in 2001, to $7.93 in 2002, $7.55 last year, likely $6.90 this year and possibly $7.10 for 2005. Ignoring negative earnings comparisons plus 2% annual revenue growth for next several years, investors have been caught up in the hype. 3. Ken Nuggent, Value Line analyst is not too hot on VZ. There is just no growth in the telephone and telecommunications industry, and this combo (June 2000) of GTE and Bell Atlantic, is no different, so traders should sell into strength every opportunity. 4. Verizon’s total debt is $44.5 billion, with almost half due within 5 years. At $9 bn free cash flow, the company is safe, but should interest rates move higher, earnings and R&D would be further affected. 5. Topping RSI and STO technical indicators in short-term data series will likely carry over to Weekly data charts, particularly if VIX and VXN volatility indicators bottom out here. 6. Guru analysis by Lynch is at 0% and Motley Fool is at just 25%.

The case against selling:
	1. The 52-week high on Sept 2 can’t be ignored. Investors like something here. I think they jumped on the higher earnings number, by mistake. 2. Maybe investors like the fact that Verizon Wireless will roll out the nation’s first broadband wireless network. 3. Guru Analysis at Nasdaq shows O’Shaughnessey rates VZ 100%.

Trader Wizard's expectation for this trade:
	1. The VZ=MH puts are at-the-money and I’m paying ~$2 time premium. I anticipate VZ to re-test its $34-35 base (-13%) within 60 days, based on a normative price of 14.2 to 14.6 P/E (times $2.40 estimated earnings). This would move the puts to ~$6, and a gain of ~200%. This decision, however, is mostly based on anticipated stock market direction and the relative technical strength of other Dow components. 2. This is an aggressive stance: the stock has just set a 52-week high and may break out to new high ground here. If it moves up to its June 20, 2003 high of $41.35 (i.e., against me just 3.2%), the puts will drop to ~$1.50, which would be a loss of ~25% of capital. If these puts drop to $1.00, I’d be a seller.

Trader Wizard Profit & Loss:
	Future issues of the ‘Trader Wizard buy or sell’ Ezine will present a calculation of p&l for individual trades and for all trades (both open and closed) for the Trailing Twelve Months.

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