Monday, July 16, 2012

Delivering Freight On Time with Strong Earnings

This week I've got a low-risk high-reward short-sell stock pick on United Parcel Service. Bernanke is talking on Tuesday and if he says ok for more quantitative easing then then this downside trade may not work out and equities may continue higher so use stop-loss in case you take a position today. I suggest waiting until Tuesdaay after Bernanke's speech to Congress to take new positions.

The Markets This Week

The markets this week will be looking at European debt crisis as last week. Spain is looking to collect 30 billions euros from the European Central bank now. Spanish 10 year bond yields will be under the microscope eyeing the very important 7% area. Spain is holding more bond auctions on Tuesday and Thursday of this week so be ready for that. More important Euro events this week are the European Stability Mechanism (ESM), and the Eurozone's rescue fund issues. Eurozone CPI is due today Monday, the German ZEW July Survey on Tuesday, and the European Central Bank is meeting on Thursday. US June Retail Sales and Fed Chief Bernanke is addressing Congress on Tuesday. The markets are looking to Bernanke for the ever so critical news of continued quantitative easing or not. With China's GDP slowing to 7.6% now, the markets are wondering if they will be doing quantitative easing of their own to prop up their equity markets. US Corporate earnings reporting season is now on with the markets also focused on profit or loss reports, and earnings guidance going forward.

This Weeks Stock Pick

Zacks Investment Research recently reported eading package delivery company United Parcel Service, Inc. (UPS) has increased its freight rate by 5.9% on non-contractual shipments in the U.S., Canada and Mexico. The increase is effective July 16, 2012.

The company offers a variety of less-than-truckload (LTL) and truckload (:TL) services to customers through its Freight segment, which remains a significant source of revenue with approximately 20% contribution in total revenue as of the first quarter 2012

UPS remains well positioned to benefit from firming industrial fundamentals and the LTL industry pricing discipline despite the prevailing economic volatility in the global market. The current price hike should support UPS' long-term goal of robust revenue and margin expansion plus earnings improvement.

Continued focus on pricing improvement signifies UPS' initiative to better its revenue and margins along with earnings improvement over the next several years. Earlier, UPS hiked its general rate by 4.9% for ground packages, air express and the U.S. origin international shipments, effective January 2012.

Apart from the routine rate hikes, UPS has a series of initiatives underway that is expected to deliver industry leading margin and earnings growth over the long term. Key among these is renewed focus on yield improvement in the U.S. Domestic Package division.

Other drivers include increased export volumes, operating leverage benefits and capacity expansion plans. Further, the company continues to expand its footprint in emerging markets such as health care, which could be a larger contributor to growth in the future. The business wins are expected to expand the distribution reach further to Asian and Latin American markets as well as emerging countries like China and Brazil.

We believe the growth initiatives will aid the company to deal with near-term headwinds such as rising fuel prices, substantial capital investment and high labor unionization. These would give UPS a competitive advantage over its peers like FedEx Corporation (FDX).

We are currently maintaining our long-term Neutral recommendation on UPS.

UPS retains a Zacks #4 Rank (Sell) for the short term (1–3 months).

Invest2Success Short-Sell on UPS - Ticker UPS

Sell Entry: 82.16 to 79.14

Stop-Loss: 88.73

Take Profit Areas: 72.57 to 71.68, 70.68 to 69.88, 64.91 to 64.06, 53.44 to 52.77

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Click the UPS stock chart below for a larger view.