Opportunity: Trade This Stock’s Drop for a 100% Return in 12 Weeks

Option Trade of the Day: Zoetis Inc. (NYSE: ZTS)

The April employment report was pretty much perfect as far as investors were concerned. The report was released Friday morning and it showed solid job growth, a lower unemployment rate, and average hourly earnings rose modestly. Stocks did open slightly lower, but then rallied sharply for the rest of the day.

[hana-code-insert name=’adsense-article’ /]The Nasdaq was up 1.71% on the day to lead the indices.

The Dow gained 1.39% and the S&P gained 1.28% by the end of the day.

All ten sectors moved higher Friday with six of them gaining over one percent.

The tech sector led the way with a gain of 1.9% and it was followed by the consumer staples sector with a gain of 1.45%.

The utilities sector was the worst performer, but it still managed to gain 0.45%.

My scans had a decidedly bullish skew Friday night with 76 names on the bullish list and only nine on the bearish list. When I added these results to the barometer readings, it jumped to 35.8.

The name that stood out most to me on the bullish list was Zoetis Inc. (NYSE: ZTS). The pharma company ranks very high in IBD’s EPS rating (96) and SMR rating (A). The company reported earnings last week and showed earnings grew by 42% and sales grew by 11%, but that was still disappointing to investors. This is a case where sentiment was too bullish ahead of the earnings report and it caused a drop.

We see the drop on Wednesday and I think it is giving us a great buying opportunity. I drew a regression channel for the last nine months and you can see that the stock was farther below its regression line last week than at any point during that time. I look for the stock to rally sharply in the next month or so and will move back above the regression line.

Buy to open the July18 80-strike calls on ZTS at $4.00 or better. These options expire on July 20. The stock will need to get to $88 for these options to double and that is only a gain of 7.9% from where the stock is now. With the slope of the line, the stock may not even have to rise above it for these options to double.

— Rick Pendergraft

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.