A New Year’s War Wish? (CAE, TSLA)

We ran down a lot of trades last week in our pre-Christmas bonanza. But there was one we neglected to report, and that was our November 11th initiative with Tesla Motors (NASDAQ:TSLA), a company that swings like a chimp and gives us wily investors one helluva bag o’bananas.

monkey

The letter was called Go Make a Name for Yourself, and in it we offered a complex concatenation of purchases and sales of different strikes and expiries using TSLA options, all underpinned by an unerring grand prophetic understanding of the wishes and desires of both man and beast.

The trade went thus –

1. Purchase the TSLA January 280 CALL for $3.60 and the January 200 PUT for $3.30

2. Sell the November 28th 280 CALL for $0.18 and the November 28th 200 PUT for $0.44, and

3. Sell the December 26th 190 PUT for $1.03 and the December 26th 290 CALL for $0.78.

Total debit for the trade was $4.47.

And what happened?

Well, a week later in a missive called The Truth about Supply and Demand, we closed out the long January CALL and PUT (#1) for $6.90. The November options expired worthless (#2), and we bought back the December 290 CALL for $1.40.

Then, as of last week’s options expiry, the December 190 PUT expired with no value.

All told, we come away with $5.50 (6.90 – 1.40) on $4.47 spent. That’s a profit of 23% in just over six weeks.

Book It!

We’re going to turn our attention now to a theme that we’ve been discussing for the last several years and which now demands closer inspection. The theme is war, and there’s no question that recent escalations in the conflict versus ISIS in the Middle East and the ongoing Ukraine/Russia clash are creating opportunities for investors.

Before we delve into them, however, a quick word regarding the morality of investing in arms manufacturers.

We at Normandy don’t like war; we don’t like death and killing and blood, and yet we recognize that these things happen, that they’re inevitable and that corporations that supply weapons for war will thrive when wars agglomerate.

Our job at Normandy, however, is neither to fight wars nor to argue their relative justness. Rather, we’ve been tasked with identifying market opportunities and exploiting them. It just so happens that the tray of war has now been served, and we’re therefore obliged to partake of its fruit.

veggies

Pomegranate, Anyone?

The company we’ve lined up for you today is a Canadian enterprise that just won a number of big contract bids and that we think is ready to take flight. It’s called CAE Inc. (NYSE:CAE) and it’s engaged in the flight simulation business for both military and civilian aircraft.

The company is 60 years old, has a market cap of $3.5 billion, a P/E of 21 (not a detail we’re enthralled with), a dividend yield of 1.85% and its long-term chart looks like this –

cae

The weekly technicals hold a lot of promise. To begin, both RSI and MACD indicators (black boxes) are back above their respective waterlines, a position they haven’t held since the end of June, just after CAE registered its best mark in a decade at $14.00.

In addition, we see all the major moving averages are unfurled and trending higher as of this past summer – a fully bullish development – and the short-term MA (in blue) has now ‘scooped’ price.

A large ascending triangle is now being formed (see the daily chart below) that we believe will be penetrated on the upside, leading to a very strong burst of buying and a retest of CAE’s all-time highs in the $20 range.

In the meantime, we have two resistance levels to overcome (in red). The first lies just 30 cents away at $13.50, a 2% climb. The second is the aforementioned $14.00 mark, a mere 6% above current price levels.

This ain’t no Tesla, Jack!

CAE is not given to wild swings in price, as you’ll soon see, but we’ve a hunch the market will shortly catch on to this rather plodding number, particularly if and when the technical buying emerges at $13.50. This is a development we expect to see within a few weeks, after which a jet-like burst in price will almost surely ensue.

Consider some fundamental facts –

CAE has in the last few months grown its sales and service pipeline dramatically, with $115 million in new defense contracts alone, including:

• Providing new full-flight simulators to the Polish Air Force (and subsequent service);

• Extending current contracts with the German Army Aviation School through 2021 that includes maintenance and support of their existing twelve simulators (all CAE product), and provision of two additional CH- 53GA simulator cockpits to the German Army,

• Undertaking a training needs analysis for the joint German-French Tiger Helicopter Program, and

• New sales contracts to the Royal New Zealand Defense Force’s Super Seasprite helicopter training device, as well as through-life support and maintenance services for 15 years.

On a Roll

CAE’s management team has clearly been pushing of late, and as the daily chart below makes clear, the ascending triangle formed by the green and blue lines is likely to be breached in the very near term.

See for yourself –

cae2

We like the looks of the RSI and MACD indicators here, as well (black boxes). As you know, a full-on bullish position is marked when the two rise above their respective midway ‘waterlines’. RSI accomplished that at mid-month, and MACD is now in the process of the same.

After touching its long-term moving average in late September (red circle), CAE shares have been climbing methodically toward resistance at $13.50 (in blue). The next attempt to ascend above that line will be the fifth in six months, and we believe it’ll do the trick. Price is trending above all its moving averages, and even though they’re not yet fully unfurled, one or two days in the current price range should turn the last of them (the 137 DMA) higher, a move that will also be greeted enthusiastically by technicians.

To profit from CAE’s eventual breakout, we’re recommending a deep-in-the-money CALL purchase. And since options for CAE are only available in Canada, you’ll have to speak directly to your broker for the purchase.

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Options Trader Elite recommends you consider the purchase of the CAE June 12 CALLs, now trading for $3.50.

CAE stock is now trading at CAD$15.34.

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Options Trader Elite recommends you consider the purchase of the CAE June 12 CALLs, now trading for $3.50.

CAE stock is now trading at CAD$15.34.

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A very happy new year to all our readers, their friends and loved ones!

With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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