The best time to buy is often when the news is at its worst. A recent example was in early 2009, when U.S. stocks were more than 50% off their highs. Many traders were selling stocks and moving to cash. In hindsight, we know that buying an index fund of U.S. stocks while the news was at its worst would have delivered large gains. Some individual stocks did even better.
Among the hardest hit stocks was Apple (NASDAQ: AAPL), which had fallen to about $82 a share and was trading with a price-to-earnings (P/E) ratio of 9. Traders who ignored the news and bought AAPL were rewarded with a gain of more than 730% in a little more than three years.
There's a similiar opportunity in the market right now... but not in the United States.
Europe is now the source of some of the worst financial news. Greece and Spain are flirting with economic slowdowns that might be thought of as depressions. Analysts are also warning of problems in Italy and France. Traders can consider ETFs for any of these countries, or they can look deeper into the components of those ETFs and seek out the best trading opportunity in those countries.
France Telecomm (NYSE: FTE) seems to be among the best choices for low-risk stocks in a high-risk environment. Telephone companies are fairly safe in any economic environment. Earnings are generally steady because phones are a necessity. FTE is likely to maintain profitability no matter how long the European crisis lasts, but traders seem to have factored their worst fears into the price of FTE. Shares are trading at a forward P/E of 8, less than half its 7 year average of 18.
Like most European companies, FTE pays an (earnings-based) dividend twice a year. Based on current earnings estimates, the stock could provide a yield of 8-10% over the next twelve months. Generating income is not the goal of this trade, but it could be a bonus if shares are held long enough to capture a dividend.
Turning to the technicals, there are a number of reasons to buy FTE. Starting with the monthly chart, we can see that the stock offers a great deal of potential. It has been in a trading range for most of 2012 and appears to be bottoming.
The price target based on the trading range is $18.96, almost 40% above the recent price. The Intraday Intensity Index (III), an indicator that quantifies the bullishness or bearishness of volume and can be calculated for any time frame despite its name, is bullish.
Vertical bars highlight two oversold extreme lows in the III. In 2010, that sell-off marked the beginning of a 45% rally. The more recent sell-off, which reached a deeper oversold level, has seen a small move higher but leaves significant potential profits for traders looking at entering the trade now.
On a daily chart below, the Bollinger Band Impulse indicator is also signaling a buy. This indicator measures the one-day rate of change in the width of the Bollinger Bands. It is not a widely followed indicator, possibly because it rarely offers signals. It is mostly flat with very occasional spikes. Those spikes generally signal buying opportunities.
Another bullish consideration for FTE is that the stock is likely to benefit from the flurry of news that will accompany the next European leaders' summit meeting in October. Buying now makes sense based on the chart, the low P/E ratio and the potential income. Although the dividend is likely to be cut, FTE still offers better-than-average income.
Weekly Bollinger Bands can define the risk for the trade. A close below the lower Band, at about $13.13, offers a stop with less than 4% risk.
Another way to manage risk on the trade is to buy a call option, which limits the risk to the price of the option. FTE calls expiring in November with a strike price of $12.50 are trading at about $1.38 (the midpoint between the bid and ask price). If FTE moves above $13.88, then the calls would have some intrinsic value. It could take several months to reach the price target of $18.96, but a 10% move based on news out of the October summit seems very possible given the market volatility that occurred with previous summits.
A 10% increase would push FTE to $14.72 and the $12.50 call option would be worth at least $2.22 at that price, which is about 61% higher than the recent trading level. Traders buying the call below $1.48 would enjoy a profit of at least 50% if the price target is reached.
FTE looks like a stock that could be bought for the long term. Or you could use inexpensive November calls for a low-risk trade on the European summit.
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