All eyes were on Fed Chairman Ben Bernanke’s speech this morning, and I wasn’t surprised to see some initial selling when it was clear he wasn’t kicking off another round of quantitative easing. However, the market has digested his somewhat indecisive remarks and has moved higher, even with a hurricane heading for Wall Street.
We’ll talk more about the speech in the Weekly Update later today, but for now, the recent action gives us the go-ahead to put on a trade I’ve been watching for several days: buying calls in satellite imagery maker GeoEye (GEOY).
Acquisition rumors have swirled lately around GeoEye, whose products are used by the Department of Defense and other private and governmental agencies. In fact, some of the satellite images you see of the hurricane this weekend will be from the company’s satellites. Given the stock’s strong industry position, cheap valuation and unique products (such as those used in Google Earth), the takeover buzz seem to have a lot of credibility.
Shares have fallen sharply in the recent selling on fears that any company relying on government revenues will be hurt by budget constraints. That’s a legitimate concern, but in GEOY’s case, the company has already signed a long-term contract for its new GeoEye2 satellite, which is expected to launch in early 2013, and the rate is significantly higher than the current GeoEye1.
The recent selling has made the stock cheap, trading at just 5.8X enterprise value to earnings, which is a metric frequently used in evaluating acquisitions. At the same time, GEOY has also moved up off recent lows around $30, so there looks to be good support not far below current prices.
Buy to open the GeoEye (GEOY) December 30 call options (@GEOY 111217C00030000) at $6.70 or better. We’re going further out on the expiration to give the takeover buzz time to build or even result in an actual announcement. And even if no deal happens, I see the stock moving back toward recent levels over $40, which would give us a nice move in the calls. Note: There is a pretty big spread on the bid and ask with these contracts, which don’t have a lot of open interest yet or volume. I highly recommend you use a limit order for these to make sure you get the right price.