Swing News !!!

The last four out of five “Swing Ideas” have been winners and have reached their swing targets within 5 trading sessions each. My last swing idea winner was Research In Motion (NASD:RIMM), which was posted on June 28, 2004. RIMM’s “buy above” price (on common) was set at $60.75. RIMM soared 19% to peak at $72.07 on July 1, 2004; reaching its swing target in 1 trading session. Investors that followed my option swing recommendation on RIMM, would have bought RUPGK long and realized between 130% to 145% return on capital.  

Larry’s Swing Idea For Friday July 9, 2004:

BMC Software Inc. has been selected as one of my top (short) swing ideas for this week. To reduce your capital outlay and increase your leverage, I recommend buying this Company’s put options to maximize short-term profitability. Please read on for more details… 
     

Recommended Option Swing Play:

BMC Software Inc. (NYSE : BMC)
Industry: Technology   Sector: Software & Programming

Employees: 6,429  Market Cap: 3.16 Billion
Institutional Ownership: 85.9%
Insider Ownership: 0.99%
Shares Issued & Out: 222.8 Million
Company Information: www.bmc.com

Option Summary:
Option Information:www.optionsxpress.com
Symbol: BMCSW   Type: PUT   Exchange: AMEX  Last Ask: $3.40
Strike Month: JULY 2004   Strike Price: 17.50 
Option Position: Mid-Way: In-The-Money

Swing Data:
Swing Trade Strategy: Buy Put Options (Short-Term : Bearish)
Trade Targets: Common (8%) / Option (80%+)
Trade Composition: 25 % Technicals / 75 % Fundamentals
Trade Entry: 1 to 5 days 
Trade Exit: until swing target or stop loss is reached: 1 to 5 trading days max.

Option Entry Strategy: Buy BMCSW “IF” BMC Trades Below $14.05
Buy put options (Sym:BMCSW) when the underlying common stock (Sym:BMC) trades “just below” its 1-day support level at $14.10.

Option Exit Strategy:  Sell BMCSW “IF” BMC Falls 8% To Swing Target: $12.90
Close out or sell your put option positions (BMCSW) once the underlying common (BMC) trades down 8% to the assigned swing target of $12.90.

Note: I set my swing target based on the movement and pricing of the underlying common stock. It’s far easier to follow trading instructions based on common stock than on volatile options.

Stop-Loss: Place a 4% Mental Stop-Loss Limit: (Based On The Common)
If the common stock rises 4% above the equivalent entry price of the common, I recommend selling all of your put options, at or near “the market”, to minimize loss. A “mental stop-loss” is simply a stop-loss price remembered in your head and always should be written down.

Larry’s Exit Tip: You should move your mental stop up if the common stock rises. The best way to protect your intra-day profit and minimize potential loss, is by keeping your stop-loss price 4% from the common’s intra-day low.

Potential Risk/s: bullish market conditions due to GE's positive earnings or software industry price strength

Need More Help: *see Larry’s trading tips at the bottom*

Business Summary:

BMC Software, Inc. is an independent systems software vendor. The Company provides software solutions that allow companies to manage their information technology (IT) infrastructure from a business perspective. Its portfolio of software solutions spans from enterprise systems, applications, databases and service management.

Last Quarter: For the fiscal year ended 3/31/04, revenues rose 7% to $1.42 billion. Net loss totaled $26.8 million vs. an income of $48 million. These financial results reflect increased maintenance revenues associated with Remedy™ and Magic™, offset by costs related to exit activities and higher personnel expenses.

Primary Swing Catalyst/s: 

1. Company Lowered Guidance (7/07/2004)

BMC Software said Wednesday July 7, 2004 that delays in customers' purchasing decisions would cause the Company to miss its first-quarter revenue and earnings forecasts. The Company also mentioned that license bookings were estimated to be down 20 percent to 26 percent compared with the first quarter last year. Consequently, BMC expects to post earnings, excluding charges, between 11 to 14  cents a share on $318 million to $328 million in revenue for the first quarter of 2004. The Company had earlier estimated it would earn between 12 to 16 cents a share on revenue between $345 to $355 million. Both guidance figures were based on Reuters Research.

In summary, BMC Software’s management on Wed. July 7^th lowered their revenue and earnings per share (EPS) guidance (for the first quarter of 2004), by 8% and 12%, respectively. I am expecting continued share price weakness in Friday’s trading session, as a result.

2. Recent Downgrade By First Albany Capital, Inc.

On Thursday July 8^th First Albany Capital, In. downgraded BMC Inc. to “Neutral” from “Buy”. This broker reduced their 2004 Q1 revenue estimates on BMC by about $30 million to $323.7 million from $353.1 million. They also reduced pro forma EPS expectations to $0.12 from $0.13. The broker also stated "besides the miss, the Company's reliance on large deals, potential for increased competition, summer seasonality and integration of its Marimba purchase create too many issues to be resolved for the time being.”

I am expecting several more of the 23 Wallstreet Analysts covering BMC to announce downward guidance revisions and/or rating downgrades on BMC in the near term. The potential for additional downgrades following BMC’s Q1 report on July 28^th is also possible.

3. Software Industry Weakness

A number of companies that make business software have lowered short-term quarterly guidance and their stocks have been punished badly as a result. Several of the following companies has lowered guidance in the last week: Yahoo Inc., Veritas, PeopleSoft and even most recently companies like Siebel, Computer Associates, Storage Technology and Primus Knowledge have all warned in the last 24 hours. In addition, Abode faces a patent infringement suit on its Acrobat software products. In addition, Japan's fair-trade watchdog will issue a warning against U.S. software giant Microsoft Corp., which has been under investigation on suspicion of violating the country's anti-monopoly law, but the U.S. software giant will not be fined, an official said early Friday morning July 9, 2004.

In summary, BMC’s software industry group is under major selling pressure by investors and also by institutions and money managers. BMC Software has an institutional equity interest of 89.5%. I am expecting continued selling of BMC’s stock from the majors in Friday’s trading session.

Fundamental Summary:

                                  2001     2002    2003    2004    2005   2006
Revenue: (mil.)       $1509.  $1288   $1326  $1418    (forecast)
Earnings Per Share: 0.16      -0.75   0.20     -.12     0.75    0.88

Past 5 Year Earnings Growth Rate: -30.7%
Future 5 Year Earnings Growth Rate: +10%

Avg. Earnings Surprise (last 4 quarters): +35% 

Avg. Analyst Rating This Week: 2.6  HOLD
Scale> (Strong Buy) 1.0 - 5.0 (Strong Sell)

Avg. Analyst Rating Last Week: 2.7  HOLD

Technical Summary:

Recent Close: $14.16 on 9.93 million shares       (Volume Alert!)
3-Month Avg. Volume: 1.65 million                       (Bullish)

52-Week Price Change:15.9%                           (Neutral)

15, 45 and 100 Day Trends: Very Bullish              (Bearish)
Short Position % of Float: 1.9% and rising            (Bearish)

Short-Term Indicators: 85% Sell Bias                 (Very Bearish)

Institutional Activity: 65% Sell Bias and rising       (Bearish)
9-Day Relative Strength Rating:15.2                (Very Bearish)
Investor Sentiment: Put/Call Volume Ratio=1.95  (Very Bearish)
Community Sentiment: 45% Long: 55% Short        (Bearish)
Avg. Tech Rating                                                       Bearish

Technical (Event) Forecast:

If market conditions stay bearish in the short-term, I am expecting BMC to test its 52 week low at $13.18 within the next few trading sessions. Technical traders may want to wait for a break below this significant resistance level, before initiating bearish positions. A break below significant resistance at $13.18 will present a “Strong Buy” signal, especially on unusually high volume.   

Larry’s Overall Swing Opinion:        75% Sell Rating

Larry’s Tips For Trading Success:

1. Swing trading is a numbers game. So it is important to maximize your winners and minimize your losers. Don’t be discouraged by the losers, they will come. 

2. Please do not deviate from my recommended swing trade strategy, unless you are an experienced options trader.   
3. I do not recommend using stop-loss orders on options, as they are often too volatile. Instead, I recommend that you use mental stops based on the underlying price of the common. Always move your stop up as your position appreciates. 
4. “If” the common stock trades above the my set target price, sell all of your options at market to lock-in your profit. Follow my exit strategy and resist the tendency of getting greedy!
5. Practice buying on weakness and selling on strength, if possible.
6. In consolidating or downward markets: always take your option profits off the table once your target price is reached. Do not risk your profit in these conditions.
7. In bullish/bearish market conditions: always let your winners run and cut your losers short. Hence, once your original option position doubles in price, sell only half of your original position. Then try to repeat this process for every additional 100% increase in option price. This will ensure that you truly do buy low and sell high, and even higher yet. 

** Note: we are in consolidating markets at present, so cut your winners short at the recommended target price, please.