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Wednesday, August 02, 2006

Adobe: No News is Good News

By William Trent, CFA of Stock Market Beat

Last night after the market closed, Adobe Systems (ADBE) reaffirmed its previous guidance. That’s all. It didn’t raise the guidance, but one might think so given the 5% rally the shares enjoyed in late trading.

We like that. To us, it suggests that expectations were already brought down to the lowest possible levels ahead of this report. We recently sold put options expecting that the worst was over. In fact, we now sorta-own the stock, being long calls at $30 and short puts at $27.50.
To us, the logic is simple, as we described in the put option post and previously when we bought the calls:

Valuation is at the low end of the recent range.

The upcoming release of the Creative Suite for Intel Macs should spawn a massive upgrade cycle.

Adobe tends to expand in valuation during upgrade cycles.

Last night, Mr. Market offered some confirmation that our logic is probably correct.

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