Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/27/2015

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Strong Dollar Storm

by Jim Brown

Click here to email Jim Brown

While traders were taking cover from the Juno blizzard the market was floundering under a storm of high profile earnings reports blaming the strong dollar for missing estimates. Add in a huge decline in durable goods orders and the Dow dropped -394 at the open to retest the 17,300 support level.

Market Statistics

The Nasdaq lost -112 or -2.3% at the open and the S&P declined -37 or -1.8%. While winter storm Juno failed to blanket the Northeast with the 2-3 feet of snow that was predicted the impact of the strong dollar on earnings has been worse than most analysts expected.

The biggest blow to the market was actually the Durable Goods report for December. Orders declined -3.4% for the fourth decline in the last five months. Over the last five months durable goods orders have declined an average of -4.84% per month. That is also caused by the strong dollar reducing demand for American products.

However, the December report was impacted significantly by a 55.5% decline in nondefense aircraft orders. New orders excluding aircraft still fell -0.8% while nondefense orders fell -3.2%. Orders for defense aircraft and parts fell -19.9%. Unfilled orders declined -0.8% and the first drop in seven months. New orders declined across all segments so the weakness was not just in aircraft.

Consensus estimates for the headline number were for a +0.5% gain so this decline was a big surprise. This will negatively impact the Q4 GDP and likely reduce it into the high 2% growth range, down from 4.97% in Q3.

The Richmond Fed Manufacturing Survey headline number declined from 7 to 6 for January. This is down from 20 in October. The decline was driven by the employment component that declined from 13 to 5, an 8 point drop. Backorders declined for the third month falling from -5 to -9. The new orders component was flat at 4 and relatively anemic. Prices paid declined from an annualized rate of +1.26% in December to only +0.7% in January. Prices received declined from +0.83% to +0.53%. There is no inflation in the manufacturing sector.

The separate services survey rose sharply from 3.0 to 14.0 on the headline number. This was the first gain in three months. The retail revenues component rose from 10 to 25 with services revenues rebounding from 2 to 12. The six-month demand expectations rose from 13 to 17 suggesting companies are optimistic about the future.


The Texas Services Sector Outlook Survey went the opposite direction. The headline number fell from 12.7 to -2.8 for January. That is the fifth consecutive month of declines from the high of 27.7 in September. This was the lowest reading in 11 months and the first negative reading in the last three years. All the components declined with employment falling from 14.3 to 5.8, revenue from 22.2 to 12.1, hours worked from 7.2 to 1.3, wages and benefits from 17.0 to 13.5, selling prices from 6.9 to 2.8 and input prices from 19.9 to 11.4. Since Texas has been a leader in the U.S. economic growth the sharp decline over the last several months suggests the U.S. economy is weakening.

The only positive report for today was Consumer Confidence, which soared from 92.6 to 102.9 and the highest level since August 2007. Obviously the falling gasoline prices are the prime driver of confidence. The present conditions component exploded higher from 99.9 to 112.6 and the expectations component rose from 88.5 to 96.4.

For some reason the burst in confidence did not carry over into consumer buying plans. The percentage of respondents planning on buying a car rose from 12.2% to 13.0% while those planning on buying an appliance/TV shrank from 51.9% to 43.6%. Prospective home buyers declined slightly from 4.9% to 4.8%.


The calendar for Wednesday is highlighted by the FOMC statement and the Fed's take on the recent economic events, strong dollar and worries from overseas. Morgan Stanley pushed their expected date for the first rate hike out to March 2016 and others are now targeting Q4 2015. The consensus is now July but moving farther away at a steady pace.

The GDP estimate for Friday's report has not changed officially but the number of analysts expecting a sub 3% growth number is growing. This could be market negative if the number comes in much lower.

Next week we have the ISM Manufacturing report and estimates are falling. We also have the payroll numbers that could reflect the sharp decline in workers in the energy sector plus the final layoffs from the temporary holiday workers.


The market was crushed this morning by multiple earnings misses and lowered guidance from blue chip companies. Dow component Caterpillar (CAT) fell more than $6 (about 45 Dow points) after reporting earnings of $1.23 compared to estimates for $1.55. The company also guided a lot lower for 2015 because of the impact of the crash in oil prices, mined commodities and the impact of the strong dollar. Caterpillar now expects to earn $4.60-$4.75 in 2015 compared to analyst estimates for $6.67. That is a monster guidance warning. Revenues are expected to be -9% below 2014 levels.

I warned several weeks ago to expect some ugly earnings from CAT and everyone else that depends on the energy sector and overseas sales for their revenue. Although CAT shares declined to multi-year support I would not be a buyer today.


Dow component Pfizer (PFE) went against the flow at the open with decent spike despite some lackluster earnings and warnings about the strong dollar. Earnings of 54 cents beat the street by a penny but warnings about falling revenue on patent expirations and currency issues overseas blunted the good news. Prescription drug sales declined -3%. Helping to lift shares was an announcement they would return $13 billion to shareholders in 2015 through $6 billion in share buybacks and $7 billion in dividends. This compares to $11 billion in 2014. The company is sitting on $33 billion in cash and said it is in search of an acquisition.


Dow component Procter & Gamble (PG) saw its shares decline -3.5% after it reported a -4% decline in revenue and -8% decline in earnings as a result of the strong dollar impacting overseas sales. The company said it had experienced "unprecedented currency devaluations where virtually every currency in the world devalued versus the dollar." P&G warned that 2015 revenues would be down -5% and net earnings -12% or at least $1.4 billion after taxes because of the dollar.


Dow component Microsoft (MSFT) dropped -9.2% after reporting disappointing earnings and guidance on Monday night. This decline was responsible for about -30 Dow points. The company said PC sales were expected to decline because of the strong dollar and software sales overseas were being affected. They projected an 8% decline in 2015 earnings.

On Tuesday no less than six analysts downgraded Microsoft for multiple reasons and that pushed the stock down even more than the -$2 it lost in afterhours on Monday.


Dow component Dupont (DD) fell more than $2 at the open after reporting earnings of 71 cents that were in line with estimates. However, revenue declined -4.8% to $7.38 billion because of the strong dollar. The company issued weak guidance for 2015 so the same reason. Earnings are now expected to be $4.00-$4.20 and analysts were expecting $4.47.


Polaris Industries (PII) posted earnings of $1.98 compared to estimates of $1.95. Revenue of $1.27 billion also beat estimates. The company guided lower for 2015 with earnings of $7.22-$7.42 and well under analyst estimates for $7.81. The company blamed the strong dollar for falling small vehicle sales in Europe. Polaris shares spiked +5% on the news.


Other companies that are very dependent on overseas sales and will see further weakness because of the dollar include Avon Products (AVP), which only gets 15% of its sales from the USA. Coach (COH) gets 20% of its sales from Japan. PepsiCo's (PEP) second largest market after the USA is Russia and the ruble declined -6.6% to a new record low on Monday alone. Competitor Coke (KO) only gets half its sales from the USA. Tiffany (TIF) gets 40% of its sales from overseas.

After the bell Apple (AAPL) blew the doors off earnings estimates by selling 74.5 million iPhones. The average estimate was 64.9 million units. Earnings were $3.06 per share, easily beating estimates of $2.60 per share. Net earnings were $13.072 billion and just shy of the record of $13.078 billion set in Q1-2013. Revenue of $74.6 billion easily beat estimates of $67.5 billion. CEO Tim Cook said demand for Apple products soared to "an all time high."

Apple guided for revenue of $52-$55 billion for Q2, up from $46.5 billion in the year ago quarter. Analysts were expecting $53.7 billion so that was in line with estimates. Gross margins should rise slightly to about 39%.

Apple said the impact of the dollar was reduced by a comprehensive hedging program.

iPad sales declined for the fourth quarter with an -18% drop to 21.4 million units. Mac sales rose +14% to 5.5 million units. The company said the Apple Watch will ship in April. Apple is now holding $178 billion in cash. That is enough to buy Google.

Apple shares declined -$4 in regular trading to close at $109. After the earnings shares rallied to resistance at $115 in afterhours.


Yahoo (YHOO) reported earnings of 30 cents which beat estimates of 29 cents. Revenue of $1.18 billion matched street estimates. However, Yahoo earnings were not the big news. Yahoo announced a tax free spinoff of Yahoo's 384 million Alibaba shares into a separate entity. This will avoid billions in taxes and was cheered by investors after the close with Yahoo shares rising +7% to $52 after the close. The new entity will be called SpinCo. The split is expected to occur in Q4 after the 12 month lockup of Alibaba shares expires. It will require approval by the IRS and SEC. The Alibaba stake is worth $39 billion today. Yahoo will retain its 36% in Yahoo Japan, currently worth $7 billion.


Companies on tap for earnings on Wednesday include Dow component Boeing, Facebook, Qualcomm. Expect more of the same with warnings about the strong dollar.


Crude oil rallied +2% today despite the down market and energy stocks bucked the market decline. However, the 2% gain on WTI intraday barely registered on the chart. The rally was short lived with WTI declining -75 cents after the close to $45.51. No bottom yet but that $45 level is getting a lot of traffic.


There is a huge argument in progress in the analyst community about the impact of the oil crash on the economy. Everyone agrees that lower gasoline prices will be very stimulative for consumer spending. However, the sharp decline in spending by energy companies and the large number of job losses is going to weigh on the economy. The argument in the analyst community is based on how much this will impact the economy. Some believe it will be negligible and others are thinking as much as -1% on GDP because of the relationship factors from other sectors dependent on energy spending.

We won't know the real impact for another 3-6 months because current projects/drilling has been budgeted and contracted for months. Until those existing commitments expire we won't see the real impact of the oil decline. If oil prices do find a bottom here in the $45 level and begin to climb into the high demand summer driving season then budgets may not be trimmed as much as expected and the economic impact muted.

Gasoline prices rose today to end the record streak of consecutive declines at 120 days. That is the longest streak since records were started 15 years ago. Gasoline prices rose to $2.038 per gallon, up from $2.033 on Monday. That is still 40% less than the same week in 2014.

Markets

The gains in Apple and Yahoo spiked the futures after the close and they are holding at +4 points at 7:30 ET. After a big market decline like we had today we could expect some dip buyers to appear but they may be traumatized by the nearly -400 point Dow decline at the open. The intraday rebound failed and if the market had been open another 30 minutes we could have closed back on the lows.

The S&P failed at the 2,064 level I highlighted in the weekend commentary and dipped all the way back to 2,020 intraday today before rebounding to close at 2,029. The rebound was lackluster and the selling into the close suggests we could see further declines ahead. The 150-day average has been support since the December decline and it now at 1,995. That is the level we should key on for any future decline. The 2,000 level is psychological and we saw earlier in the month the selling overshot that level somewhat. If we test that again and 1,995 fails we could be looking at another decline like we saw in October.

There is zero chance that we will not see additional earnings misses and lowered guidance because of the strong dollar. However, that excuse will eventually be ignored. I just don't expect it this week.

The analyst estimates for S&P earnings are dropping like a rock and I would not be surprised to see estimates under $120 soon and earnings growth for Q4 to turn negative. That will be a serious drag on the markets and we need to prepare for that event.


Much of the market decline today was Dow related. The number of Dow stocks losing large amounts simply overpowered the index. The declines in the S&P were not as severe and the declines in the Russell 2000 and Russell Microcaps were minimal at roughly .5% and .3%. It was a big cap decline. The small caps have very little exposure to currency issues since sales are mostly in the USA.

The Dow declined to uptrend support at 17,300 and just above the earlier January declines. The number to watch here is 17,275, which allows for a small overshoot to the downside. Resistance is 17,800.



The Nasdaq was weak in part because of Apple earnings fears. Apple shares declined -$4 in regular trading and Apple is 12% of the Nasdaq 100. That suggests the Nasdaq should open higher with the Nasdaq futures up +26 late Tuesday. Qualcomm will weigh on the Nasdaq at the close tomorrow because 90% of their revenue comes from overseas. They are likely to report serious currency issues if they have not adequately hedged against the soaring dollar.

The challenge for the Nasdaq will be Apple. The big event is over and once the shorts cover there may not be enough buyers left to push it higher.

Support on the Nasdaq is 4,650 and resistance well above at 4,770.



The Russell 2000 declined -6 points and remains very close to resistance at 1,200. This was a strong showing given the big decline in the Dow. The Russell Microcap ($RUMIC) only lost -1.5 points. This is critical since the micro caps are inherently risky and fund managers are careful about loading up on these small companies. I view this as a bullish signal. That does not mean the Russell indexes are going to charge higher but it does suggest the broader market is not as negative as it appears on the surface.



Despite the big gains by Apple and Yahoo I continue to have a neutral bias for the market. Until the negative reaction fades to the dollar impact on earnings we are going to have a lot more stocks moving lower after they report. The FOMC announcement on Wednesday should be market positive because the prospect for rate hikes should slide farther into the future. The GDP on Friday could be a problem if it shows a larger than expected decline. The combination of all these events plus the increase in violence in the Ukraine and headlines from Greece could weigh on investor sentiment.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Option Plays

15 Million Customers A Week

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Lowe's Companies - LOW - close: 69.85 change: -0.59

Stop Loss: 65.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.3 million
Entry on January -- at $---.--
Listed on January 27, 2015
Time Frame: Exit PRIOR to earnings on Feb. 25th
New Positions: Yes, see below

Company Description

Why We Like It:
Lowe's Companies is a Fortune 100 company. They sell to 15 million customers a week with annual sales of more than $53 billion. LOW is the second biggest player in the home improvement retail business. Their main rival is Home Depot. LOW currently has more than 1,800 stores across the United States, Canada, and Mexico.

The stock has been a great performer the last couple of years, significantly outperforming the broader market. Their most recent earnings report was November 19th and results were one cent above expectations with a profit of $0.59 a share. Revenues also beat expectations with +5.6% growth to $13.68 billion. Same-store sales were up +5.1%.

Management issued bullish guidance for 2015 and raised their earnings estimate above Wall Street's forecast. LOW also raised their revenue guidance above analysts' estimates. The company expects revenues to grow +4.5% to 5% in 2015 with same-store sales growth in the +3.5% to 4% range.

The stock is often influenced by trading and news out of the homebuilders. This year there have been a couple of bombs in the homebuilding industry with both KBH and LEN warning on potential margin pressures in 2015. Shares of LOW, a retailer, shrugged off this headlines.

The U.S. economy grew +4.9% in the third quarter last year and is expected to grow about +3% in 2015. The slow and steady improvement in the U.S. economy is a tailwind for LOW. Another bonus is low gas prices. While we have not seen a lot of evidence that consumers are spending their savings at the pump eventually that money, amounting to hundreds of dollars a year for the average driver, will be spent. Americans love to spend money on their homes, which is bullish for LOW.

We are quickly approaching the spring residential real estate selling season. That means consumers will be spending money on fixing up their homes to go on the market. Those people who buy a home will spend money on their new purchase.

Technically LOW's stock has been consolidating sideways between support near $65 and resistance near $70 the last few weeks. The point & figure chart has already produced a new triple-top breakout buy signal with a $75 target (that could grow). Yesterday the stock hit an intraday high of $70.50. Tonight I am suggesting a trigger to buy calls if LOW hits $70.60.

Trigger @ $70.60

- Suggested Positions -

Buy the MAR $70 CALL (LOW150320C70) current ask $2.37

Option Format: symbol-year-month-day-call-strike

Daily Chart:



In Play Updates and Reviews

Earnings Disappointments Spark Sell-off

by James Brown

Click here to email James Brown

Editor's Note:

A number of big cap earnings disappointments and lower than expected economic data helped spark a significant drop in the major market indices. Fortunately, most of the weakness seemed to be localized to just the earnings movers and the big cap names.

Our plan was to exit the RCL trade today at the closing bell.


Current Portfolio:


CALL Play Updates

Alkermes plc. - ALKS - close: 70.55 change: -0.81

Stop Loss: 66.85
Target(s): To Be Determined
Current Option Gain/Loss: +80.6%
Average Daily Volume = 833 thousand
Entry on January 07 at $63.01
Listed on January 06, 2015
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/27/15: It was a rough day for the major indices but ALKS spent most of the session drifting sideways. The 10-dma should offer short-term support near $69.00.

I am not suggesting new positions.

Earlier Comments: January 6, 2015:
Biotech stocks were not immune to the market's widespread sell-off today. Yet one stock was bucking the trend. That's biotech stock ALKS.

According to the company's marketing material, "Alkermes plc is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. The company has a diversified portfolio of more than 20 commercial drug products and a substantial clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

Investors want to see companies with a growing pipeline of drugs and ALKS certainly qualifies. Here is a list of treatments in various stages of clinical trials at ALKS current pipeline .

The stock's jump today was thanks to a press release issued this morning. Here's an excerpt from ALKS' press release:

[ALKS] today announced topline results from FORWARD-1, one of a series of supportive clinical studies in the comprehensive FORWARD phase 3 pivotal program for ALKS 5461, a once-daily, oral investigational medicine with a novel mechanism of action for the adjunctive treatment of major depressive disorder (MDD). The FORWARD-1 study was designed to evaluate the safety and tolerability of two titration schedules of ALKS 5461. In addition, the study assessed the efficacy of ALKS 5461 over an eight-week period, compared to baseline, in patients with MDD.

...significantly reduced depressive symptoms from baseline starting at Week One and continued to the end of the treatment period at Week Eight...

If this treatment gets approved by the FDA it could be huge. According to a Thomson-Reuters article, depression is a massive opportunity going forward. Almost 350 million people worldwide suffer with depression and it's the leading cause of disability in the world. As more and more healthcare systems around the world get better at diagnosing depression it's going to drive demand for treatment.

Jim Cramer, on CNBC, mentioned ALKS this morning and commented on the company's press release about this new depression drug.

Technically shares have been showing relative strength the last few days and ignoring the market's sell-off. Today's breakout past resistance at $60.00 has also produced a new point & figure chart triple-top breakout buy signal with a $100 price target.

I am cautioning readers that biotech stocks are volatile. ALKS is no different. This is another higher-risk, more aggressive trade. The option spreads are pretty wide, which puts us at a disadvantage.

Tonight we are suggesting small bullish positions if ALKS can trade at $61.75. I would prefer to buy March calls since ALKS reports earnings in late February but March options are not available yet.

- Suggested Positions -

Long Feb $65 CALL (ALKS150220C65) entry $3.10

01/24/15 new stop @ 66.85
01/10/15 new stop @ 59.25
01/07/15 triggered on gap higher at $63.01, suggested entry was $61.75.
Stock rallied on positive Phase 2 trial data for schizophrenia drug.
Option Format: symbol-year-month-day-call-strike


Avago Technologies - AVGO - close: 104.79 change: -1.94

Stop Loss: 101.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.2 million
Entry on January -- at $---.--
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below

Comments:
01/27/15: Apple Inc's (AAPL) blowout earnings tonight should be bullish for shares of AVGO, who is a part supplier to AAPL's iPhone 6. Shares of AVGO are already trading higher after hours. I would expect this stock to gap open higher tomorrow morning. Our suggested entry point to buy calls is at $107.75 or higher although if AVGO gaps open too high you may want to hesitate on launching positions.

Earlier Comments: January 24, 2015:
AVGO is in the technology sector. They are part of the semiconductor industry. They make chips that speed up mobile phones while reducing interference. According to company marketing materials, "Avago Technologies is a leading designer, developer and global supplier of a broad range of analog, digital, mixed signal and optoelectronics components and subsystems with a focus in III-V compound semiconductor design and processing. Backed by an extensive portfolio of intellectual property, Avago products serve four primary target markets: wireless communications, wired infrastructure, enterprise storage, and industrial and other."

AVGO is probably best known as a part supplier to Apple Inc. (AAPL). AAPL's huge success with the iPhone 6 and 6+ has been a blessing for AVGO. Earnings and revenue growth is seeing significant moment. The last few reports have all come in above expectations with revenues up +25% in the second quarter, +100% in the third quarter, and up +115.4% year over year in AVGO's fourth quarter (last October). Earnings growth surged +58% quarter over quarter and up +123% from a year ago. Gross margins also improved quarter over quarter and rose from 51% a year ago to 58% in their most recent quarter. Management then raised their guidance for Q1 2015.

Following their December 3rd, 2014 earnings report several Wall Street analysts raised their price targets on AVGO into the $115-122 range. The point & figure chart is even more positive with a forecast of $127.00.

The stock was showing strength again on Friday with a +1.7% gain. AVGO appears to have short-term resistance near $107.50. Tonight we are suggesting a trigger to buy calls at $107.75. I do want to caution investors that AVGO could be heavily influenced by AAPL's earnings report. AAPL reports earnings this coming Tuesday (Jan. 27th, after the closing bell). If AAPL somehow disappoints it could negatively impact shares of AVGO.

Trigger @ $107.75

- Suggested Positions -

Buy the MAR $110 CALL (AVGO150320C110)

Option Format: symbol-year-month-day-call-strike


Acuity Brands, Inc. - AYI - close: 153.29 change: -0.80

Stop Loss: 149.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 365 thousand
Entry on January -- at $---.--
Listed on January 26, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
01/27/15: AYI also spent much of Tuesday's session consolidating sideways. We are on the sidelines waiting for a breakout higher. Our suggested entry point is $156.05.

Earlier Comments: January 26, 2015:
AYI is part of the technology sector. The company has managed to deliver double-digit sales and earnings growth in six out of the last seven quarters.

Who are they? "Acuity Brands, Inc. is a North American market leader and one of the world's leading providers of lighting solutions for both indoor and outdoor applications. With fiscal year 2014 net sales of $2.4 billion, Acuity Brands employs approximately 7,000 associates and is headquartered in Atlanta, Georgia with operations throughout North America, and in Europe and Asia. The Company's lighting solutions are sold under various brands." (source: company press release)

The last couple of earnings reports have been healthy. Back in October AYI beat Wall Street's estimates on both the top and bottom line with revenues rising +15.3%. Their most recent report was January 9, 2015. Earnings rose +38% from a year ago to $1.32 a share, which was above expectations. Revenues rose +12.7% to $647.4 million, also above expectations.

AYI's President Vernon Nagel commented on the quarter saying, "We were extremely pleased with our record fiscal 2015 first quarter results. Gross profit margin of 42.2 percent increased 90 basis points over prior year's first quarter, while adjusted operating profit margin of 14.9 percent increased 230 basis points over last year's first quarter adjusted operating profit margin. Our variable contribution margin, i.e., the incremental adjusted operating profit as a percentage of the increase in net sales, was over 33 percent. We believe our record first quarter results reflect our ability to provide customers truly differentiated value from our industry-leading portfolio of innovative lighting and control solutions along with superior service."

AYI also discussed their outlook and Mr. Nagel said, "We remain very bullish about our prospects for continued future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years. Our order rates through the month of December reflect this favorable trend. Further, we expect to continue to outperform the growth rates of the markets we serve due to benefits from growing renovation and tenant improvement projects, further expansion in underpenetrated geographies and channels, and growth from the introduction of new products and lighting solutions."

At least two analysts have already upgraded their price targets on AYI following the January earnings report.

Technically shares have spent the last couple of weeks digesting gains after its big, post-earnings pop to new highs. Now the stock looks poised to begin its next leg higher. There is short-term resistance near the $155.50-156.00 area. Tonight I'm suggesting a trigger to buy calls at $156.05.

Trigger @ $156.05

- Suggested Positions -

Buy the MAR $160 CALL (AYI150320C160)

Option Format: symbol-year-month-day-call-strike


Big Lots Inc. - BIG - close: 47.60 change: +0.15

Stop Loss: 43.40
Target(s): To Be Determined
Current Option Gain/Loss: +8.8%
Average Daily Volume = 1.26 million
Entry on January 15 at $45.75
Listed on January 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
01/27/15: BIG managed to keep the rally going in spite of the market's declines. Shares tagged potential resistance near the $48.00 mark before paring its gains.

Investors may want to raise their stop loss again. I'm not suggesting new positions at this time.

Earlier Comments: January 14, 2015:
It would appear that investors have a pretty short memory when it comes to BIG. This company is in the services sector. They're part of the discount store industry.

According to company marketing materials, "Big Lots Inc. (BIG) is a unique, non-traditional, discount retailer operating 1,495 BIG LOTS stores in 48 states with product assortments in the merchandise categories of Food, Consumables, Furniture & Home Decor, Seasonal, Soft Home, Hard Home, and Electronics & Accessories."

The stock saw big gains in 2014 at least until they reported their Q3 earnings in December. That big drop on the daily chart was a reaction to BIG's earnings results. Analysts were expecting a loss of $0.05 a share on revenues of $1.12 billion. BIG reported a loss of $0.06 with revenues virtually flat at $1.11 billion. Guidance was only in-line with Wall Street's estimates.

The good news is that BIG does expect to see a profit again in the fourth quarter. They also reported +1.4% comparable store sales growth in the third quarter, which not only beat the -2.5% comp sales from a year ago but was the first positive growth in three years. None of that mattered. BIG plunged -17% on its Q3 report and didn't find support until the $38.00 area.

Since then shares have seen something of a turnaround. After consolidating sideways for a couple of weeks BIG has shot higher in January while most of the broader market has been sinking. The breakout above technical resistance at its 50-dma and its 200-dma is encouraging.

This morning the U.S. retail sales data came in below expectations and yet BIG managed to shrug off this headline. Traders bought the dip near the 50-dma (around $44) this morning. By the closing bell BIG was outperforming with a +1.6% gain.

It looks like this relative strength may continue. Further gains could spark some short covering. The most recent data listed short interest at 17% of the relatively small 52 million share float. Today's intraday high was $45.65. We are suggesting a trigger to buy calls at $45.75. The 200-dma is at $43.50. We'll start this trade with a stop at $43.40.

- Suggested Positions -

Long Apr $47.50 CALL (BIG150417C47.5) entry $2.85

01/15/15 triggered @ 45.75
Option Format: symbol-year-month-day-call-strike


Cracker Barrel Old Country Store - CBRL - cls: 135.18 chg: -1.49

Stop Loss: 129.75
Target(s): To Be Determined
Current Option Gain/Loss: -9.9%
Average Daily Volume = 248 thousand
Entry on January 26 at $135.15
Listed on January 22, 2015
Time Frame: Exit prior to earnings in late February
New Positions: see below

Comments:
01/27/15: CBRL found support near $134.50 intraday. The late afternoon high was about $135.65. I'm suggesting a new rally past $135.70 as our next entry point to buy calls if you don't feel like buying the dip today.

Earlier Comments: January 22, 2015:
The falling price of gasoline in the U.S. is a significant tailwind for the restaurant industry. AAA said the price of gas has fallen 119 days in a row with the national average down to $2.04 a gallon. Looking in the rearview mirror we can see how it affected the restaurant industry.

According to TDn2K's Black Box Intelligence data restaurants saw their same-store sales grow +3.1% in December, the fastest pace in three years. The fourth quarter of 2014 delivered the fastest same-store sales growth in the last six years. Another industry analyst believes that having more money in their pocket from low gas prices means that consumers are willing to trade up from fast-food to more traditional dining options.

One firm that should benefit is CBRL. According to the company, "Cracker Barrel Old Country Store, Inc. provides a friendly home-away-from home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that’s surprisingly unique, genuinely fun and reminiscent of America's country heritage … all at a fair price. Cracker Barrel Old Country Store, Inc. (CBRL) was established in 1969 in Lebanon, Tennessee and operates 634 company-owned locations in 42 states." Another detail that makes CBRL unique is that 85% of the company's locations are at Interstate highway exits (likely near a gas station).

Earnings last year were decent. The company has developed a trend of beating Wall Street's estimates and then guiding lower. Management has either been super cautious on guidance or they're trying to manage expectations. Their most recent earnings report was November 25th. CBRL earnings were up +16% to $1.42 a share. That beat estimates of $1.29. Revenues came in at $683 million, above the $665 million estimate. CBRL said their same-store sales surged +3.3%, which was above the industry average.

Once again CBRL management lowered their immediate quarter guidance but this time they did raise guidance for FY2015.

Looking ahead the restaurant industry should see easy comparisons to January and February last year since much of the country was blanketed by winter storms. On the other hand several states raised their minimum wage, which began on January 1st this year so that has the potential to impact restaurant industry margins.

Technically shares of CBRL have just performed a 38.2% Fibonacci retracement from their recent high. This bounce might be an entry point. However, I want to see CBRL break through some short-term resistance. Tonight I'm suggesting a trigger to buy calls at $135.15. We will plan on exiting prior to the company's earnings report in late February.

- Suggested Positions -

Long MAR $140 CALL (CBRL150320C140) entry $2.72

01/26/15 triggered @ 135.15
Option Format: symbol-year-month-day-call-strike


Monster Beverage Corp. - MNST - close: 118.81 change: -1.14

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: -28.9%
Average Daily Volume = 1.1 million
Entry on January 23 at $120.25
Listed on January 17, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: see below

Comments:
01/27/15: MNST is still consolidating sideways between short-term support at its rising 10-dma and resistance near $120. If you're looking for an entry point tonight I suggest a new rally past $120.25.

Earlier Comments: January 17, 2015:
Shares of MNST have been extremely effervescent. Last year the NASDAQ composite rallied +13.4%. Yet MNST soared +59% in 2014. Thus far in 2015 the NASDAQ is down -2.1% while MNST is up +9.7%. The stock looks poised for more gains.

The company's market material describes MNST as, "Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks and alternative beverages including Monster Energy® brand energy drinks, Monster Energy Extra Strength Nitrous Technology® brand energy drinks, Java Monster® brand non-carbonated coffee + energy drinks, M3® Monster Energy® Super Concentrate energy drinks, Monster Rehab® non-carbonated energy drinks with electrolytes, Muscle Monster® Energy Shakes, Übermonster® energy drinks, and Peace Tea® iced teas, as well as Hansen's® natural sodas, apple juice and juice blends, multi-vitamin juices, Junior Juice® beverages, Blue Sky® beverages, Hubert's® Lemonades and PRE® Probiotic drinks."

A big part of last year's gains in MNST came in August. On August 15th, 2014 it was announced that Coca-Cola (KO) was buying a 16.7% stake in MNST. This is part of a long-term strategic partnership to conquer the energy drink category. This generated a +20% pop in shares of MNST and the stock has been in rally mode ever since.

Earnings have been mediocre. MNST has beaten Wall Street's bottom line earnings estimate the last three quarters in a row. Yet they also missed analysts' revenue estimates those same three quarters. Revenue growth has actually been slowing down. Their Q4 2013 revenues grew +14.7% while their Q3 2014 revenue growth was down to +7.7%. Investors don't seem to care.

There has been a lot of analyst action on this name with both upgrades and downgrades in the last several weeks. So far the upgrades are outnumbering the downgrades. This past week saw Cowen upgrade MNST and give it a $140 price target.

The bears are that MNST will suffer from stronger competition from Red Bull, their main rival. They've been rival for years, so what's going to change? There is the valuation argument that MNST is too expensive with the stock trading at 36 times earnings.

Bulls can argue that MNST will see stronger growth when they make the switch to KO's global distribution system. Right now international sales only make up 22% of MNST's total revenues and MNST only has 5% of the international energy drink market. That compares to 37% of the energy drink market in the U.S. By joining KO's distribution platform it's going to give MNST a lot more exposure overseas, especially in Latin America and China. Currently MNST has zero exposure in China. There is speculation that MNST could double its market shares internationally pretty quickly.

Another bonus for MNST is the consumer spending situation in the United States. About 70% of MNST's sales come from convenience stores and gas stations. The massive drop in gasoline prices is very bullish for MNST since consumers will have more money in their pocket after filling up.

At a recent investor meeting MNST said that sales growth in the energy drink category had "re-accelerated" after three consecutive quarters of slowing sales growth (not declines, just slower growth).

There is speculation that MNST might be able to raise prices in the U.S. since their rival, Red Bull, recently raised their prices. There is also the relationship with KO as the company could up its stake in MNST to 25%. Of course they could outright buy MNST too.

The point & figure chart for MNST is bullish and forecasting a long-term $155.00 target. We are not setting a target tonight. The plan will be to exit prior to earnings in late February. The $120.00 level might be round-number resistance so we are suggesting a trigger to buy calls at $120.25.

- Suggested Positions -

Long MAR $125 CALL (MNST150320C125) entry $4.50

01/23/15 triggered @ 120.25
Option Format: symbol-year-month-day-call-strike


Constellation Brands - STZ - close: 111.29 change: -0.43

Stop Loss: 104.85
Target(s): To Be Determined
Current Option Gain/Loss: +11.3%
Average Daily Volume = 1.25 million
Entry on January 15 at $109.36
Listed on January 14, 2015
Time Frame: Exit prior to February expiration
New Positions: see below

Comments:
01/27/15: Tuesday was a quiet session for STZ. Shares consolidating sideways. The stock remains inside the $110-112 trading range.

More conservative traders may want to start raising their stop loss.

Earlier Comments: January 15, 2015:
Today the big players in the beer industry like Anheuser-Busch InBev (BUD) and Molson Coors (TAP) are losing market share to smaller craft beer brewers. Yet STZ actually seeing momentum in its beer portfolio.

STZ is part of the consumer goods sector. According to the company's website, "Constellation Brands, Inc. is a leading wine, beer and spirits company with a broad portfolio of premium brands. Constellation is the world leader in premium wine, the leading multi-category beverage alcohol company in the U.S. and the number three beer company in the U.S. Headquartered in Victor, New York, Constellation Brands is an S&P 500 Index and Fortune 1000® company with more than 100 brands in our portfolio, sales in approximately 100 countries and operations in approximately 40 facilities."

Last year the stock was a strong performer. The S&P 500 rallied about +11% in 2014 while STZ surged +39%. Investors have been consistently buying dips. The relative strength from last year has carried into 2015.

The company recently reported earnings on January 8th. Wall Street was expecting a profit of $1.14 per share on revenues of $1.51 billion. STZ said their earnings rose +11.8% to $1.23 a share. Revenues were up +7% to $1.54 billion, beating estimates on both counts. Management then raised their 2015 guidance from $4.10-to-$4.25 to $4.25-to-$4.35. That compares to Wall Street's 2015 estimate of $4.24.

STZ's CEO Rob Sands commented on their latest results saying, "We achieved outstanding results for the third quarter driven by the exceptional ongoing momentum for our beer business." Their beer sales rose +16% and gained market share.

The stock has seen multiple upgrades in January and currently trading at all-time highs. Today traders bought the dip near $105.00. The stock looks poised to breakout past short-term resistance at $108.50. The point & figure chart is bullish and forecasting a long-term target of $127.00.

We are suggesting a trigger to buy calls at $108.65. We'll start this trade with a stop at $104.85.

- Suggested Positions -

Long FEB $110 CALL (STZ150220C110) entry $2.47

01/15/15 triggered on gap open at $109.36, trigger was $108.65
Option Format: symbol-year-month-day-call-strike


Valeant Pharmaceuticals - VRX - close: 160.80 change: +0.94

Stop Loss: 154.80
Target(s): To Be Determined
Current Option Gain/Loss: -20.8%
Average Daily Volume = 2.5 million
Entry on January 26 at $160.55
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: see below

Comments:
01/27/15: VRX gapped open lower this morning. Shares quickly recovered and managed to outperform the broader market with a +0.5% gain. I would still consider new bullish positions at current levels.

Earlier Comments: January 24, 2015:
Healthcare stocks have been some of the market's best performers in 2015. VRX is helping lead the group higher with a +11.5% gain already.

The company's website says, "Valeant Pharmaceuticals International, Inc. is a multinational specialty pharmaceutical company that develops and markets prescription and non-prescription pharmaceutical products that make a meaningful difference in patients' lives. The company's growth strategy is to acquire, develop and commercialize new products through strategic partnerships, and strategically expand its pipeline by adding new compounds or products through product or company acquisitions. Headquartered in Laval, Quebec, Valeant has approximately 17,000 employees worldwide and is listed on both the New York Stock and Toronto Stock Exchanges under the symbol VRX."

VRX made a lot of headlines last year with its attempted hostile takeover of Allergan (AGN). Eventually VRX lost out to a rival. AGN agreed to a takeout by Actavis (ACT) for $219 a share, which was more than VRX wanted to pay.

Meanwhile VRX has been doing just fine on the earnings front. The company is developing a trend of beating analyst estimates. Plus they guided higher in April 2014, in September and with their last earnings report on October 20th. In November VRX's Board of Directors announced at $2 billion stock buyback program.

This year VRX has already raised guidance again. They see Q4 results above Wall Street estimates. They also raised their guidance for FY2015 into the $10.10-10.40 range compared to consensus estimates near $10.01.

The stock has been surging with a rally to new all-time highs. The point & figure chart is bullish and forecasting at $180.00 target.

Currently VRX sits just below round-number resistance at $160.00. We are suggesting a trigger to buy calls on a breakout at $160.55.

- Suggested Positions -

Long MAR $170 CALL (VRX150320C170) entry $4.80

01/26/15 triggered @ 160.55
Option Format: symbol-year-month-day-call-strike


Whole Foods Market, Inc. - WFM - close: 53.15 change: -0.34

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: +76.1%
Average Daily Volume = 4.9 million
Entry on January 08 at $50.35
Listed on January 07, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
01/27/15: WFM spent today's session churning sideways after the stock gapped open lower this morning. I don't see any changes from my prior comments. It looks like the $52.00 area might be short-term support. Readers may want to raise their stop loss closer to the $50.00 level.

I am not suggesting new positions at this time.

Earlier Comments: January 7, 2015:
WFM is in the services sector. As of November 2014 the company had 401 stores in the U.S., Canada, and the United Kingdom. Founded in 1978, WFM has become synonymous with healthy, organic food, at least for a growing portion of the population.

In early May 2014 the stock was crushed when the company missed Wall Street's earnings estimates and lowered its 2014 guidance. Investors were very unhappy with WFM's same-store sales growth as well. The organic food space has been growing more competitive in recent years as other retail groceries seek to boost their profits with wider margin "organic" fare.

WFM spent months languishing in the $36-40 zone before finally surging in early November. The big rally was sparked by better than expected earnings results and management raising their 2015 guidance. Shorts panicked and the stock exploded higher.

WFM has been slowly working its way higher since then but now WFM looks poised to breakout past key resistance at the $50.00 level.

The huge drop in gasoline prices is very bullish for the U.S. consumer. They now have more money in their pocket that they can spend on other items, like high priced organic foods at WFM.

Traders have started buying the dip and shares hit an intraday high of $50.18 today. Tonight we are suggesting a trigger to buy calls at $50.30. We will plan on exiting prior to WFM's earnings results in mid February.

- Suggested Positions -

Long FEB $50 CALL (WFM150220C50) entry $2.30

01/08/15 triggered on gap open at $50.35, suggested entry was $50.30
Option Format: symbol-year-month-day-call-strike


Zebra Technology - ZBRA - close: 84.61 change: +0.07

Stop Loss: 78.75
Target(s): To Be Determined
Current Option Gain/Loss: +8.8%
Average Daily Volume = 494 thousand
Entry on January 12 at $80.85
Listed on January 10, 2015
Time Frame: Exit prior to earnings in February
New Positions: see below

Comments:
01/27/15: ZBRA is holding up well. Shares bounced from short-term support at its 10-dma this morning and rallied back to unchanged by the close. The stock remains below resistance near $85.00. I am not suggesting new positions at the moment.

Earlier Comments: January 10, 2015:
ZBRA is considered part of the industrial goods sector but they sound more like a technology company. The company website describes them as "Zebra Technologies is a global leader in enterprise asset intelligence, designing and marketing specialty printers, mobile computing, data capture, radio frequency identification products and real-time locating systems. Incorporated in 1969, the company has over 7,000 employees worldwide and provides visibility into valued assets, transactions and people."

Their goods are used by 90% of the Fortune 500 companies. They have almost no debt. Last year they spent almost $3.5 billion buying Motorola Solutions (symbol was MSI). ZBRA's CEO believes that the MSI acquisition will help them capitalize on three big trends: mobility, the Internet of things, and cloud computing.

In February 2014 ZBRA raised their earnings guidance. They did it again two months later in April. Their most recent earnings report was above expectations. ZBRA announced record revenues with sales up +19% in Middle East and Africa, +16% in North America, +11% in Latin America, and +9% in Asia Pacific.

Technically the stock has been stair-stepping higher with a bullish trend of higher lows and higher highs. This past week ZBRA displayed relative strength and broke out to new multi-month highs. The point & figure chart is bullish with a $92.00 target.

Tonight we are suggesting a trigger to buy calls at $80.85. We will plan on exiting positions before ZBRA reports earnings in mid February.

- Suggested Positions -

Long FEB $85 CALL (ZBRA150220C85) entry $1.70

01/12/15 triggered @ 80.85
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Starwood Hotels & Resorts - HOT - close: 74.04 change: -1.27

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: -50.0%
Average Daily Volume = 2.3 million
Entry on January 14 at $73.90
Listed on January 12, 2014
Time Frame: Exit prior to earnings in mid February
New Positions: see below

Comments:
01/27/15: Good news! It looks like the oversold bounce in HOT is rolling over. Today's intraday low was $73.72. I'm suggesting a new decline below $73.60 as a new entry point for bearish positions.

Earlier Comments: January 12, 2015:
HOT is in the services sector. According to a company press release, "Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with more than 1,200 properties in 100 countries, and 181,400 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Meridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands."

The company's most recent earnings report was October 28th. The company beat the bottom line estimate by a penny but missed the revenue number. Management then guided lower. Since then at least two analyst firms (UBS and JP Morgan) have downgraded shares of HOT. JPM said their downgrade was on valuation concerns. Other analysts have issued worries about how the strong dollar might hurt HOT's financials.

There are also concerns that Airbnb could be hurting the hotel business. Airbnb's growth has surged since it was founded back in 2008. Just four year later Airbnb announced their 10 millionth night booked. It may not be fair to say all 10 million of those would have gone to the hotel industry but certainly a good chunk of Airbnb's business has been stolen from more traditional lodging services.

Technically shares of HOT look weak. The point & figure chart is bearish and forecasting at $68 target (which could get worse). Today's breakdown under support near $75.00 looks ominous. The intraday low today was $74.06. Tonight I am suggesting a trigger to buy puts at $73.90. We will plan on exiting prior to HOT's earnings report in mid February.

- Suggested Positions -

Long FEB $70 PUT (HOT150220P70) entry $1.60

01/14/15 triggered @ 73.90
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Royal Caribbean Cruises - RCL - close: 84.71 change: -0.04

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: + 2.4%
Average Daily Volume = 2.9 million
Entry on December 24 at $82.30
Listed on December 22, 2014
Time Frame: Exit tomorrow at the close
New Positions: see below

Comments:
01/27/15: Our plan was to exit our RCL trade today at the closing bell to avoid holding over the company's earnings report expected later this week. Shares rallied up to test its recent high before paring its gains and closing virtually unchanged on the session.

- Suggested Positions -

MAR $85 CALL (RCL150320C85) entry $3.37 exit $3.45 (+2.4%)

01/27/15 planned exit
01/26/15 prepare to exit at the closing bell tomorrow
01/24/15 Earnings are coming up on Thursday, Jan. 29th. Prepare to exit before they report earnings.
01/14/15 new stop @ 79.65
12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike

chart: