Option Investor
Newsletter

Daily Newsletter, Thursday, 3/19/2015

Table of Contents

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

Market Wrap

Market Mixed After Fed

by Thomas Hughes

Click here to email Thomas Hughes
Global markets were mixed following yesterday's FOMC inspired rally.

Introduction

The global markets were mixed following yesterday's FOMC inspired rally. The double-speak provided by the FOMC statement and Ms. Yellen's comments was enough to soothe near term fear but has left the door open for an interest rate hike as early as June.

Market Statistics

Asian indices, primarily those in China, were able to reach new highs with the noticeable exception of Japan. The Nikkei traded just below the long term high set yesterday. In Europe trading was impacted by ongoing Grecian issues and an EU summit which began today. Indices in this region were mostly flat with the largest decline seen by the German DAX, -0.20%.

Our markets were also mixed. Early futures indicated a mildly lower opening, except for the NASDAQ Composite. Economic data released before the bell had little effect on prices which held steady into the opening bell. After the opening bell the indices tread water just below yesterday's closing prices, again except for the NASDAQ, which was able to hold positive ground all day. The indices churned throughout the day, possibly affected by triple witching options expiration tomorrow.

Economic Calendar

The Economy

We received a couple of monthly economic reports today as well as the weekly jobless claims figures. This week initial claims rose by 1,000 from an upward revision of 1,000 to 291,000. This is basically in line with expectations which called for a gain of 3,000. The four week moving average moved up by 2,250 to 304,750 and is near the top of the 7 month range. Claims continue to trend around the 300K mark and remain consistent with labor market stability if not improvement. On a not adjusted basis claims fell by -6.6%, slightly less than the -6.9% predicted by the seasonal factors. There is a possibility that claims will remain volatile into the near future but bias remains to the downside and in-line with current labor market trends.


Continuing claims also fell, shedding -11,000 from an upward revision of 10,000 making this week a wash at 2.417 million. The four week moving average also fell and remains just above the 2.4 million line. Continuing claims continues to trend at 2.4 million and is has been very steady at this level for 2 months. The volatility seen in job turnover has not so far resulted in an increase in longer term claims and suggests that labor market conditions are healthy enough.

The total number of Americans filing for unemployment also fell in this week's data. Total claims fell by -32,496 and are 15% lower than this same week last year. Total claims remain elevated off of the low set last fall but, like the continuing claims, are also very stable at current levels. I would have to say that so far there is no indication of a serious negative impact on labor due to energy prices, as previously feared.


Leading Indicators and the Philly Fed Survey were both released at 10AM. The Index of Leading Indicators rose by 0.2%, in line with expectations and the previous month. The basket of indicators revealed widespread growth with some weakness in manufacturing. The reading is positive and indicates an expectation of short term growth. Conference Board economist Ataman Ozyildirim was quoted saying

“easing in the LEI’s six-month change suggests that we may be entering a period of more moderate expansion. With the February increase, the LEI remains in growth territory, but weakness in the industrial sector and business investment is holding economic growth back, despite improvements in labor markets and consumer confidence.”

This confirms what other data has already revealed; the first quarter saw some slowing of economic momentum but growth remains positive. The Coincident and Lagging Indexes both climbed this month as well. The Coincident Index gained 0.2% and the Lagging index 0.3%, both matching gains made in the previous month.

The Philadelphia Federal Reserve survey of business activity slipped by -0.2% to 5. This is still positive and holding steady from the previous month but well off of the high set last fall. The forward outlook indicator also fell but remains positive with expansion expected later this year. Declines in shipments and hours worked off-set improvements in labor and hiring.


The Oil Index

Oil prices slipped on fluctuating dollar values as well as comments from the Kuwaiti oil minister. According to him OPEC will have no choice but to curb production in order to support prices. This is not the first such call but is the most recent. WTI and Brent both fell by more than 3% in today's session; WTI is near $43, Brent is below $55.

The Oil Index lost more than 1% but remains above the long term trend line. Yesterday's Fed inspired rally helped to lift the sector and the index to bounce from the long trend line. The indicators are bullish and in line with this bounce; stochastic is indicating a weak buy, MACD is about to confirm. Support at this time is along the trend line near 1,250. A break above the short term moving average, near 1,330, could take the index up to test resistance. Resistance exists between 1,350 and 1,400 that could keep the index from moving higher while oil prices are moving lower.


The Gold Index

Gold prices rallied on the Fed statement. The back-handed message that rates aren't rising now, but will be rising soonish, helped to give the metal a double lift. First, plunging dollar values helped boost gold value. Second, long term buyers are stepping in along the $1,150 support line. Gold traded flat today near $1,170 following yesterdays +15% gain.

The gold miners ETF GDX is also benefiting from the Fed statement. The miners lost a half percent today but remain above resistance broken by yesterday's move. The ETF is now bouncing higher and confirming support levels formed in November and December of last year. This could be the second bottom of a long term bottoming formation and will need to be watched closely. The indicators are consistent with this bottom and suggesting a shift in momentum, back to the upside, is possible. Near term upside targets are near $20-$21 with longer term outlook heavily dependent on gold prices.


In The News, Story Stocks and Earnings

Today the Dollar Index regained much of yesterday's loss but not all, moving about 0.75% higher after an initially weak open. Today's action is a snap back rally and not one to be trusted just yet. The Fed's statements have changed the fundamental outlook and lowered the expected rate of interest rate hikes while at the same time firming up a window in which to expect the first hike. This move confirms expected dollar strength, but confirms it with weaker outlook than before. The indicators are strong and suggest a retest of the recent high is possible but also consistent with a peak; the MACD is retreating from a 12 month extreme convergent with the trend, stochastic is forming a bearish crossover high in the upper signal zone. Resistance is the current high near $99.58.


While the market was selling off today there was one sector making new highs, the retail sector. The retail Spyder XRT made a gain of 0.6% even as a flurry of mixed earnings reports hit the market. A number of well known retailers have reported over the past couple of days including Guess, Cato, Michaels and New York & Company. Fourth quarter results were mixed, some beat some did not, but for the most part guidance is weak. Based on strength in labor it is possible that guidance is weak and being set to low. If so the sector could be setting up for a round of better than expected earnings. In any event, the ETF moved higher today, set a new high, and is accompanied by rising indicators.


Apple enjoyed its first day as a Dow stock by declining -0.80%. Today's action was mild and held above the short term moving average. The indicators are mixed, MACD is bearish but in decline while stochastic is moving higher following a bullish crossover, and suggest a consolidation could be happening. This makes sense considering all the events in Apple's life recently; earnings, iPhone release, Pay service gaining traction, the watch and more. Support is along the short term moving average with resistance at the all time high.


Nike reported after the closing bell. The international shoe giant beat expectations with EPS of $.89, a 19% increase from this same time last year. The company said it is seeing strong demand across of all of its brands as well as expanding margins and a double digit increase in future orders. The stock traded higher in today's session and moved higher again in the after hours session.


The Indices

The market was mixed and choppy today. The indices traded within relatively small ranges but up and down throughout the day. Most of the indices closed with a loss but not the NASDAQ Composite. The tech heavy index managed to hold a gain of +0.19% and closed near the top of its range. The index is now trading just below 5,000 and has less than 8 points to go in order to move back across that level. The indicators are about to roll into a trend following signal, but haven't yet and may not if the index can not move above resistance. Resistance is the current long term high just above 5,000.


The Dow Jones Transportation Average made the smallest decline today, shedding only -0.09%. Today's move created a small spinning top halfway between the support of the short term moving average and the top of the 5 month trading range, which is also the all time high. The indicators are bullish and consistent with the index moving to the top of the range but as yet not very strong. The index is currently drifting higher with the top of the range as a target but any rally beyond that will require a break above resistance.


The next smallest loss was on the S&P 500. The broad market lost -0.49% and is testing support near 2,090. The indicators are mixed and do not give clear insight into direction; stochastic is signaling a trend following entry, MACD is bearish but about to confirm stochastic with a zero line crossover so it looks like a rally could come, but only if resistance is broken. It looks to me like the index is creeping higher with a chance of momentum shifting back to the upside, if so the index could retest the current all time high near 2,120.


The Dow Jones Industrial Average brings up the rear today. The blue chips lost -0.65% in today's session and puts the index back below 18,000. The index is now sitting on the short term 30 day moving average with indicators that could be rolling over into a bullish trend following signal. The problem is that they haven't yet and with resistance just above the current levels its not looking like a great time for new positions. The index could just as easily retest support as it could move up to test resistance. Until it does one or the other I think a little patience, pun intended, may be in order.


Now that the Fed meeting has passed we can rest assured that a rate hike most likely won't come at the next meeting. This means the market can focus on the day to day data, at least until the next FOMC meeting draws near. Until then we have to balance the near term and the long term outlook against each other, track the data and make a judgement.

In the near term we have an economy that is growing but has slowed its growth. In the longer term we have an economy that is expected to begin expanding again. Near term fears may continue to impact the market, and may even result in another move down to test long term support, but I think the longer term outlook will dampen any decline and turn it into a buying opportunity.

As for tomorrow, expect volatility. It is triple witching so regardless of the FOMC, trends or outlook the market is likely to make some big moves.

Until then, remember the trend!

Thomas Hughes


New Option Plays

A Record Year

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Lennox International - LII - close: 109.46 change: +0.23

Stop Loss: 106.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 417 thousand
Entry on March -- at $---.--
Listed on March 19, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LII has been in business for over one hundred years. Lennox Intl. is part of the industrial goods sector. They offer residential cooling and heating products as well as commercial cooling and heating equipment. They are considered a global leader in the heating, air conditioning, and refrigeration markets. The residential business generates just over half of their annual sales.

The last couple of quarters have seen steady growth for LII. You can see the big gap higher in the stock price back in October 2014. That was a reaction to its Q3 earnings results. Their most recent report was February 2nd, 2015 where LII delivered its Q4 results.

Analysts were expecting a profit of $0.99 a share on revenues of $790 million. LII reported earnings per shares grew +32% to $1.02. Revenues were up +8.4% to $812.8 million, led by +13% sales growth in their residential segment.

Chairman and CEO Todd Bluedorn commented on his company's results,

"2014 was a year of strong growth and record profitability for Lennox International, led by 10% revenue growth at constant currency and 31% profit growth in our Residential business. In the fourth quarter, the company's momentum continued, with revenue up 10% at constant currency and total segment profit up 24%. Growth in the quarter continued to be led by Residential, with revenue up 14% at constant currency and profit up 57% from the prior-year quarter. In Commercial, revenue rose 8% at constant currency. Commercial profit was essentially flat with the prior-year quarter on headwinds from customer mix, foreign exchange, and investments related to our entrance in the VRF market. In Refrigeration, revenue was up 8% at constant currency. As expected, Refrigeration profit was down from the prior-year quarter by 45% due to the repeal of the carbon tax in Australia, North America product mix, and a negative impact from foreign exchange. We continue to expect Refrigeration revenue, margin and profit to be up in 2015 on continued growth in North America and improvement in Australia in the second half of the year. For the company overall in 2015, we expect another strong year of growth and record profitability, with strong cash generation for investments to drive growth as well as to return cash to shareholders."
Last year LII earnings rose more than +20% to $4.23 a share. They are forecasting $5.20-5.60 per shares in 2015 (+22.9% to +32.3%) versus Wall Street estimates of $5.42 per share.

Shares have been a steady performer the last few months with a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a $140 target. Today shares of LII are hovering just below round-number resistance at $110. We are suggesting a trigger to buy calls at $110.25.

Trigger @ $110.25

- Suggested Positions -

Buy the JUN $115 CALL (LII150619C115) current ask $2.35
option price is a current quote and not a suggested entry price.

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

Daily Chart:



In Play Updates and Reviews

Digesting Yesterday's News

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market spent most of Thursday simmering in negative territory. Investors were digesting yesterday's big news from the FOMC announcement and Yellen's press conference comments.


Current Portfolio:


CALL Play Updates

Aetna Inc. - AET - close: 108.31 change: +0.83

Stop Loss: 102.85
Target(s): To Be Determined
Current Option Gain/Loss: +223.5%
Average Daily Volume = 2.2 million
Entry on March 04 at $101.15
Listed on March 02, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: The rally in AET shares continued on Thursday after the stock garnered more bullish comments. One firm upgraded AET to a buy. Meanwhile Barron's issued an article on AET saying the stock has strong fundamentals, healthy earnings growth, the cheapest among the large-cap health insurers, and still has +30% more upside.

I am not suggesting new positions at this time. The $110 level is potential round-number resistance.

Trade Description: March 2, 2015:
Healthcare stocks have been extremely strong performers from the market's mid October 2014 lows. Investors have continued to buy the dips and that's especially true in shares of AET. This stock has been outperforming the market in 2015 and currently up +12.0% for the year.

Who is AET? According to the company, "Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 46 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products and services. Aetna's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates."

Investors have been bullish on big healthcare names because of the Affordable Care Act (a.k.a. Obamacare). Initially this industry was resistant to the deal. Obamacare did get off to a rocky start. Yet now a couple of years after its launch most of the wrinkles have been ironed out. Obamacare has generated millions of new health insurance customers for the industry.

Earnings have been strong. AET's most recent earnings report was February 3rd. The company delivered a Q4 profit of $1.22 a share. That was in-line with estimates. Revenues were up +12.5% to $14.77 billion, which was above expectations. More importantly AET raised their 2015 guidance from $6.90 a share to $7.00. That's actually below Wall Street's estimate but it's moving the right direction. Multiple analysts raised their price target on AET following the Q4 report. Meanwhile the point & figure chart is bullish and forecasting at $119 target.

The healthcare providers got another boost last week on February 23rd after the government issued new proposals to raise the rate they pay insurers for Medicare/Medicaid. Shares of AET have not seen that much profit taking from its February high and traders are already buying the dip.

We want to jump on board if this rally continues. Tonight we're suggesting a trigger to buy calls at $101.15. We'll try and limit our risk with an initial stop loss at $98.85.

- Suggested Positions -

Long Apr $105 CALL (AET150417C105) entry $1.36

03/16/15 new stop @ 102.85
Our option has more than doubled. Traders might want to take some money off the table here.
03/04/15 triggered @ 101.15
Option Format: symbol-year-month-day-call-strike


Cavium, Inc. - CAVM - close: 72.48 change: +1.74

Stop Loss: 68.45
Target(s): To Be Determined
Current Option Gain/Loss: +13.2%
Average Daily Volume = 737 thousand
Entry on February 27 at $68.75
Listed on February 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: After underperforming recently shares of CAVM surged +2.45% on Thursday. The stock has broken out from a three-week trading range in the $68-72 zone. Today's high was $73.09. I would be tempted to use a new rally past $73 as another bullish entry point.

Earlier Comments: February 26, 2015:
Semiconductor stocks have been showing relative strength this year. The SOX semiconductor index is already up +4.3%. CAVM is outperforming its peers with a +10.6% gain.

If you're not familiar with CAVM, Investors.com described the company as "a specialty niche designer of network security processors 14 years ago" that has grown into "a mainstream player challenging the likes of Intel, Broadcom, and Freescale Semiconductor."

The company describes itself as "Cavium is a leading provider of highly integrated semiconductor products that enable intelligent processing in enterprise, data center, cloud and wired and wireless service provider applications. Cavium offers a broad portfolio of integrated, software-compatible processors ranging in performance from 100 Mbps to 100 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access and service provider equipment. Cavium's processors are supported by ecosystem partners that provide operating systems, tool support, reference designs and other services. Cavium's principal office is in San Jose, CA with design team locations in California, Massachusetts, India and China."

The last four quarterly earnings reports have been better than expected. CAVM has consistently beat analysts' estimates on both the top and bottom line. Revenue growth has slowly accelerated from +19.7% in Q1 2014, +22.2% in Q2, +23.6% in Q3, and +25% in Q4 2014.

CAVM's CEO Syed Ali is optimistic on 2015 saying, "This will be the single biggest year of new product introductions in our history."

Meanwhile analyst Christopher Rolland, with FBR Capital Markets, commented on the company, saying, "innovative design team, solid pipeline of new products and ability to increasingly tap into a fast-growing hyperscale customer base should provide a solid backdrop of growth for the next few years."

Wall Street expects CAVM revenue growth of +20% in 2015 and earnings growth of +26%. The point & figure chart is very bullish and forecasting a long-term target of $96.00. Technically shares spent the last few days consolidating sideways but today's display of relative strength is a bullish breakout. We are suggesting a trigger to buy calls at $68.75. (FYI: April and May options are not available yet so we chose June)

- Suggested Positions -

Long JUN $75 CALL (CAVM150619C75) entry $3.80

03/17/15 new stop @ 68.45
03/07/15 new stop @ 67.65
02/27/15 triggered @ $68.75
Option Format: symbol-year-month-day-call-strike


Cracker Barrel - CBRL - close: 154.84 change: +1.95

Stop Loss: 149.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 320 thousand
Entry on March -- at $---.--
Listed on March 17, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
03/19/15: Yesterday's performance in CBRL was a little bit worrisome. Shares made up for it with some relative strength today (+1.2%). The stock is poised to breakout past the $155 level soon. Our suggested entry point to buy calls is at $155.55.

Trade Description: March 17, 2015:
Looking at the big picture for retail we have not seen any significant evidence that lower gasoline prices has boosted consumer spending. The one exception might be restaurant sales and CBRL is definitely near the top of the list. It is probably no coincidence that a big number of CBRL's locations are located near the interstate highway (and likely near a gas station).

The company describes itself as "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. The restaurant serves up delicious, home-style country food such as meatloaf and homemade chicken n' dumplins as well as its made-from-scratch biscuits using an old family recipe. The authentic old country retail store is fun to shop and offers unique gifts and self-indulgences. Cracker Barrel Old Country Store, Inc. (CBRL) was established in 1969 in Lebanon, Tenn. and operates 634 company-owned locations in 42 states."

CBRL has beaten Wall Street's earnings estimates the last three quarters in a row. Their most recent report was their Q2 on February 24th. Analysts were looking for a profit of $1.62 a share on revenues of $734 million. CBRL crushed the numbers with a profit of $1.93 a share, which is a +24% improvement from a year ago. Revenues were up +8.2% to $756 million. Management said comparable store restaurant sales were up +7.9%. Their average check was up +3.2%.

CBRL raised their 2015 guidance from $5.95-6.10 to $6.40-6.50. Consensus was only $6.13. They raised their revenue forecast from $2.8 billion to $2.8-2.85 billion. Wall Street was forecasting $2.82 billion. Following CBRL's better than expected results and bullish forecast the stock received a couple of upgrades with price targets in the $165-170 range.

A few days after their earnings report the company announced a $1.00 dividend payable on May 5th to shareholders on record as of April 17th, 2015. The stock's current dividend yield is 2.5%, above the 2.0% yield of the 10-year bond.

The stock exploded higher following its earnings results in February. That's probably thanks to some short covering. The most recent data listed short interest at almost 14% of the very small 18.9 million share float. The stock's big rally also produced a buy signal on the point & figure chart that is now forecasting a long-term target of $220.

Tonight we are suggesting a trigger to buy calls at $155.55.

Trigger @ $155.55

- Suggested Positions -

Buy the JUN $160 CALL (CBRL150619C160)

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


Salesforce.com, Inc. - CRM - close: 68.88 change: +0.33

Stop Loss: 62.75
Target(s): To Be Determined
Current Option Gain/Loss: +30.3%
Average Daily Volume = 4.5 million
Entry on March 17 at $66.75
Listed on March 16, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
03/19/15: CRM delivered another gain. That makes it four up days in a row. The $69-70 zone could be overhead resistance. I'm expecting CRM to see a pullback soon.

Trade Description: March 16, 2015:
This year could be a good one for shares of CRM. The stock spent most of last year churning sideways in the $50-65 range. CRM managed to end 2014 with a +7.4% gain, which underperformed the major indices. Today CRM is up +12% in 2015 and that's after a correction from its post-earnings highs in February.

Marc Benioff is CRM's CEO and Chairman. After CRM's recent Q4 earnings report Benioff said, "Salesforce reached $5 billion in annual revenue faster than any other enterprise software company and now it's our goal to be the fastest to reach $10 billion."

If you're not familiar with CRM the company describes itself as "Salesforce.com is the world's largest provider of customer relationship management (CRM) software. Our industry-leading CRM platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in mobile, social, and cloud technology to sell, service, market, and succeed like never before. Salesforce has headquarters in San Francisco, with offices in Europe and Asia."

Their most recent earnings report was February 25th, after the closing bell. CRM's Q4 2015 earnings and revenues were both in-line with estimates at $0.14 a share on sales of $1.44 for the fourth quarter. Revenues were up +26% in the fourth quarter and up +32% for the full year. They were up +29% in the fourth quarter if you account for currency headwinds.

Almost 93% of CRM's sales are their subscription software business. In the fourth quarter their subscription software service was up +25% and their professional services subscription was up +41%. Back in fiscal year 2014 CRM signed 100 big deals in the seven-to-eight figure range. This past year the number of big deals surged to 550. Analysts were happy to see CRM's deferred revenues grow, which jumped +32% in the fourth quarter, up from +28% in the third quarter.

Benioff commented on their results, "Salesforce delivered yet another year of exceptional growth, with revenue, deferred revenue and operating cash flow all growing more than 30%, while exceeding our expectations in non-GAAP operating margin improvement."

CRM guided for +21% sales growth in 2016 (up to $6.52 billion). This was just above their prior guidance and in-line with Wall Street estimates. The company now expects their 2016 earnings in the $0.67-0.69 range compared to analysts' estimates of $0.69. Consensus estimates are for $6.5 billion in sales. Wall Street analysts praised CRM's results. There was a parade of price target upgrades. Most of the new price targets are in the $79-80 range.

Shares have filled the gap from its post-earnings pop and investors have stepped in to buy shares at new support (prior resistance). Today's rally looks like an opportunity. We are suggesting a trigger to buy calls at $66.75.

- Suggested Positions -

Long MAY $70 CALL (CRM150515C70) entry $1.95

03/17/15 triggered @ 66.75
Option Format: symbol-year-month-day-call-strike


Mallinckrodt - MNK - close: 131.21 change: -1.30

Stop Loss: 125.25
Target(s): To Be Determined
Current Option Gain/Loss: +46.7%
Average Daily Volume = 1.3 million
Entry on March 16 at $125.29
Listed on March 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: MNK finally encountered some profit taking. Today's dip snapped a five-day winning streak and essentially erases yesterday's gain.

More conservative traders may want to take profits now. If MNK breaks down under $130.00 the next support level could be $125.00. No new positions at this time.

Trade Description: March 14, 2015:
The relative strength in healthcare stocks continues. Healthcare and biotech stocks were big performers last year and that outperformance appears to be continuing into 2015. One stock that is really outperforming its peers is MNK. Shares delivered a +89% gain in 2014 and they're already up +25% in 2015.

MNK describes itself as "Mallinckrodt is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents. Areas of focus include therapeutic drugs for autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology along with analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities. The company's Specialty Brands segment includes branded medicines such as OFIRMEV and Acthar; its Specialty Generics segment includes specialty generic drugs, active pharmaceutical ingredients and external manufacturing; and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has approximately 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2014 revenue totaled $2.54 billion."

MNK's global medical imaging business has fallen from about one third of the company's sales to about a quarter as the specialty pharmaceuticals business continues to grow. One reason for the growth is MNK's acquisition strategy. Last year they purchased Cadence Pharmaceuticals for $1.3 billion, which added Ofirmev to MNK's stable of therapies. MNK also spent $5.6 billion to acquire Questcor Pharmaceuticals. This added Questcor's Acthar gel to MNK's drug business.

MNK has been really delivering on the earnings front. Last August they reported their Q3 2014 numbers with revenues up +14.6% and earnings of $1.20, which was $0.35 above expectations. Management also raised their 2014 guidance. In October 2014 they raised their 2015 guidance. Then in November MNK announced their Q4 2014 results with revenues up +44.8%, above expectations, and earnings of $1.68 per share, which was $0.27 higher than estimated.

The revenue and earnings parade continued when MNK reported their Q1 2015 numbers on February 3rd. The company's profit more than doubled with earnings up +109% to $1.84 per share. That beat Wall Street's estimate by 26 cents. Revenues accelerated as well with +60% improvement to $866.3 million. However, this time analysts had ratcheted up their estimates to $885 million. MNK said their gross profit margin improved to 50.6% from 47.3% a year ago. MNK is currently forecasting 2015 numbers of $6.70-7.20 a share on revenues in the $3.65-3.75 billion range.

Mark Trudeau, Chief Executive Officer and President of Mallinckrodt, commented on their recent results,

"Mallinckrodt is off to a good start in fiscal 2015 driven by strong performance across all of our businesses. We achieved meaningful top- and bottom-line growth particularly in the Specialty Brands and Specialty Generics segments, increasing the proportion of total company net sales from specialty pharmaceuticals to over 75% in the quarter. The strategies we have pursued have gone far toward transforming us into a leading specialty biopharmaceutical company, and we are highly focused on maintaining momentum and expanding our portfolio to provide durable, sustained growth."
Investors appear to believe in MNK's growth story. The stock has a steady trend of higher lows and higher highs. MNK popped on March 5th thanks to M&A news. Wall Street seems to approve. Normally shares of the acquired company go up and the acquirer go down but investors bought MNK too. MNK is spending $2.3 billion to buy privately held Ikaria. This company makes INOmax, which is an inhaled nitric oxide used to treat babies with respiratory issues. The acquisition will boost MNK's earnings by 25 cents a share in 2015.

Following the acquisition news multiple analysts have raised their price targets on MNK. The nearly all the new targets are about $140 a share. Today MNK is sitting just below what looks like round-number, psychological resistance at the $125.00 mark. We are suggesting a trigger to buy calls at $125.15.

I'd rather buy May or June options but they're not available yet. We'll use the Julys.

- Suggested Positions -

Long JUL $130 CALL (MNK150717C130) entry $7.50

03/17/15 new stop @ 125.25
03/16/15 new stop @ 121.85
03/16/15 triggered on gap open at $125.29, suggested trigger was $125.15
Option Format: symbol-year-month-day-call-strike


Northrop Grumman Corp. - NOC - close: 162.52 change: -0.32

Stop Loss: 158.45
Target(s): To Be Determined
Current Option Gain/Loss: -22.2%
Average Daily Volume = 1.4 million
Entry on March 19 at $163.50
Listed on March 18, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
03/19/15: Shares of NOC spiked higher this morning and tagged our suggested entry point at $163.50. Unfortunately gains faded but shares essentially closed unchanged on the session. Today's rally stopped at the 20-dma. Investors might want to wait for a new rally past $163.75 before initiating bullish positions.

Trade Description: March 18, 2015:
The United States spends more on its defense budget than any other country in the world. The Budget Control Act of 2011 led to the sequestration budget cuts of $1.2 trillion. Half of that spending reduction is taken out of the U.S. defense budget from 2013-2021 (nine years).

Now pretend you are a defense contractor. You might think that having your biggest customer cut their budget would send your revenues and your stock price lower. That has not been the case for the major defense players. While it is true that many defense companies did see slower sales to the U.S. their stocks have delivered significant gains since the sequester.

I should note that part of the defense cuts have been delayed or amended with various short-term deals in Washington but the sequester is poised to return to full power in 2016. Law makers are already trying to find a way around it. Meanwhile, both 2013 and 2014 saw stocks like NOC outperform the broader market averages. That relative strength has continued into 2015, even after the recent correction.

According to their company website, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." What does that mean? It means NOC makes bombers, unmanned drones, cyber security solutions, and logistics. If you're curious, C4ISR stands for command, control, communications, computers, intelligence, surveillance, and reconnaissance.

The fact that the world seems to be growing more dangerous, not less dangerous, should be a bullish undercurrent that lifts the defense sector. NOC should benefit because the American public does not have the stomach for another war. That means the U.S. will use more and more unmanned technology like NOC's drones.

NOC has consistently delivered on the earnings front. Not only has NOC beaten expectations but they have raised their guidance the last five quarters in a row. A key driver has been a push to diversify their customers base so they're not so reliant on the U.S.

The company's Q4 report was released on January 29th. Wall Street was expecting a profit of $2.25 a share on revenues of $5.99 billion. NOC delivered earnings of $2.48 per share, up +17% from a year ago. Revenues slipped -0.8% but came in better than expected at $6.11 billion. Their profit margin improved and their backlog at the end of 2014 was $38.2 billion compared to $37 billion the prior year.

Management raised their 2015 earnings guidance into the $9.20-9.50 range and their revenue guidance up to $23.4-23.8 billion. This is above Wall Street's estimate of $9.12 on revenues of $23.5 billion.

The stock peaked near $172 about four weeks ago. Since then NOC, like most of the defense stocks, have seen a correction. NOC was down -9% from its high as of last Friday's low. Yet the point & figure chart is still bullish and forecasting a long-term target of $210.

We like how NOC has kept the bullish trend of higher lows alive. Now, after consolidating sideways in the $158-162 zone the last few days, the current bounce looks like an potential entry point. Tonight we're suggesting a trigger to buy calls at $163.50.

Caveat: The U.S. Air Force is expected to make a big decision in spring or summer this year. That decision is who will make America's next-generation bomber. The program is called the Long Range Strike-Bomber (LRS-B) and will be worth tens of billions of dollars to the winning contractor. This is a major fight between defense contractors like NOC and rivals Boeing (BA) and Lockheed Martin (LMT). If NOC loses this opportunity it could hurt the stock price.

- Suggested Positions -

Long MAY $170 CALL (NOC150515C170) entry $2.25

03/19/15 triggered @ 163.50
Option Format: symbol-year-month-day-call-strike


NXP Semiconductors - NXPI - close: 105.32 change: -0.04

Stop Loss: 101.65
Target(s): To Be Determined
Current Option Gain/Loss: +552.5%
Average Daily Volume = 3.7 million
Entry on February 12 at $84.15
Listed on February 11, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: NXPI managed to stay above the $105 level but shares didn't build on yesterday's breakout. The stock closed virtually unchanged. There's a chance that if the NASDAQ can breakout past resistance at the 5,000 mark that it could rejuvenate the big tech names and NXPI could get a second wind.

I'm not suggesting new positions at this time.

Earlier Comments: February 11, 2015:
According to Apple Inc. CEO Tim Cook 2015 will be the year of Apple Pay. That's good news for NXPI. Apple launched its Apple Pay mobile payment system last September. In just the last four months it has taken off. About 8% of retailers already support it and estimates suggest that 38% of retailers will support Apple Pay by year end.

Tim Cook discussed the growth of Apple Pay in his company's recent conference call. Every $3 spent using mobile payments with Visa, Mastercard, and American Express, about $2 of that is used through Apple Pay. Panera Bread said that 80% of its mobile payment usage is through Apple Pay. Whole Foods noted that customers using mobile payments surged +400% once Apple Pay started.

All of this is good news for NXPI because they make the key chips necessary for Apple Pay to work.

The company describes itself as "NXP Semiconductors N.V. (NXPI) creates solutions that enable secure connections for a smarter world. Building on its expertise in High Performance Mixed Signal electronics, NXP is driving innovation in the automotive, identification and mobile industries, and in application areas including wireless infrastructure, lighting, healthcare, industrial, consumer tech and computing. NXP has operations in more than 25 countries, and posted revenue of $4.82 billion in 2013."

Earnings have been good. NXPI managed to beat Wall Street's estimates on both the top and bottom line the last five quarters in a row. Back in July NXPI raised their guidance. Influential hedge fund manager David Tepper, who runs Appaloosa Management, launched a new position in NXPI back in the third quarter of 2014. In early December shares of NXPI were upgraded with a $100 price target by Oppenheimer.

NXPI's most recent earnings report as February 5th. Revenues surged +18.9%. Management delivered bullish earnings guidance for the first quarter. Since this report at least four analyst firms have raised their price targets on NXPI (most of them into the mid $90s).

Today NXPI just hit all-time highs. The stock had been consolidating sideways in at $75-82.50 trading range. This breakout looks like an entry point. I'm suggesting a trigger at $84.15 to buy calls.

- Suggested Positions -

Long Apr $90 CALL (NXPI150417C90) entry $2.36

03/16/15 new stop @ 101.65
03/13/15 NXPI soars on a "strong buy" rating and $140 price target
03/04/15 new stop @ 96.25
03/02/15 new stop @ 94.85, NXPI soars after announcing acquisition of FSL
02/21/15 new stop @ 83.25
02/17/15 new stop @ 80.35
02/12/15 triggered @ 84.15
Option Format: symbol-year-month-day-call-strike


Under Armour, Inc. - UA - close: 81.01 change: +0.98

Stop Loss: 75.95
Target(s): To Be Determined
Current Option Gain/Loss: +44.3%
Average Daily Volume = 2.1 million
Entry on March 17 at $77.60
Listed on March 12, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: The bullish breakout in UA shares continued today. The stock outperformed the major indices with a +1.2% gain. UA is now up five out of the last six session.

After hours tonight UA's larger rival Nike (NKE) reported its Q3 earnings. NKE beat the bottom line estimate with earnings five cents above expectations. NKE's revenues were up +7% but that was below estimates. The failure was due to currency headwinds.

Shares of UA are drifting higher after hours following NKE's earnings. NKE has a much bigger international presence. The stronger dollar will not hurt UA as much as it hurt NKE.

UA does look short-term overbought. I am not suggesting new positions.

Trade Description: March 12, 2015:
The NPD Group reports that Americans spent $323 billion on apparel, footwear, and related accessories last year. That's only a +1% improvement from the prior year but all of the growth was due to athletic footwear and apparel. There is a new trend in fashion and it's called "athleisure". Marshal Cohen, chief industry analyst at the NPD Group, said, "This is no longer a trend - it is now a lifestyle that is too comfortable, for consumers of all ages, for it to go away anytime soon."

UA is in the consumer goods sector. They make shoes and athletic wear. According to the company, "Under Armour (UA), the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitnessâ„¢ platform powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal."

The athletic shoe and athletic apparel business is very competitive. Nike (NKE) has dominated the space for years. UA is about 10% the size of NKE but it is actively fighting for market share and recently overtook Adidas as the second biggest athletic wear brand inside the United States. Nike had sales of $27.8 billion in 2014. UA is a fraction of that with 2014 sales of $3.08 billion but they saw growth of +32%.

UA isn't stopping with just apparel and footwear. They recently spent $710 million to buy the MapMyFitness, MyFitnessPal, and Endomondo apps. This has boosted UA's digital consumer audience to 130 million. UA management believes that more and more we will see technology and software move from our smartphone into a merger between apps and clothing.

UA has been firing on all cylinders with its earnings results. Most of last year saw the company not only beating Wall Street's estimates but also raising guidance. UA's most recent earnings report was February 4th. The company reported a profit of $0.40 a share with revenues climbing +31% to $895 million, which was above estimates for $849 million. UA's CEO Kevin Plank, in a recent interview, said his company will grow at 20%-plus in 2015. The company's current estimates are $3.76 billion in sales for the year.

You might notice that shares of UA held up pretty well during the market's recent sell-off. Shares only dipped toward support in the $74-75 area. During today's market rebound shares of UA outperformed with a +2.7% gain. More aggressive traders could buy calls now. I am suggesting a trigger to buy calls at $77.60.

- Suggested Positions -

Long JUL $80 CALL (UA150717C80) entry $4.09

03/18/15 be prepare for possible volatility on Friday morning as UA reacts to Nike's earnings out Thursday night.
03/17/15 new stop @ 75.95
03/17/15 triggered @ 77.60
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Bunge Limited - BG - close: 79.03 change: -1.03

Stop Loss: 81.05
Target(s): To Be Determined
Current Option Gain/Loss: -21.7%
Average Daily Volume = 1.0 million
Entry on March 18 at $78.45
Listed on March 11, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/19/15: BG did not see any follow through on yesterday's rally, which is good news if you're bearish. I will note that today's session is an "inside day" and we should stay cautious. Yesterday's low was $78.40. I would wait for a drop below $78.40 before initiating new positions.

Trade Description: March 11, 2015:
It only takes one earnings report to alter a stock's trajectory if the news is big enough. For BG it was the company's Q4 report announced in February.

BG is in the consumer goods sector. According to the company, "Bunge Limited (www.bunge.com, NYSE: BG) is a leading global agribusiness and food company operating in over 40 countries with approximately 35,000 employees. Bunge buys, sells, stores and transports oilseeds and grains to serve customers worldwide; processes oilseeds to make protein meal for animal feed and edible oil products for commercial customers and consumers; produces sugar and ethanol from sugarcane; mills wheat, corn and rice to make ingredients used by food companies; and sells fertilizer in South America. Founded in 1818, the company is headquartered in White Plains, New York."

The middle of 2014 the outlook for BG was a lot more enthusiastic. BG's Q2 earnings report (on July 31st) was better than expected and the company beat estimates on both the top and bottom line. Unfortunately the next two quarters were tough. BG's Q3 results were released on October and the company's profit of $1.31 a share was 59 cents worse than expected. Revenues were down -7.0% from a year ago.

That slowdown in earnings and revenues accelerated in the fourth quarter. BG reported its Q4 results on February 12th. Wall Street was expecting a profit of $2.52 a share on revenues of $16.5 billion. BG delivered $1.20 a share with revenues down -15% to $13.9 billion. That's a HUGE miss on both the top and bottom line.

The Wall Street Journal summed up the quarter this way, "upheavals in the commodity trading firm's oilseed businesses outweighed benefits from bumper U.S. corn and soybean crops." BG suffered terrible margins on their soybean crushing business in China and saw a slowdown in Europe. Their main agribusiness division reported net sales fell -20%.

Naturally investors reacted negatively. The stock plunged to support near $80.00. The initial oversold bounce stalled near $83.00. Now, about four weeks later, shares of BG are breaking down below key support at $80.00. The next support level appears to be the $73.50 area. The point & figure chart is forecasting at $67.00 target. Tonight we are suggesting a trigger to buy puts at $78.45.

- Suggested Positions -

Long APR $80 PUT (BG150417P80) entry $2.49

03/18/15 triggered @ 78.45
Option Format: symbol-year-month-day-call-strike


Deckers Outdoor - DECK - close: 71.89 change: +0.20

Stop Loss: 73.05
Target(s): To Be Determined
Current Option Gain/Loss: -41.7%
Average Daily Volume = 922 thousand
Entry on March 10 at $71.46
Listed on March 09, 2015
Time Frame: Exit prior to April option expiration
New Positions: see below

Comments:
03/19/15: DECK spent the day hovering near short-term resistance at the $72.00 level. I don't see any changes from my recent comments.

I am not suggesting new positions at this time.

Trade Description: March 9, 2015:
Consumers can be a fickle lot. When one brand falls out of favor the drop off in sales can be earth shaking for the manufacturer. One company that appears to be seeing some trouble is DECK.

According to the company's marketing material, "Deckers Brands is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The company's portfolio of brands includes UGG®, I HEART UGG®, Teva®, Sanuk®, Ahnu® and HOKA ONE ONE®. Deckers Brands products are sold in more than 50 countries and territories through select department and specialty stores, 138 Company-owned and operated retail stores, and select online stores, including Company-owned websites. Deckers Brands has a 40-year history of building niche footwear brands into lifestyle market leaders attracting millions of loyal consumers globally."

DECK started seeing trouble last year. Back in July they reported earnings that beat expectations but management lowered guidance. They did it again in October with DECK delivering results above estimates but lowering guidance. Their most recent report was January 29th where DECK delivered their December quarter. Earnings were up +11% from a year ago to $4.50 a share. That actually missed Wall Street's estimate. Revenues rose +6.6% to $784.7 million. This too missed analysts' expectations of $812.5 million.

If that wasn't bad enough the company lowered their Q4 and 2015 guidance. They downgraded their 2015 revenue growth from +15% down to +13.5% largely due to slowing sales of their UGG brand. That's definitely a warning signal since UGG accounts for more than 80% of DECK's sales.

The stock crashed -19.5% the next day on its disappointing earnings results and lowered guidance. The following two weeks saw an oversold bounce but that bounce is over. Shares are starting to breakdown again. A Morgan Stanley analysts was not enthusiastic on DECK and said they don't see any catalyst between now and the next holiday shopping season to drive the stock higher.

DECK was definitely showing relative weakness today and broke below short-term support near $72.50. Tonight I'm suggesting a trigger to buy puts at $71.65.

- Suggested Positions -

Long APR $70 PUT (DECK150417P70) entry $2.40

03/16/15 new stop @ 73.05
03/10/15 triggered on gap down at $71.46
Option Format: symbol-year-month-day-call-strike