Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/31/2015

Table of Contents

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

Market Wrap

Not a Good Omen

by Jim Brown

Click here to email Jim Brown

The Dow gave back -200 of the +263 points it gained in Monday's monster short squeeze. Giving back that many points on the last day of the quarter when retirement money should be flowing into fund accounts is not a good omen for the days ahead. The morning started out slightly negative but selling accelerated late in the afternoon.

Market Statistics

The S&P and Nasdaq have risen for nine consecutive quarters and but the Dow broke its string after Tuesday's loss pushed it negative by -0.26% for the quarter. The Dow had the most triple digit swings in Q1 since the Q4-2011. The market's momentum has begun to fade with only the Russell 2000 (+3.99%) and the Nasdaq (+3.48%) posting decent Q1 gains.

The graphic below shows the Q1 gains and losses for the major indexes. The biotech sector was the big winner with +16% and crude oil the biggest loser at -11.3% despite a strong rebound in March.


There were no headlines this morning to account for the market decline. However, Monday was purely a short squeeze after comments from a PBoC governor suggested they could launch a new stimulus program in the near future. Also pushing stocks higher was merger Monday. A flurry of acquisitions helped to power stocks higher. United Health (UNH) will acquire pharmacy benefit manager Catamaran (CTRX) in a deal worth $12.78 billion. Drugmaker Teva Pharmaceuticals (TEVA) said it would buy drug maker Auspex (ASPX) for $3.5 billion. Horizon Pharmaceuticals (HZNP) is buying Hyperion Therapeutics (HPTX) for $1.1 billion.

When there was no rebound on Friday after a -414 point Dow decline for the week the outlook for this week was mixed at best. The short squeeze capitalized on the heavily negative outlook from Friday and everyone that went into the weekend short was severely squeezed at the open on Monday.

Today was simply a return to the sentiment from last week. Today should have been positive from quarter end retirement contributions so the lack of positive market suggests we are still going lower.

On the economic front the Intuit Small Business Employment Index showed hiring was flat in March at +0.7%. Businesses with less than 20 employees added 15,000 jobs in March and the same pace as February. However, hours worked declined -0.35% and compensation declined -0.16%. Small businesses normally rely more on walk in foot traffic and severe winter weather could have impacted the totals.

The Case Shiller Home Price index showed that home prices rose +4.6% in January compared to +4.3% in the prior report. This is a lagging report and the market ignored it.

Consumer Confidence for March rose significantly from 96.4 to 101.3. The February decline from January's 103.8 high was almost completely erased. The present conditions component declined from 112.1 to 109.1 but the expectations component rose from 90.0 to 96.0. Auto buyers increased from 11.8% to 12.8% while prospective home buyers declined from 5.6% to 4.5%. Prospective appliance buyers declined from 50.0% to 48.4%. Consumers are not spending their gas savings but using it to pay down credit cards and existing loans.


The economic calendar for the rest of the week is heavily weighted towards employment reports. The estimates for the ADP and Nonfarm payrolls have been fluctuating about 15-20K every couple of days as analysts rethink their positions. The ADP is now expected to show a small gain to +240,000 and the Nonfarm Payrolls are expected to show a decent decline from 295,000 to 248,000. Bear in mind that analysts are all over the map on these estimates because of the weak economic reports for the last month. There is a strong possibility we could get a negative surprise.

The Nonfarm Payroll report is on Friday and the market will be closed for Good Friday. This means investors will not be able to trade on the report until Monday and a three day weekend is a lifetime if you are positioned in the wrong direction. This makes the next two days critical for positioning and you better be very confident of your positions going into Thursday's close. The ADP report on Wednesday will give traders a potential heads up for their trades ahead of Thursday's close.

The ISM Manufacturing on Wednesday will also be important. With economic reports weakening this is the proxy for all of April. If the ISM comes in weak analysts will project that forward into April. The Texas Manufacturing Outlook yesterday fell from -11.2 to -17.4 and Texas is supposed to be an economically strong state. The Kansas Fed Manufacturing Survey a couple days before declined from 1 to -4 in a continuing series of disappointments. Analysts will be looking at the ISM for hope for the future.


This is going to be a short commentary tonight. Our Internet was down all afternoon and did not come back up until 8:30 ET. It is really hard to do research without the Internet. What did we do 20 years ago? We listened to our brokers and watched the nightly news at 6 & 10 and that was all we had. Think how much smarter and better informed investors are today.

In stock news Charter Communications (CHTR) announced the acquisition of Bright House in a $10.4 billion deal. This will give Charter a bigger footprint in California, Florida and Michigan. Charter will pay for the deal with $2 billion in cash and a mix of common and convertible preferred stock.

Bright House has about 2.5 million cable subscribers. Charter lost out on the Time Warner deal last year when Comcast agreed to pay $42.5 billion. However, Charter agreed to take control of 3.9 million Comcast cable-TV customers in order to make the approval process easier for the Comcast deal. That was a heck of a consolation prize! Time Warner has a right of first offer on the Bright House transaction but is not expected to take it since the Comcast acquisition is still in progress.


Priceline (PCLN) was upgraded from hold to buy at Stifel Nicolaus with a price target of $1,400. The analyst said the conditions in Europe were improving and the company had been giving conservative guidance. However, over 70% of foreign bookings have exposure to foreign currencies and Priceline was going to have to manage that headwind. Travel to Europe is increasing thanks to the strong dollar buying more European goods and services and that was seen as a positive for Priceline.


Dyax (DYAX) shares rallied +50% on heavy volume after the company said an early-stage study showed that drug DX-2930 designed to treat hereditary angioedema, a rare swelling of the extremities, was safe to use, achieved all primary goals and reduced attacks. The drug was granted a fast-track designation from the FDA.


Conn's (CONN) declined -6% after the company reported a worse than expected -44% decline in Q4 profits. The company reported earnings of 42 cents compared to 75 cents in the year ago quarter. Revenue increased +18% to $426.8 million. Analysts were expecting 64 cents and revenue of $421 million. The company said it was exploring strategic alternatives including the sale of its loan portfolio and will stop selling electronics and stick to furniture.


Orthofix (OFIX) reported earnings of 17 cents and said it had entered into an option agreement to acquire eNeura. Orthofix has 18 months to exercise the option. Orthofix has agreed to provide a $15 million loan to support SpringTMS in the U.S. and Europe. If the option to purchase eNeura is exercised, Orthofix will pay $65 million to consummate the merger and eNeura will repay the unpaid principle under the loan. Shares rallied 15% on the news.


Sprouts Farmers Market (SFM) rallied +5% after Morgan Stanley named the company to its "Best Ideas" list. MS said now was a "very attractive" time to buy into one of retails best growth stories. Shares had pulled back after the company issued cautious guidance of 20% earnings growth after posting nearly 50% in the prior two years. Morgan said Sprouts had a history of beating expectations.


Crude oil did not help the market today with a -$1.19 decline in regular trading and continued its fall in afterhours with another -40 cents. Multiple analysts are reiterating their call for lower $40s or even sub $40 prices in the weeks ahead. This pressured all the energy stocks and weighed on the Dow and the S&P.


Markets

The S&P declined -18 points to close just above light support at 2065 to eras all byt 6 points of the Monday gains. The index gapped lower at the open and did not even retest the high resistance at 2089 from Monday. The opening print was 2084 and it was all downhill from there. The next level support is now the 100-day at 2060 and the early March lows at 2040. Without a sudden reversal of direction I think that 2040 level is going to be tested.


The two-year chart on the S&P has been trending pretty much straight up. However, over the last three months the upward momentum has slowed and as you can see in the chart below the tops of the candles are moving farther and farther away from the top of the channel. There is a good chance we are going to have a retest of the uptrend support in the 1985-2000 range. The critical question will be whether that 1985 level holds given the weak estimates for earnings for the first three quarters of 2015. The uptrend support is almost identical to the 50-week moving average, which is also a critical support point.


The Dow only had three components that were positive with the heaviest weighted stocks losing the most points. Goldman, Boeing, IBM and Apple were the biggest losers and helped to drag the index significantly lower.

Art Cashin said there was $1.5 billion in stock for sale at the close on the NYSE. That was a lot of fund selling and suggests there was a race to the exits ahead of quarter end and the ADP Employment report before the open on Wednesday.

The Dow made a lower high and the odds are good it is heading for a lower low in the days ahead. Support at 17,620 is likely to be tested and possibly broken. That would then target 17,130 and the support from January.



The Nasdaq appears to be headed for a retest of support at 4850 and that level better hold or the broader market could accelerate lower. The biotechs have been supporting the Nasdaq while chip stocks and solar stocks have been erratic. Tuesday's -46 point drop came mostly in the last few minutes of trading and futures continued lower after the close.



The Small Cap Russell 2000 lost -5 points today but continues to hold the high ground. The index is only 14 points away from a new closing high. An analyst mentioned today that S&P stocks with no exposure to Europe were up +0.5% for the year while those with exposure to Europe were down an average -1.8% for the year. This is even truer for the Russell stocks with the index up +4% for the year. As long as the R2K holds above the 1230 level from last week the broader indexes should not decline too far.


I would remain cautious for the rest of the week after the return of the triple digit volatility. The S&P made another lower high and should it make a lower low in the next couple days it would be very negative. The S&P futures accelerated lower after the close and at one point were down -25 points. Unless there is a miracle recovery the market open on Wednesday is going to be ugly.


There is always the possibility that today's flush was some sort of technical selling or portfolio rebalancing for the end of the quarter. This was the first losing quarter for the Dow after 8 consecutive winning quarters. This could be a warning for the weeks ahead.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

 


New Option Plays

Churning Sideways

by James Brown

Click here to email James Brown

Editor's Note:

The stock market really can't seem to make up it's mind. Yesterday was the first time in about a month that the S&P 500 actually managed back-to-back up days. You see how long that rally lasted.

You could argue the S&P 500 is in a neutral consolidation pattern of lower highs and higher lows. Investors might be waiting for Q1 earnings season to start.

Art Cashin, Director of Floor Operations at UBS, noted that April is historically bullish for the market but the first half of April tends to be weak and then stocks make it up with gains in the second half of the month.

Seasonally the next couple of days tend to have a bullish bias but the day after Easter is normally down.

Don't forget that the U.S. stock market is closed on Friday.

Tonight we are not adding any new trades. With the market searching for a direction it is easy to get chewed up in the churn.




In Play Updates and Reviews

Q1 Ends On A Sour Note

by James Brown

Click here to email James Brown

Editor's Note:

Stocks gave back most of yesterday's gains. Worries about the dollar and Q1 earnings growth remain an issue. The disappointing economic data in the U.S. is not helping with a lower than expected Chicago PMI this morning.


Current Portfolio:


CALL Play Updates

Cardinal Health, Inc. - CAH - close: 90.27 change: -0.53

Stop Loss: 87.75
Target(s): To Be Determined
Current Option Gain/Loss: -10.8%
Average Daily Volume = 1.7 million
Entry on March 30 at $90.55
Listed on March 28, 2015
Time Frame: We might exit prior to CAH earnings
(potentially April 30th)
New Positions: see below

Comments:
03/31/15: The bounce in CAH looks like it might be rolling over under last week's highs. Of course the broader market was down today with all the major U.S. indices posting losses. CAH should find short-term support in the $88-89 area.

Trade Description: March 28, 2015:
The big healthcare names have shown significant relative strength over the last couple of years. That momentum has carried into 2015 and shares of CAH are outperforming the broader market with a +11% gain year to date.

You might have heard about CAH recently since the company made headlines in early March. Here's a brief description of the company, "Headquartered in Dublin, Ohio, Cardinal Health, Inc. (CAH) is a $91 billion health care services company that improves the cost-effectiveness of health care. As the business behind health care, Cardinal Health helps pharmacies, hospitals, ambulatory surgery centers, clinical laboratories and physician offices focus on patient care while reducing costs, enhancing efficiency and improving quality. Cardinal Health is an essential link in the health care supply chain, providing pharmaceuticals and medical products and services to more than 100,000 locations each day and is also the industry-leading direct-to-home medical supplies distributor. The company is a leading manufacturer of medical and surgical products, including gloves, surgical apparel and fluid management products. In addition, the company operates the nation's largest network of radiopharmacies that dispense products to aid in the early diagnosis and treatment of disease."

Management has been doing a good job with the earnings game. The last three quarters in a row have seen CAH beat Wall Street estimates on both the top and bottom line. Their next report should be the end of April.

On March 2, 2015 CAH made the news with their $2 billion acquisition of Cordis. Here's an except from the company's press release:

Cardinal Health today announced plans to acquire Johnson & Johnson's Cordis business, a leading global manufacturer of cardiology and endovascular devices, for $1.944 billion in cash, or approximately $1.594 billion, net of the present value of tax benefits. The acquisition is expected to be financed with a combination of $1.0 billion in new senior unsecured notes and the remainder with existing cash. The transaction is expected to close in the United States and key non-U.S. countries towards the end of calendar 2015.
CAH is forecasting this acquisition will add more than $0.20 per share to the company's 2017 earnings. They expect synergies to be more than $100 million by the end of fiscal 2018.

CAH's chairman and CEO, George Barrett, commented on the acquisition,

"We are extremely excited about the acquisition of Cordis. This is a significant step forward in our cardiovascular strategy. Cordis brings with it a long and proud legacy of cardiovascular innovation. This move highlights our commitment to address a major pain point in healthcare systems through innovative new approaches to the management of physician preference items. This acquisition follows a sequence of strategic moves for Cardinal Health in the areas of cardiology, wound management and orthopedics. We are well-positioned to help customers standardize around mature medical devices, while bringing them innovative solutions around supply chain management, inventory optimization, and work flow tools and data to support the most effective management of the patient...

With an aging population and the accompanying demand for less invasive medical treatments, health systems around the world are searching for the best way to bring quality care to their patients in the most cost-effective way. The acquisition of Cordis reinforces our strategic position to address this need and strengthens an important growth driver in the Cardinal Health portfolio."

Moody's Investors Service, a credit rating agency, commented on the deal and said it would be credit positive for CAH. Meanwhile a couple of analyst firms upgraded their price targets on CAH following the story with new targets at $105 and $107.

Technically shares of CAH have been trading in a bullish pattern of higher lows and higher highs. Investors just bought the dip at $88.00 near its trend line of support. We want to hop on board and tonight we are suggesting a trigger to buy calls at $90.55.

- Suggested Positions -

Long MAY $90 CALL (CAH150515C90) entry $2.86

03/30/15 triggered @ 90.55
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 124.37 change: -0.40

Stop Loss: 119.65
Target(s): To Be Determined
Current Option Gain/Loss: +27.8%
Average Daily Volume = 32.7 million
Entry on March 27 at $123.05
Listed on March 26, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
03/31/15: The IWM spent the last day of the first quarter churning sideways in an 80-cent range. Should stocks dip again then watch for support near $122.00.

Trade Description: March 26, 2015:
The IWM is the exchange traded fund (ETF) that mimics the small cap Russell 2000 index ($RUT). Last year we saw the Russell 2000 underperform its large cap rivals. The S&P 500 delivered a +11.5% gain in 2014 while the $RUT only rose +3.6%. The situation has changed this year. As of last week's high the $RUT was up +5.3% compared to a +2.3% gain in the S&P 500.

Investors have been drawn to small cap companies because they will endure the impact of a strong dollar better than the large caps. Many of the large cap S&P 500 companies are big multi-national firms. Almost 50% of revenues for S&P 500 components are overseas. Yet only 20% of revenues for Russell 2000 companies are outside the U.S. At the same time the U.S. economy, while growing slowly, is still growing faster than Europe.

Technically the IWM was holding up pretty well until Wednesday's market-wide plunge. Traders bought the dip today near its trend of higher lows. The point & figure chart for the IWM is still bullish and forecasting a long-term target of $154.00. We think stocks could see a bounce soon and the IWM could be a great way to play it. Tonight we are suggesting a trigger to buy calls at $123.05. We'll start this trade with a stop at $119.65.

- Suggested Positions -

Long MAY $125 CALL (IWM150515C125) entry $1.94

03/27/15 triggered @ 123.05
Option Format: symbol-year-month-day-call-strike


Jack in the Box, Inc. - JACK - close: 95.92 change: -1.12

Stop Loss: 93.85
Target(s): To Be Determined
Current Option Gain/Loss: -20.6%
Average Daily Volume = 616 thousand
Entry on March 27 at $96.25
Listed on March 24, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/31/15: The action in JACK today is a bit concerning. You could argue that technically today's drop (-1.1%) has produced a new bearish engulfing candlestick reversal pattern. Plus the bounce following the March 24th sell-off has stalled at the 61.8% Fibonacci retracement pattern.

I am not suggesting new positions at this time.

Trade Description: March 24, 2015:
It's a burger-eat-burger world out there in the fast-food business. Jack in the Box is small fries compared to its larger rivals like McDonalds (36,258 locations) and Wendy's (6,515 locations). Let's not forget heavy weights like Taco Bell, Burger King, Subway, Dairy Queen, and a handful of pizza chains. JACK only has about 2,200 restaurants but it also has a secret weapon and that is the Qdoba Mexican Grill restaurant with about 600 locations. Chipotle Mexican Grill has almost 1,800 locations.

Some of that intense competition being felt by McDonalds and Chipotle Mexican Grill is coming from Jack in the Box and its Qdoba brand, which is growing sharply. A majority of their Qdoba franchisees own multiple stores with 10, 20 even 40 stores common. Enterprising business owners don't open additional stores if the original stores are not working. To have so many owners with high numbers of stores suggests the franchise is consistently profitable.

To be profitable they need solid customer traffic, good food and decent margins. Shares of JACK have been one of the best performers on the S&P over the last year because the company has been posting solid earnings and growth.

With analysts cutting earnings estimates for McDonalds and Chipotle because of competition in the sector it makes sense to look at what has happened at JACK. Over the last quarter and the last year not a single analyst has lowered their earnings estimates for JACK. According to Zacks there has been a noticeable trend of raising estimates. JACK is expected to grow +16% to +20% this year and in 2016. JACK has beaten earnings by an average of 6% over the last four quarters.

Because of the drop in gasoline prices consumers have more money in their pocket. Some of that money is going to end up in the cash registers at these fast food outlets. Customers are also trending towards healthier foods and away from the mass produced burgers and fries at McDonalds. Did you know there are 19 ingredients in McDonalds fries? Surely you didn't think they were just potatoes and grease? Restaurants like JACK and Chipotle are capitalizing on the healthy food craze. JACK store sales rose an average of 5.7% over the last three quarters but Qdoba sales rose +13% for the year and +7.7% in Q4. Zacks rates JACK as a strong buy.

The company plans to open 15 new Jack in the Box stores in 2015. They're also cashing in on Qdoba's success and planning to open 50 to 60 new Qdoba locations. That compares to just 12 new Jacks and 38 new Qdobas in 2014.

It's also worth noting that JACK has an active share buyback program and they reduced the share count by 10% over the last four quarters. Earnings growth rose +20% in Q3 after three years of consecutive earnings growth of more than 30%.

JACK's most recent earnings report was February 17th, when they reported their 2015 Q1 results. Analysts were expecting a profit of $0.87 a share on revenues of $461.2 million. JACK delivered earnings of $0.93 a share. That's a +24% improvement from a year ago. Revenues were up +4.1% to $468.6 million, above estimates. Their operating margins improved 1% to 19.3%.

Management expects same-store sales at Jack in the Box to surge from +0.9% a year ago to +5% to +7% in Q2. Qdoba same-store sales are forecasted to be in the +7% to +9% range. The company raised full-year 2015 guidance to $2.85-2.97 a share compared to Wall Street estimates of $2.84.

Shares of JACK surged on the earnings news and bullish guidance. Since the report that has been almost no profit taking. Now, after more than four weeks of consolidation, the stock looks poised to breakout past major, psychological resistance at the $100.00 mark. Tonight we're suggesting a trigger to buy calls at $100.25.

- Suggested Positions -

Long JUN $100 CALL (JACK150619C100) entry $3.40

03/27/15 triggered @ 96.25
03/26/15 strategy update: Move the entry trigger from $100.25 to $96.25, move the stop loss from $95.75 to $93.85
We will adjust the option strike to the 2015 June $100 call
Option Format: symbol-year-month-day-call-strike


Lennox International - LII - close: 111.69 change: +0.32

Stop Loss: 106.75
Target(s): To Be Determined
Current Option Gain/Loss: -7.8%
Average Daily Volume = 417 thousand
Entry on March 23 at $110.96
Listed on March 19, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/31/15: LII managed to buck the market's down trend and post a gain today. This is a new closing high for the stock. The relative strength is encouraging but if the market rolls over LII will have a hard time. I'd watch for support in the $109.50-110.00 area.

Trade Description: March 19, 2015:
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.

- Suggested Positions -

Long JUN $115 CALL (LII150619C115) entry $2.55

03/23/15 triggered on gap open at $110.96, suggested entry was $110.25
Option Format: symbol-year-month-day-call-strike


Monster Beverage - MNST - close: 138.40 change: -2.05

Stop Loss: 136.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on March -- at $---.--
Listed on March 30, 2015
Time Frame: Exit prior to earnings in May
New Positions: Yes, see below

Comments:
03/31/15: MNST did not see any follow through on yesterday's rally. The stock erased most of yesterday's gains. Right now our plan is to buy calls at $141.50. An alternative entry would be buying calls near the bottom of its trading range (near $135.00) and use a really tight stop loss.

Trade Description: March 30, 2015:
A recent report by Beverage Digest noted that the sale of carbonated beverages (a.k.a. sodas) has fallen for the tenth year in a row. Consumer spending on traditional soft drinks has plunged to the lowest pace since 1986. One area of the beverage market that is bucking this trend is energy drinks and alternative drinks. Euromonitor said that the energy drink market has soared from $3.8 billion in 1999 to $27.5 billion in 2014. The divergence between traditional sodas and energy drinks is significant. Beverage Marketing Corp. said the sale of energy drinks in the U.S. rose +6.3% in the first six months of 2014 while normal drink sales declined -1%.

One company benefiting from this divergence is MNST. If you're not familiar with the company here's a brief description: "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(R) energy drinks, Monster Energy Extra Strength Nitrous Technology(R) energy drinks, Java Monster(R) non-carbonated coffee + energy drinks, M3(R) Monster Energy(R) Super Concentrate energy drinks, Monster Rehab(R) non-carbonated energy drinks with electrolytes, Muscle Monster(R) Energy Shakes, Ubermonster(R) energy drinks, and Peace Tea(R) iced teas, as well as Hansen's(R) natural sodas, apple juice and juice blends, multi-vitamin juices, Junior Juice(R) beverages, Blue Sky(R) beverages, Hubert's(R) Lemonades and PRE(R) Probiotic drinks."

The long-term up trend in MNST's stock accelerated last year. That's because back in August 2014 MNST announced a partnership deal with beverage titan Coca-Cola (KO). MNST's management commented on the deal in their latest earnings report. Here's an excerpt:

In August 2014, Monster Beverage and The Coca-Cola Company entered into definitive agreements for a long-term strategic partnership to accelerate growth for both companies in the global energy drink category. Under the agreements, The Coca-Cola Company will acquire an approximate 16.7 percent ownership interest in Monster (post issuance) and will transfer ownership of its worldwide energy business to Monster, which, in turn, will transfer its non-energy business to The Coca-Cola Company. Monster and The Coca-Cola Company will amend their current distribution coordination agreements to expand distribution with Coca-Cola bottlers into additional territories. Upon closing, The Coca-Cola Company will become Monster's preferred distribution partner globally, and Monster will become The Coca-Cola Company's exclusive energy play. The transaction, which is subject to customary closing conditions, is expected to close in the second quarter of 2015.
This deal with KO is a game changer and will significantly boost MNST's ability to enter international markets. There is a growing camp of speculation that believes KO may end up buying MNST outright to capture the leading player in the energy drink industry to offset declines in KO's traditional soda market.

Meanwhile MNST continues to deliver on the earnings front. The company averaged +42% earnings growth last year. MNST has the highest sales growth in the nonalcoholic beverage industry (+8% to +12%) versus the industry's -2%.

MNST's most recent report was their 2014 Q4 results on February 26th. Earnings soared +63% to $0.72 a share. Analysts were only expecting $0.58. Revenues were up +12% to $605.5 million, which was also above expectations. Their full-year 2014 gross margins improved from 52.2% to 54.4%. Wall Street is forecasting MNST to see earnings grow +21% in 2015.

The stock shot higher on its earnings report in February. Shares have been consolidating sideways the last five weeks. MNST held up pretty well during the market's recent decline. We think the stock could be forming a short-term bottom in the $134-141 range. The March 24th high was $141.28. Tonight we're suggesting a trigger to buy calls at $141.50.

Trigger @ $141.50

- Suggested Positions -

Buy the MAY $145 CALL (MNST150515C145)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Nike, Inc. - NKE - close: 100.33 change: -0.56

Stop Loss: 97.40
Target(s): To Be Determined
Current Option Gain/Loss: -20.9%
Average Daily Volume = 3.6 million
Entry on March 30 at $101.23
Listed on March 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/31/15: NKE tried to rally after Deutsche Bank raised their price target on the stock from $110 to $115 this morning. Unfortunately gains faded and NKE slipped to a -0.5% decline. That was better than the -0.87% drop in the S&P 500.

I suggested yesterday that traders look for a dip near $100.00 as an alternative entry point. If you're feeling cautious, then wait for a bounce, and then buy calls.

Trade Description: March 26, 2015:
In the athletic footwear and apparel industry Nike is the 800-pound gorilla with annual sales of more than $30 billion. According to the company, "NIKE, Inc., based near Beaverton, Oregon, is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Wholly-owned NIKE, Inc. subsidiaries include Converse Inc., which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International LLC, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories."

The company's most recent earnings report was March 19th, after the closing bell. NKE reported its Q3 2015 results. Analysts were expecting a profit of $0.84 a share on revenues of $7.62 billion. NKE delivered a profit of +0.89 a share or +16% from a year ago. Revenues were up +7% to $7.46 billion. However, if you back out the currency headwinds, their revenues were up +13%.

The company reported sales growth across every geographical region. Their gross margins improved 140 basis points to 45.9 percent. Management said their online sales are soaring. Nike.com saw its revenues jump +42% last quarter.

The current quarter is NKE's 2015 Q4 (March-July) and the company said orders for Q4 in North America are up +15%, which is above analysts' estimates of +11.6%. Orders from China are up +11%, also above estimates. In the company's earnings release NKE said, "As of the end of the quarter, worldwide futures orders for NIKE Brand athletic footwear and apparel scheduled for delivery from March 2015 through July 2015 were 2 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 11 percent."

One big concern is the U.S. dollar. Sales in Europe were up +21% but when you factor in euro weakness and dollar strength that sales growth drops to +10%. The strength in the U.S. dollar is a major headwind but after NKE's Q3 results Wall Street feels that the company is managing the currency impact very well. The company is forecasting low double digit sales growth in the current quarter.

Wall Street applauded the results and shares of NKE gapped open higher on March 20th to hit all-time highs. There was a parade of bullish analyst comments. Several firms raised their price target on NKE. Here's a brief list of new price target: $106, $110, $115, $116.00. The point & figure chart is more optimistic as it is forecasting at $125.00 target.

Shares of NKE have seen some profit taking, which isn't a surprise considering the market's four-day decline. However, now that NKE has filled the gap, traders bought the dip. This could be an entry point. We are suggesting a trigger to buy calls at $100.25.

- Suggested Positions -

Long MAY $100 CALL (NKE150515C100) entry $3.35

03/30/15 triggered on gap open at $101.23, suggested entry was $100.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Alkermes plc - ALKS - close: 60.97 change: -1.55

Stop Loss: 65.25
Target(s): To Be Determined
Current Option Gain/Loss: +48.8%
Average Daily Volume = 1.26 million
Entry on March 25 at $64.90
Listed on March 23, 2015
Time Frame: exit PRIOR to May option expiration
New Positions: see below

Comments:
03/31/15: Tuesday was a good day for ALKS bears. The stock underperformed the market with a -2.47% decline and closed at new multi-week lows. The next challenge is potential, round-number support at $60.00. Tonight we'll lower the stop loss to $65.25. I'm not suggesting new positions at this time.

Trade Description: March 23, 2015:
Biotech stocks have been some of the market's best performers, especially off the October 2014 lows. The group may have gotten ahead of itself with significant gains in recent weeks. The last couple of days the biotech ETFs are flashing what might signal a potential top. Meanwhile one stock that has been underperforming its peers is ALKS.

You might not be familiar with ALKS. The company is part of the healthcare sector. According to their marketing materials, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. 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."

The company's most recent earnings report was February 24th. They beat expectations on both the top and bottom line. Unfortunate for shareholders management lowered their 2015 revenue guidance. Since its report shares have broken down. The stock has seen a couple of analyst downgrades (or lowered price targets). The point & figure chart has turned bearish and is currently forecasting at $54.00 target.

You can see the gap down on the earnings news. ALKS struggled to rebound and when it did traders immediately sold the stock at resistance. Now it's on the verge of breaking down bellow support near $65.00. The $60.00 level is potential support but there is a chance shares drop toward their 200-dma closer to $55. Tonight we are suggesting a trigger to buy puts at $64.90.

I want to remind readers that biotech stocks can be volatile. We should consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long MAY $60 PUT (ALKS150515P60) entry $2.15

03/31/15 new stop @ 65.25
03/28/15 new stop @ 67.65
03/25/15 triggered @ 64.90
Option Format: symbol-year-month-day-call-strike