Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/1/2016

Table of Contents

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

Market Wrap

Super Tuesday!

by Jim Brown

Click here to email Jim Brown

Last Tuesday we saw a +221 Monday gain nearly erased by a -189 point decline. Today we saw a -123 point Monday drop erased by a +348 point rebound to put us over recent resistance.

Market Statistics

The big gain came from an overnight rebound in Asia and Europe along with some better than expected economic numbers in the USA. Oil prices rose to more than $34 after China lowered the bank reserve rate on Monday and hopes for a successful production freeze in the Middle East. Reports from some U.S. producers said they were cutting production to conserve cash flow rather than produce at a loss.



The February Manufacturing ISM rose from 48.2 to 49.5 and almost back into positive territory. This is the fifth month in contraction for the sector. The new orders were flat at 51.5 but backorders improved from 43.0 to 48.5 but still in contraction. Production rose from 50.2 to 52.8 and employment improved from 45.9 to 48.5.

Imports declined from 51.0 to 49.0 and export orders declined from 47.0 to 46.5. Overall this was a "less bad" report but still in contraction. Analysts were beating the drum because the headline number had risen for two consecutive months up from 48.0 in December and 48.2 in January. While that is positive, I think they are grasping at straws. Still the market celebrated the improvement in the sector.


Construction spending soared +1.5% for January and well over the 0.4% estimate and the +0.1% gain in December. That was the biggest gain since May. Private construction spending was $831 billion, public spending $309 billion and total spending at $1.141 trillion. Public construction spending rose +4.5% with private spending up +0.5%. Spending on highways and streets rose +14.7% for the month to severely distort the headline number. Total spending is now up +10.4% over January 2015.

Auto sales for February continued at a 17.54 million annual pace. This is down slightly from the 17.6 million pace in January. These are outstanding numbers since January and February are the two slowest months of the year. Auto sales were on pace for 7.4 million and light trucks/SUVs at 10.1 million.

Ford's sales rose +20%, with its SUV rising +28% thanks to the low fuel prices. Car sales rose +19% with the Ford Focus compact up +4.7%. GM said overall sales declined -1.5%. Sales to rental companies declined -16,500 from 2015. Toyota said sales rose +4.1% and Chrysler +12% thanks to Jeeps and Ram trucks. Honda sales rose +13% and Nissan +10.5%.

Despite the market reaction to a better than expected ISM and Construction Spending report the Atlanta Fed GDPNow real time forecast declined -0.2% to +1.9% growth because of a markdown in real consumer spending growth from 3.5% to 3.1% because the continued contraction in the ISM.


The calendar for Wednesday has the first major jobs report from ADP and the Fed Beige Book with a recap of activity in all Fed regions. The Nonfarm Payroll report on Friday is the biggest report for the week and could weigh on the market depending on what the ADP report shows. A weak ADP report could suggest a weak Nonfarm report. A really strong Nonfarm could put the Fed back in play for their meeting on the 16th.


In stock news, Dollar Tree (DLTR) reported earnings of $1.01 that missed estimates for $1.04. Revenue of $5.365 billion rose +116.7% thanks to the acquisition of Family Dollar but still missed estimates for $5.425 billion. They now operate more than 14,000 stores. The company guided to full year revenue of $20.76 to $21.11 billion. Revenue for Q1 is expected to be $5.05 to $5.12 billion. Same store sales are expected to grow in the low single digits. Earnings are projected to be 75-83 cents for Q1 and $3.35 to $3.65 for the full year. Analysts were expecting 81 cents for Q1 and $3.78 for the full year. Shares dipped $2 at the open but rebounded to gain $2.


Medtronic (MDT) reported earnings of $1.06 and revenue of $6.93 billion that matched analyst estimates. However, they reiterated full year estimates for $4.36-$4.40 per share before seeing low double digit to mid teens earnings growth in 2017. Analysts were expecting $4.38 and the mid range of those forecasts. However, the company expects revenue to decline 5.0 to 5.5% in 2016 because of the strong dollar. The foreign currency impact is expected to be -$200 million in the current quarter. Analysts and investors saw the earnings as lackluster and shares declined -5%.


Autozone (AZO) reported earnings of $7.43 per share and 15 cents above estimates. Revenue was $2.26 billion and matched estimates. Gross profits were a whopping 52.7% of sales. Same store sales rose +3.6%. They opened 30 stores in the U.S. to bring their total to 5,193 and 5,676 stores globally. Autozone said low gas prices had produced more miles driven and therefore more wear on auto components. Shares rallied $16 on the news.


Kate Spade (KATE) reported earnings of 32 cents that missed estimates by a penny. Revenue rose +7.6% to $429 million but also fell short of estimates for $443.9 million. However, same store sales spiked 14% or 9% excluding e-commerce sales. Analysts expected 10.8%. The company lowered full year earnings guidance to the range of 70-80 cents and revenue of $1.39-$1.41 billion a rise of 14 to 16%. Investors apparently liked what they heard with shares up +11%. That probably translates into a lot of short covering after KATE broke through resistance at $21.


United Technology (UTX) shares fell after Honeywell (HON) said it was it was no longer pursuing the $90 billion acquisition. Honeywell said it strongly disagreed with United's position that the deal would have a tough time being approved by regulators. CEO David Cote said, "We made a full and fair offer that would have greatly benefitted both sets of shareholders. However, continuing to try and negotiate with an unwilling partner is inconsistent with our disciplined acquisition process." RBC upgraded UTX saying the company is "now in play" despite its rejection of the Honeywell offer. RBC did not say who might be considering an offer but there could be several candidates.


Tesla Motors (TSLA) shares fell after short seller Citron Research tweeted that "Citron shorting TSLA. Supply and demand problems should take the stock down to $100 by the end of 2016. News flow all around does not look good for the stock." Citron is notorious for picking on high flyers and causing significant pain for shareholders. Tesla has had some manufacturing challenges on the Model X


Valeant Pharmaceuticals (VRX) rebounded from an intraday dip to $60 after a $26 drop over the last three days on multiple headlines. The company was downgraded by RBC to neutral after news of a new investigation by the SEC. Hillary Clinton released a new campaign ad specifically naming Valeant and citing "predatory pricing" and pledging to fix those kinds of problems with prescription medicines.

The SEC is investigating VRX for financial misrepresentation surrounding its relationship with Philidor. Yesterday Valeant said it was postponing its earnings because of accounting errors surrounding Philidor. Today the company said it would not meet the regulatory deadlines for its quarterly filings.

Citron attacked Valeant several months ago questioning their accounting and helping to cause the massive drop in the stock price.


After the close Weatherford International (WFT) announced a secondary offering of 80 million shares with the proceeds to be used for general corporate purposes including the repayment of debts. Shares were $6.18 at the close. This is one more oil company resorting to the last option available to them to avoid defaults and bankruptcy. In late January, Pioneer Natural Resources (PXD) floated 12 million shares at $117. Earlier this week Marathon Oil (MRO) announced a 145 million share offering at $7.65. Duke Energy offered 9.25 million shares at $74. AEP Resources (QEP) offered 33 million shares at $10. Newfield exploration (NFX) offered 30 million at $23.

The bigger companies are surviving by cutting their dividends and selling assets. The smaller companies with weaker balance sheets are selling shares and diluting existing shareholders. We can expect more of this in the months to come.


Oil prices rose today but after the close the American Petroleum Institute (API) reported an inventory build of 9.9 million barrels for the week ended on Friday. That was the biggest build in 11 months and well over expectations for a gain of +3.6 million barrels. Cushing Oklahoma, the WTI futures delivery point was already within 3 million barrels of capacity and they added 1.8 million to pretty well max them out.

Crude futures declined to $33.90 after closing at $34.43. If the EIA report on Wednesday confirms this build, I am sure we will see lower prices. I have warned for weeks that the inventory build season does not end until the end of March or early April. Once refineries begin to draw down inventories, the prices should begin to stabilize at a higher level.

Markets

Everybody loves a short squeeze unless of course if you are short. The factors combining to cause today's squeeze included month end fund flows, rebounds in Europe and Asia, better than expected economics, rising oil prices and the idea that Super Tuesday sometimes produces bottoms in the market depending on the outcome of the vote. Having a lot of sellers pile on to the MSCI rebalance decline on Monday did not hurt either. They just added more fuel to the fire today.

In 1996 the market declined -2.9% the week before Super Tuesday. Bob Dole swept the contests to seal his nomination and the market rallied +2.3% the next week. In 2012 the S&P dropped -2% in the five days prior to Tuesday, Mitt Romney had a solid win and the market rose 4% over the next week. The key is a strong winner. If the contests end up with a mixed result, the markets tend to continue lower because of the lingering uncertainty.

Whatever the reason for the rally I am thrilled. The rally lifted the major indexes well above prior resistance and hopefully high enough that we will not have to revisit those levels. The strong gain also suggests the worst is now behind us and we are not likely to retest the lows.

Volume on Tuesday was 8.8 billion shares and relatively heavy. Advancing volume was 3:1 over declining volume. Advancers were a little more than 3:1 over decliners at 5,533 to 1,585. On a big +348 point day, we would have liked to see those numbers a little more lopsided in favor of the advancers.

The S&P surged past resistance at 1,950 and the 50% retracement level at 1,963 to close at 1,978. It would take some serious selling to return us to 1,950 but that 1,963 level is in play. In theory, those levels should now be support on any future decline.

You know there is a decline in our future. We cannot soar 348 points without some profit taking. Whether it is a little or a lot remains unknown and a lot of it revolves around the Asian markets tonight, payroll reports, Fed Beige Book and Fed speaker comments.

The next resistance is the 1,999 retracement level and the psychological hurdle of 2,000.


The Dow industrials were powered higher by short covering in more than half of the components. The banks were the leaders because the better than expected economics suggested the Fed could hike sooner rather than later and rising interest rates are good for banks. Apple rallied after the law enforcement lost a case in New York to unlock an iPhone in a non-terrorist investigation. FBI Director Comey and the attorney for Apple gave testimony in the House and it appeared Apple won the day but maybe not the war.

The Dow surged through the 50% retracement level at 16,718 and closed 150 points over that level. This was a strong day and also suggests we will not be going back to retest any lows.



The Nasdaq could be the problem child. The Nasdaq composite rose to exactly the 50% retracement level at 4,691 and came to a dead stop. It was a +131 point gain of +2.88% so we really cannot complain. What this means is that we could have some backing and filling on the Nasdaq before it moves over that 50% retracement level. Apple was a main supporter but Amazon, Priceline, Google and even Netflix contributed to the rally.

Prior resistance at 4,600 should be support but that would be a 90-point decline and I really hope we do not see that level again.



The index I am most happy about is the Russell 2000, which broke through not only 1,035 but 1,050 as well. If the Russell can hold its gains, we could be off to the races. The semiconductor, financial, energy and even biotech sectors all posted gains that supported the Russell. Keep your fingers crossed.


Regardless of who wins the Super Tuesday contests I expect some retracement of the gains. It is only natural. The real key will be how far back we drop and whether investors buy the dip.

I would not be looking to add to any positions on Wednesday. I would be raising stop losses on any position with profit you do not want to lose. As we have seen in recent weeks, the market can take back its gains even faster than it produces them. I would look to buy any decent dips.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Don't Be Stupid

by Jim Brown

Click here to email Jim Brown

Editors Note:

Market rallies are wonderful, especially when they come after periods of high volatility and negative performance. However, after a +348 point spike on the Dow, +131 on the Nasdaq and +46 on the S&P, to add a new position at the open the next day would be stupid.

While there are no guarantees the odds favor a down day on Wednesday. Profits need to be taken and winning plays closed. This could be simply a morning drop, full day decline or a couple days of choppy trading.

A lot of investors believe they have to make a new trade every day. Those are the ones that end up losing money in the long term. It is best to trade only when it makes sense to trade. It does not make sense to go long a new position after a nearly 3% one day rally on the Nasdaq.

We currently have 17 positions. That is far too many to handle if the market reverses course significantly. Adding another one in a severely overbought market is just asking for trouble. I do recommend buying any material dip because market sentiment has changed. I believe the worst is behind us but that does not mean the volatility is over.

Be patient. There is always another day to trade if you have money left to invest.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Party On!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market blowout today provided gains to the vast majority of stocks but the real key was the break over resistance on all the major indexes. The S&P blew through resistance at 1,950 and again at 1,963, which was the 50% retracement level. This was a key event but now we have to hold over that level.

The rally came on month end funds flows, rising oil prices, better economics and of course short covering.

I wish we only had to worry about the next level at 1,999 but you know there will be some profit taking from today's gains. You cannot rally this much in a single day without some retracement.



Current Portfolio




Current Position Changes


AKAM - Akamai

The long call play remains unopened until a trade at $55.75.


EA - Electronic Arts

The long call play was opened this morning.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AKAM - Akamai Technologies -
Company Description

Comments:

Akamai failed to push through to our entry trigger at $55.75. The high of the day was at the close at $55.57.

The position remains unopened until AKAM trades at $55.75.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

With a AKAM trade at $55.75

Buy April $57.50 call, currently $1.67, initial stop loss $51.85.


AOS - AO Smith - Company Description

Comments:

Fantastic gain of nearly 4% as short covering finally kicked in and shares closed at a two-month high.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


ATVI - Activision Blizaard Company Description

Comments:

Minor gain and barely edged over resistance at $32. Not exciting but still a gain.

Original Trade Description: February 24th.

Activision announced on Wednesday they had completed their acquisition of King Digital (KING) for $5.9 billion. This is a major milestone for Activision and they now have more than 500 million gamers making them the largest game network in the world.

They produce Candy Crush, World of Warcraft, Call of Duty and more than 1,000 other titles that can be played on mobile devices, consoles and PCs. The games are played in 196 countries. Activision was named one of Fortune's 100 Best Companies to Work For in 2015.

King Digital had 318 million monthly actuve users as of December 31st and offers games in more than 200 countries.

The combination of these two companies creates a powerhouse that will cross market to the combined subscriber base and new subscriptions and sales of new games to the combined user base will explode in 2016. Earnings are going to rocket higher. Activision is projecting 2016 revenue of $6.25 billion, earnings of $2 billion and earnings per share of $1.75. This compares to 2015 revenue at $4.62 billion and $1.19 in earnings.

The earnings on February 11th missed estimates for a variety of reasons and shares fell to a six-month low at $26.50. The rebound was immediate on the impending announcement of the completion of the King Digital acquisition. Shares closed today at $31.72.

With the higher earnings estimates and the King acquisition behind them I am expecting the shares to continue to rise. The high was $40 in December.

Earnings are May 12th.

Position 2/25/16 with an ATVI trade at $32.15

Long May $34 call @ $1.51, see portfolio graphic for stop loss.


DNKN - Dunkin Brands - Company Description

Comments:

Dunkin was the only loser for the day with a -3 cent drop. After the big gain over the last week I am still happy to see no big decline.

Original Trade Description: February 17th.

Everybody knows Dunkin Donuts. Consumer consultancy, Brand Keys, named Dunkin Donuts coffee as the top brand for consumer loyalty for tenth consecutive year. I know, you would probably have said Starbucks if you were asked the question but Dunkin Donuts coffee is the most loved. Dunkin was also number one in packaged coffee loyalty for the fourth consecutive year. Starbucks sells more units because Dunkin Donuts did not sell their K-Cups in supermarkets for a long time. Up until recently, if you wanted to buy Dunkin K-Cups you have to go to a Dunkin store. Now they are available everywhere, even in Kohl's stores and Ace Hardware.

Dunkin is changing their business model. They are opening 62 "non-traditional" stores in 2016 in addition to their normal stores. Those non-traditional stores will be located in airports, transportation terminals, casinos and resorts, hospitals, stadiums, grocery stores, military bases, colleges and universities. They are also opening multibranded stores featuring both Dunkin Donuts and Baskin Robbins, their ice cream brand. That will allow for traffic from the morning donut and coffee to the after dinner ice cream treat. They are also adding other bakery goods to their donut menus including a full range of breakfast sandwhiches.

Dunkin currently has 11,700 stores under the Dunkin brand, with 750 of those now non-traditional. They also run more than 7,600 Baskin Robbins in 40 countries. They operate more than 220 stores in Europe.

Dunkin prides itself on the "blue collar" appeal compared to the sometimes snobby views of Starbucks with $10 coffees.

Their Q4 earnings were 52 cents that beat estimates by 2 cents. Revenue of $203.8 million increased 5% and also beat estimates. U.S. same store sales comps rose +1.4%.

Shares peaked just under $44 on February 5th, just before earnings. Post earnings depression and the weak market knocked them back to $40 but they have rebounded to close at $44 today and a five-month high.

No entry trigger because the June option is cheap and we have a long time before expiration. However, earnings are April 21st. We will decide on an exit strategy as we near that date.

Position 2/18/16

Long June $45 call @ $2.05, see portfolio graphic for stop loss.



EA - Electronic Arts - Company Description

Comments:

EA finally moved over resistance at $65 and hit our entry point at $65.45 for a few cents.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.


FB - Facebook - Company Description

Comments:

Major breakout over resistance at $107.85. FB gained +$2.90 for the day.

Original Trade Description: February 23rd.

I do not really need to tell you what Facebook does. They are turning into the biggest online marketing portal on the planet and they still have not fully monetized WhatsApp, Instagram and several other web portals they own.

Facebook beat estimates for Q4 earnings at 79 cents compared to estimates for 69 cents. Revenue of $5.84 billion beat estimates for $5.37 billion. Earnings rose +46% and revenue +52%. Full year revenue rose +44% to $17.93 billion.

Monthly active users rose to 1.59 billion. Monthly active mobile users rose to 1.44 billion. Every day users watch more than 100 million hours of video. Zuckerberg hinted they were going to create s video space similar to YouTube to expand that video viewing. Average revenue per users rose to $3.73 compared to estimates for $3.43. WhatsApp ended the year with nearly 1 billion monthly active users.

Mobile ad impressions rose 29%. More than 2.5 million advertisers are actively promoting products on Facebook.

Post earnings Facebook shares rallied to $117 before the February market crash knocked them back down to $97. In another newsletter I was trying to launch a play at the 200-day moving average at $94.50 and never got filled. The rebound over the last week to $108 on Monday was solid. With the close at $105 today this may be our best chance for a new entry.

Earnings are April 20th. I am using the April options because they are cheaper than the May by a lot. They expire on the 15th so we will be out before they report.

Because of the market decline today I am going to use an entry trigger. If the market continues lower, I would rather not be holding calls at this level if we can potentially buy them lower.

Position 2/24/16 with a FB trade at $106.45

Long April $110 call @ $3.30, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Description

Comments:

The IWM exploded higher thanks to the break over resistance by the Russell and the broader market. We should be set for continued gains in the weeks ahead. I hope I am not jinxing the play with that comment.

Original Trade Description: February 25th

The Russell 2000 has come alive. Over the last two weeks the small cap index has been surging with bigger daily gains than the big cap indexes. The final resistance hurdle is 1,035 with another speed bump at 1,050 then it is clear sailing until 1,150. That is better than 100 points from today's close.

While we cannot guarantee it will happen the green shoots are appearing Today's gains was confirmation that the Wednesday rebound could be the start of a major move to the upside.

I am recommending we buy calls on the IWM in hopes of capturing the gains on a breakout that could run to the 115 level. The IWM is actually a little ahead of the Russell and was testing that local resistance today.

Position 2/26/16 with an IWM trade at $103.25

Long April $105 call @ $1.91, see portfolio graphic for stop loss.


JNJ - Johnson & Johnson - Company Description

Comments:

Breakout by JNJ to $107. I am recommending an exit target at $108.75.

Original Trade Description: February 24th

I have JNJ as a longer-term play in another newsletter so I am going to use part of that play description here to save time.

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KORS - Michael Kors - Company Description

Comments:

Another 8-month high as it extends its gains. Prepare to exit at $59.85.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.

Target $59.85 for an exit.


KR - Kroger - Company Description

Comments:

Kroger spiked to our exit target of $40.35 at the open to close the play. The stock rallied +2.35 since it was added to the portfolio. The option exit was $1.78 for a 73 cent or 69.5% gain.

Original Trade Description: January 28th

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Position 1/29/16: Closed 3/1/16

Closed: Long April $40 call, entry $1.05, exit $1.78, +.73 gain


N - NetSuite - Company Description

Comments:

Another nice gain in a bullish market.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


PII - Polaris Industries - Company Description

Comments:

Polaris rebounded back over resistance at $88 with a $2 gain but it has not yet broken free of that critical level. The close at $90 is still below the $91 close on Friday. No complaints but I would like to see it move higher from here to begin a new trend over resistance.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


QCOM - Qualcomm Company Description

Comments:

Nice recovery to a new three-month high close. Support is now $50.

Original Trade Description: February 24th.

Qualcomm holds the major patents on the 3G/4G wireless technology and their chips are showing up in more and more phones every month. Several days ago they signed a new licensing agreement with Lenovo for 3G and 4G technology for use in China. The devices will be marketed under the Motorola and Lenovo brands. Under the agreement Qualcomm will receive royalties on 3G (WCDMA and CDMA2000) and 4G (LTE-TDD, TD-SCDMA and GSM) devices. Lenovo will design, produce and market lower priced phones for the Chinese market.

A couple days later NXP Semiconductors (NXPI) and Qualcomm announced the integration of an industry-leading near field communication (NFC) and embedded secure element (ESE) solutions for Qualcomm's Snapdragon 800, 600, 400 and 200 processor platforms. This provides Qualcomm an end-to-end solution for mobile transactions and payment processing.

A day later Qualcomm announced the Snapdragon 820 processor with integrated Snapdragon X12 LTE modem for 33% faster 4G+ LTE download speeds and 200% faster LTE upload speeds, would power the new Samsung Galaxy S7 and S7 Edge phones. When coupled with the Samsung TruSignal multi-antenna boost technology, these will be the fastest phones currently in production.

A day later Qualcomm announced its collaboration with Ericsson (ERIC) on the new 5G technology, which is expected to be in production in 2018. The companies are doing the development work necessary on the 3GPP platform to insure rapid adoption of the new ultra high speed wireless technology. This puts Qualcomm at the forefront once again.

According to ABI Research, Qualcomm held a 65% market share of the 4G LTE baseband chipsets in 2015. The 4G LTE market is expected to grow at a 78.6% CAGR through 2019 when the 5G phones will begin to be plentiful. ABI said the Snapdragon 820 chip would probably increase Qualcomm's market share in 2016. Because of their dominance ABI believes Qualcomm will be able to increase the average selling price as the demand for the high end phones increases.

All the buzz about the new partnerships and deals has lifted QCOM shares out of a two-year decline. Shares fell while Qualcomm was fighting various companies about royalty payments in China. The new agreements with Chinese companies clearly show those problems are behind Qualcomm. All the analyst ratings changes in 2016 have been upgrades. Bernstein upgraded them to a buy last week.

I believe the long term downtrend is being reversed and although Qualcomm is up $10 over the last two weeks the positive rebound can continue. Normally I would not touch a company with a 25% rally in progress but the news is so strong I believe it is worth a chance. The most recent analyst price target is $70.

Earnings April 27th.

Position 2/25/16:

Long April $52.50 call @ $1.58, see portfolio graphic for stop loss.


SBUX - Starbucks - Company Description

Comments:

Sprint over resistance at $59.50 to $60.04 and puts the $61.20 level into play as the next material resistance.

Original Trade Description: February 19th

You know what Starbucks does. They are the premier coffee retailer in the U.S. and Europe. Shares were crushed in early February after sales growth slowed in Europe. CEO Howard Schultz said they were headed for a record Q4 until the Paris attacks and everything just stopped. Consumers avoided the streets and especially retail establishments. Schultz said conditions were returning to normal and 2016 would be a good year.

U.S. same store sales rose +9% and +6% internationally excluding Europe. Earnings are expected to grow 15% annually for the next five years. They are opening 500 stores a year in China over that same period. The currently operate 21,000 stores in 66 countries. Schultz expects annual revenues to double from $16 billion last year to $30 billion by 2019.

To do this they are constantly adding more menu items including baker goods, sandwiches, desserts and even beer and wine to create an "evening experience" to expand their profitable hours. The average Starbucks customer visits a store 16 times a month with many making daily visits.

The post earnings crash in early February was more market related than earnings related. With double digit earnings and revenue growth and a proven business model there is nothing not to like about Starbucks.

Shares have rebounded from the $53 low on February 8th to $57.66 on Friday. Nomura initiated coverage on Friday with a buy rating and $70 price target. I am recommending the June $60 call and we will exit before earnings. I am using the June options so there will still be an earnings expectation premium when we exit before the event.

Earnings April 21st.

Position 2/22/16 @ $58.63:

Long June $60 call @ $1.46, see portfolio graphic for stop loss.


THO - Thor Industries - Company Description

Comments:

Minor gain today but the stock is up +$7 in the last two weeks. Any day without a decline is a good day.

Earnings March 7th. Target $56.85 for an exit.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


HPQ - Hewlett Packard - Company Description

Comments:

HPQ inching slowly higher and we have plenty of time. No specific news.

We should see a directional move begin now and I would be perfectly happy if it was higher. We are agnostic on direction since we have both a put and call but the prior direction was bullish and the call is already profitable. We do not care which direction it moves just as long as it moves several dollars in that direction over the next two months.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

The VXX dropped more than 2 points thanks to the big market rally. If we could add a couple more days of market gains could push it down to $20.

Because we are running out of time on the March put I added an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally do not move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss






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