Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/6/2016

Table of Contents

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

Market Wrap

Takeover Tuesday

by Jim Brown

Click here to email Jim Brown

The markets surged out of the gate this morning on a flurry of acquisitions and mergers.

Market Statistics

The initial opening gains were reversed into temporary losses but by 11:30 the major indexes were back in positive territory. This was a big cap rally day with the smaller cap indexes, S&P-600 and S&P-400 both closing fractionally lower after making new highs on Friday.

The reason the market went negative right after the open was a sharp drop in the ISM Nonmanufacturing report. This is the services sector of the economy and represents 88% of GDP and the headline number fell from 55.5 to 51.4 for August. This mirrored the ISM Manufacturing decline we saw last week. The consensus estimate was for a minor decline to 55.0 and they missed it by a mile.

This was the lowest level since January 2010. This was not a good report despite the fact it remained over 50.0 and slightly in expansion territory.

New orders fell from 60.3 to 51.4 and the biggest drop since 2008, employment from 51.4 to 50.7 and business activity 59.3 to 51.8. Imports fell from 53.0 to 50.5, exports from 55.5 to 46.5, order backlogs from 51.0 to 49.5 and inventories declined from 54.0 to 48.0. None of the components posted even a minor gain.

For the headline number this was the third decline in the last four months. Only nine industries reported growth compared to 15 in July. Thirty-two percent of respondents said their inventories were still too high based on current business conditions.

The decline in the components suggests there will be an even lower headline number for September and this close to 50 it is possible we could see a contraction in September.


The unexpectedly bad ISM report pushed estimates for a September rate hike even lower. On Friday, there was a 21% chance as indicated by the Fed Funds Futures and the CME FedWatch Tool. That declined to 18% today. There is almost no actual chance of a rate hike in September. The December meeting probability declined slightly from 54% to 52% and some analysts were rating the odds even lower than that.


The only positive report was the global Semiconductor Billings for July. Billings rose from +1.1% in June to +2.6% in July to $27.1 billion. This was the largest gain since September 2013. Billings in the U.S. rose 6.7% with China sales up +9.8%. Strangely, the Semiconductor Index was negative for the day. The index did make a new high on Thursday so this was simple profit taking.


The calendar for Wednesday is headlined by the Apple iPhone 7 announcement at 1:00 and the Fed Beige Book at 2:00. Apple's announcement will generate far more headlines and air time than the Beige Book.

Given the drop in the ISM Manufacturing, ISM services and anecdotal reports about the weak retail sector in August, I am not expecting good things from the Beige Book. However, the Fed officials that put it together always try to spin the news positive whenever possible.


Apple is expected to announce the iPhone 7 and possibly some other items as well. The iPhone 7 announcement is expected to be underwhelming. The "space gray" color option will be replaced by "dark black" regular finish and a glossy black finish called "piano black," which is expected to only be available in the high end models. The minimum memory size will be 32Gb and the upgrades will be to 128Gb and 256Gb. The phone will have a dual lens 12 megapixel camera system, one for wide angle and one for telescopic but they will both work together. This is expected to give you the capability of refocusing pictures after they have been taken. The phone will be more water "resistant" but not water "proof."

There will not be a headphone jack and that is sure to anger many people with high-end headphones that will now be almost useless. However, Apple is including an adapter that will plug into the "lightning" jack and allow you to plug your wired headphones into the adapter. That sounds very clunky and I am sure it is just a way to get everyone temporarily over the shock of no jack on the phone.

The new A10 processor is expected to be 2.4 Ghz and a big jump over the current A9 at 1.85 Ghz. It is also expected to be a drag on battery life. The camera's flash will have 4 LEDs, 2 warm and 2 cool for better color rendition.

Most consumers are likely to be unimpressed. If you are tuned into the Apple product family, you probably already know there will be a radically new iPhone released next year for the 10-year anniversary of the product. The people buying an iPhone 7 either do not know there is a big new redesign on the horizon or their current phone is on its last legs and they just have to have a new phone now.

Apple is also going to start overhauling the App Store next week. They are going to review all the existing apps and remove all the outdated apps plus the ones that do not conform to current requirements, have crashes in their history log, etc. In order to get back into the App Store, developers will have to bring apps current and then resubmit the apps to be reviewed again under the current rules. Quite a few of the oldies but goodies are going away.

Apple is also expected to release a new operating system that includes more "core" apps like News, Photos, and Messenger.

Apple shares were fractionally lower ahead of the event. Typically, Apple shares decline on the announcement. Active traders may want to pick up some puts on Wednesday morning. The September $107 puts with 10 days until expiration were $1.19 at the close. Apple shares could easily drop to $105 or so without any unexpectedly good news in the announcement.


Monsanto (MON) is closer to a deal with Bayer (BAYRY) but it is not yet agreed. Bayer raised their offer to $127.50 a share with Monsanto at $106 today. Monsanto confirmed the receipt of the "nonbinding" proposal and said it was in "constructive negotiations" with Bayer. What puzzles me is the lack of any material movement on Monsanto stock. Analysts believe the bid price would still have to be raised but that is even a better reason to own the company.

I looked at call options on Monsanto several times since the discussions have been in progress. Several weeks ago, the prices were high and the bid-ask spreads were $2-$3. Today the October at the money calls are $2.65/$2.93. If they a moving closer to a deal and the price is expected to go higher, then those calls are a bargain. The fly in the soup is the clause "a deal may not be concluded" in all the various press releases. That means the calls go to zero the instant a "no deal" headline crosses the wires. If you are willing to risk $3 on a potential $20 gain, then jump right in.


Danaher Corporation (DHR) said it was acquiring Cepheid (CPHD) for $53 a share in cash or roughly $4 billion including debt. Cepheid is a molecular diagnostics company that develops tests to screen for diseases. This will be a good fit for Danaher because they already have a testing business that produces $5 billion in annual revenue. Shares rallied 52% on the deal.


EOG Resources (EOG) said it was buying privately held Yates Petroleum and some of Yates subsidiaries in a deal valued at $2.5 billion in order to increase its assets in the Permian Basin. EOG will issue 26.06 million shares and pay $37 million in cash. The company will also assume $245 million in Yates debt and $131 million in cash from the Yates acquisition.

Yates has 1.6 million acres under lease. This raises EOG's position in the Permian to 574,000 acres. It doubles their Powder River acreage to 400,000 acres. It gives EOG a foothold in the Emerging Northwest Shelf of 150,000 acres and creates a combined 424,000 acre position in the Delaware Basin. The Yates acreage gives EOG immediate new inventory of 1,740 premium drilling locations. EOG defines "premium location" as a well that will produce a 30% return after taxes assuming a $40 oil price. EOG will add additional rigs to begin drilling these locations in 2017. Yates currently produces 29,600 boepd with 48% crude oil. They have proved reserves of 44 million barrels. EOG currently produces 551,000 Boepd.

EOG shares surges 7% on the news.


Enbridge Inc (ENB) is buying Spectra Energy (SE) for $28 billion in a stock for stock transaction. Spectra has more than 21,000 miles of pipeline in North America. Spectra shareholders will receive 0.984 shares of Enbridge for every share of Spectra they own. The merger will create the largest energy infrastructure company in North America with an enterprise value of $127 billion. The combined company expects to increase the dividend by 15% in 2017. The combined companies have $37 billion in pipeline projects in development. The transaction is expected to close in Q1.



Dave and Busters (PLAY) reported earnings after the bell of 50 cents compared to estimates for 44 cents. Revenue rose 12.4% to $244.3 million and beat estimates for $243.1 million. However, they cut same store sales expectations for the full year from 3.25%-4.25% to 2.25%-3.25%. Shares fell $3 in afterhours.


After the close AMD announced plans to sell $600 million in stock and $450 million in convertible senior notes. The combined proceeds of $1.02 billion will repay current borrowings and outstanding notes. Any remaining proceeds will be used for normal corporate uses. Shares fell back to $7 after the announcement.


Chipotle Mexican Grill (CMG) spiked in after hours when news broke that Bill Ackman's Pershing Square fund had acquired a 9.9% stake in the company. In an SEC filing, Pershing said Chipotle's shares were "undervalued, offered a strong brand, a differentiated offering, enormous growth opportunity and visionary leadership." Ackman needs to buy a winner after his losing positions in Herbalife and Valeant.


Casey's General Store (CASY) reported record earnings of $1.70 but that missed estimates for $1.79. Shares fell $10 on the news.


Twitter (TWTR) shares rose again on multiple stories being floated about a potential acquisition or even being taken private. There is a board meeting on Thursday and that has the trader sphere all in a twitter.


Market

It seemed like a normal trading day despite the lack of any volatility. Once the ISM dip was over the markets slowly drifted higher. Volume was very decent at 6.6 billion shares considering it was the day after a three-day weekend. The normal holiday hangover was minimal.

The Nasdaq Composite closed at a new high thanks to the FANG stocks. Every one of them posted strong gains on no news. It was as if portfolio managers sitting on a lot of cash decided to through a lot of money at the highly liquid stocks as an easy way to get invested quickly now that we are in the countdown period for their fiscal year end on October 1st.





The prior Nasdaq high was 5,262 and the index closed at 5,275.91 for a new record. It was also a new intraday high since the index closed at the high of the day. The biotech sector came roaring back to with a +93 point gain to provide support.

The Nasdaq is poised for a new leg higher but those fund managers will need to keep feeding the rally with their accumulated cash.




The S&P only added 6 points to 2,186 with the prior closing high at 2,190. It is very close but we saw twice in the last two weeks where the S&P spiked to 2,193 intraday only to fall back sharply. The S&P did not get the same lift from the FANG stocks as the Nasdaq but they did help. Support remains 2,175 and 2,150.


The Dow had a mediocre gain with the oil stocks helping after Saudi Arabia and Russia agreeing on Monday to form a joint venture to stabilize oil prices and possibly freeze production. Crude oil was up $1 on Monday and another 44 cents today. That lifted Chevron and Exxon into the top 5 list on the Dow. McDonalds and Boeing were the other two winners.

The Dow remains stuck below multiple levels of converging resistance at 18,625 and today's +46 points was lackluster. If Apple declines after the iPhone announcement, it will be a drag on the Dow on Wednesday afternoon.

Support remains 18,350 and 18,300.



The Russell 2000 only gained 1 point and the S&P-400 and S&P-600 were negative for the day. The small cap stocks were leaders late last week but it was a big cap tech day today. The Russell 2000 is still progressing higher but very slowly. As the market sentiment index, it is not showing any bullish conviction today.


While today's Nasdaq rally was nice, one day does not make a trend. Just because the portfolio managers threw some money at the FANG stocks today and lifted the Nasdaq, it does not mean they are going to do the same thing on Wednesday.

The Apple announcement could turn into a negative for the Dow if Apple shares sink. The Fed Beige Book could be bad news, but that may actually be another buy signal suggesting the Fed is on hold at least until December.

I would continue to refrain from being overly long just in case Tuesday's rally was a head fake. There is plenty of time to make new trades. There is always another trade waiting as long as you have capital to invest.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Rerun

by Jim Brown

Click here to email Jim Brown

Editors Note:

This recent position merits a rerun after an unexpected dip. I said last week I was going to add ITW back into the portfolio after we were stopped out on a temporary dip.


NEW DIRECTIONAL CALL PLAYS

ITW - Illinois Tool Works - Company Profile

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company distributes its products directly to industrial manufacturers, as well as through independent distributors. Illinois Tool Works Inc. was founded in 1912.

In late July, ITW reported earnings of $1.46 that rose 12.3% and beat estimates for $1.40. Revenue of $3.43 billion beat estimates for $3.40 billion. ITW guided for Q3 earnings of $1.42-$1.52 compared to analyst estimates for $1.46. The company raised full year guidance for earnings by 10 cents to the $5.50-$5.70 range. Analysts were expecting $5.51 per share.

Earnings Oct 19th.

The stock jumped from $111 to $115 on the news and then traded sideways for two weeks on post earnings consolidation. In early August, the shares started a slow climb to hit $119 and a new high. Every day I thought about recommending ITW but I kept waiting for a pullback.

After we were in the prior position the stock continued sideways with only a slightly positive bias. This consolidation was fin but we were stopped out on 9/1 when I raised the stop to close thinking the market was about to weaken.

On Friday shares spiked to $123.50 on no news. That spike was erased and shares drifted back down to the prior consolidation range of $119. If the market is going to rally, ITW is a strong growth stock that managers should want to own.

I am choosing an inexpensive strike to allow us to ride out any volatility.

Buy Dec $125 call, currently $2.00. No stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Big Cap Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap indexes posted modest gains with the Nasdaq Composite closing at a new high. The S&P 400 Mid-cap and S&P-600 Small cap indexes posted minor losses as market sentiment shifted to the big caps for at least one day.

There were several high profile mergers and the FANG stocks were on fire. This suggests portfolio managers were rushing to put some cash back into the market and the big cap FANG stocks were the easiest and most liquid stocks available.



Current Portfolio


Stop Loss Updates

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


Profit Targets

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




Current Position Changes


SMG - Scotts Miracle-Gro

The long call position was opened with a trade at $83.25.


AMP - Ameriprise Financial

The long call position remains unopened until a trade at $102.55.


FTNT - Fortinet

The long call position remains unopened until a trade at $37.50.


FTNT - Fortinet

The long put position remains unopened until a trade at $98.75.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


AKAM - Akamai Technologies - Company Profile

Comments:

No specific news. Six-week high close.

Original Trade Description: August 13th.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.

If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.

Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world, distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.

In the Q2 report, Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.

The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.

The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.

With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.

Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on Thursday. I believe they will recover their pre earnings level of $58, which just happened to be an eight month high.

Earnings are October 25th.

Position 8/15/16:

Long Nov $55 Call @ $2.46, see portfolio graphic for stop loss.


AMP - Ameriprise Financial - Company Profile

Comments:

No specific news.

The position remains unopened until a trade at $102.75.

Original Trade Description: September 3rd.

Ameriprise Financial, Inc., provides various financial products and services to individual and institutional clients in the United States and internationally. The company's Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage services primarily to retail clients through its advisors. Its Asset Management segment offers investment management and advice, and investment products to retail, high net worth, and institutional clients through unaffiliated third party financial institutions and institutional sales force. They offer U.S. mutual funds and their non-U.S. equivalents, exchange-traded funds, variable product funds underlying insurance, and annuity separate accounts; and institutional asset management products, such as traditional asset classes, separately managed accounts, individually managed accounts, collateralized loan obligations, hedge funds, collective funds, and property funds. They also offer annuities and various insurance products including disability, property, casualty and life insurance. The company was originally known as American Express Financial Corporation. They were founded in 1894 and employ more than 10,000 financial advisors.

In late July the company reported earnings of $2.23 and analysts were expecting $2.27. Revenue was $2.87 billion which missed estimates for $2.91 billion. The company has assets under management of $776.6 billion. The revenue and earnings miss was caused by exchange rate problems enhanced by Brexit and outflows of investor funds. The entire industry is struggling because investors are afraid of the market after a 7-year run and they are pulling funds out of investments in advance of the next recession. The current expansion is the third longest in history so investors are expecting it to end. It may be two quarters from now or two years from now but they expect it to end. Because this is an industry problem rather than a company problem, I believe the minor miss on earnings and revenue was actually positive. They also declared a quarterly dividend of 75 cents.

The company repurchased $444 million in stock in the quarter. They also closed an acquisition of Emerging Global Advisors in an effort to accelerate their Smart Beta efforts. This expands the Ameriprise foothold in the ETF marketplace. They recently filed for multiple new ETFs under the Smart Beta name. They first began offering ETFs of their own in 2011.

Earnings Oct 26th.

Shares fell sharply on the earnings miss from $101 to $85. Over the last month, they have recovered that loss and are back at the $101 level with resistance at $102.50. A break over that level targets $110 and then $115. Because of the potential for market volatility I am going to recommend an entry trigger.

With an AMP trade at $102.75

Buy Dec $105 Call, currently $3.10, initial stop loss $97.65.


CAVM - Cavium Inc - Company Profile

Comments:

No specific news. Still consolidating after the big gains.

Original Trade Description: August 27th.

Cavium, Inc. designs, develops, and markets semiconductor processors for intelligent and secure networks. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video, and connected home and office applications. The company's products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection, and deep packet inspection. In addition, it provides commercial grade embedded Linux operating systems, development tools, application software stacks, and support and services.

On August 17th, Cavium completes the $1.36 billion acquisition of QLogic. The acquired company has been around a long time and is a leading name in the Ethernet market. As of 2015, QLogic had a double digit market share lead over its peers. Pacific Crest believes Cavium will be able to reduce QLogic's manufacturing costs by 50% and this would help capture further market share gains on cost while expanding into congerged NIC and onboard LAN markets. That could produce another $1 billion in revenue.

Analysts raised estimates for Cavium revenue from $526 million to $957 million and earnings rose from $1.87 to $2.60.

Earnings Oct 26th.

Shares have been moving up since late June when the acquisition was announced. They plateaued at $55 over the last week but could be poised to move higher with resistance at $64.

Position 8/30/16 with a CAVM trade at $56.40

Long Nov $60 call @ $3.70. See portfolio graphic for stop loss.

Optional:
Short Nov $70 call @ 85 cents. See portfolio graphic for stop loss.

Net debit $2.85


FTNT - Fortinet Inc - Company Profile

Comments:

Called a visionary in Gartner's latest publication.

This position remains unopened until a trade at $37.50.

Original Trade Description: September 3rd.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. The company also offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

They reported earnings of 3 cents that beat estimates for 2 cents. Revenues rose 29.9% to $311.4 million and beat estimates for $304 million. Product revenues jumped 19% and services revenues surged 40%. During the quarter they added 9,000 customers to bring their total to more than 280,000. The number of transactions over $100,000 increased by 36% and deals over $250,000 rose 35% with deals over $500,000 rising 19%. Total billings rose 26% to $373.8 million. Gross profits rose 33.2%. They ended the quarter with $985 million in cash.

They guided for Q3 to earnings of 17-18 cents and revenue of $319-$324 million. Consensus estimates were expecting 7 cents and $318.9 million. They also raised full year revenue guidance to $1.28 billion which was also above prior estimates.

Earnings Oct 20th.

The company is growing rapidly and the future is bright. There is resistance at $37.25 from a gap down last October and it has failed at that level twice. I expect it to break through on the next attempt. That breakout will target $43-$45 and then the prior highs at $50.

With a FTNT trade at $37.50

Buy Dec $39 call, currently $1.80, initial stop loss $35.25


GRUB - GrubHub - Company Profile

Comments:

No specific news. New 52-week high close.

Original Trade Description: August 29th.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.

GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.

Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.

In Q2 net revenue rose +37% to $120.2 million topping estimates for $114 million. Earnings rose 35% to 23 cents and also beating estimates for 19 cents. They guided for the current quarter for revenue in the range of $116-$119 million and analysts expected $113 million. At the midpoint that would be another 37% rise.

GrubHub active diners rose 24% to more than 7.35 million. They added 382,000 in Q2. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.

The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.

An analyst at Moness Crespi Hardt upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly, they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.

Earnings Oct 27th.

Shares spiked to $39 on the earnings and then spent a month in post earnings depression, dropping back below $36 in mid August. The rebound has begun and Monday's close was a new 14-month high. Initial resistance is $41 and our best-case target is $47.

I am using the December option so there will be some expectation value when we close the position ahead of earnings.

Position 8/30/16:

Long Dec $42.50 call @ $2.71, see portfolio graphic for stop loss.


JACK - Jack in the Box - Company Profile

Comments:

No specific news. Minor pullback after the big surge on Friday.

Original Trade Description: August 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of August 10, 2016, it operated and franchised approximately 2,250 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951.

Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.

They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.

Earnings Nov 21st.

Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level and closed at a historic high on Monday. Today's decline was minimal given the weak market. The next time the market strings together several days of gains I expect JACK shares to break over $100 and start a new leg higher.

Because the market appears "toppy" and we are due for a dip, I am putting an entry trigger on the position. I am using the December options so there is some expectation premium when we exit before earnings.

With a JACK trade at $100.25

Buy DEC $105 Call, currently $4.00, initial stop loss $95.85
Optional: Sell short DEC $115 call, currently $1.10, initial stop loss $95.85
Net debit $2.90


MKC - McCormick & Co - Company Profile

Comments:

No specific news. Still stuck in a range along with the market.

Original Trade Description: August 20th.

McCormick & Company manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari brands, as well as Vahine brand in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; McCormick and Aeroplane brands in Australia; and Kohinoor brand in India, as well as through regional and ethnic brands, such as Zatarain's, Thai Kitchen, and Simply Asia. This also supplies its products under the private labels. This segment serves retailers, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound and other flavors to multinational food manufacturers and foodservice customers.

They reported Q2 earnings of 75 cents that beat by a penny. Revenue rose 3.8% to $1.06 billion and matched estimates. Consumer sales rose 7% to $641.8 million while industrial sales declined -0.7% to $421.5 million. For the full year they guided for earnings on a constant currency basis of $3.68 to $3.75 and analysts were expecting $3.74. Revenues are expected to be $4.34 to $4.43 billion but that was on the low side of estimates for $4.41 billion. They expect sales growth of 5% and EPS growth of 10%. They said they had more confidence they would come in at the high end of their revenue and sales guidance. However, that only matched expectations on earnings and was still light on revenue.

Earnings Sept 29th.

They have several challenges. The quit selling a low cost economy product in India and that reduced revenue. Indians have a very low standard of living and try to find the lowest cost products. The company also warned on currency issues. Total sales growth in Q2 was 3.8% but adjusted for constant currency that would rise to 6%.

They also had an issue with private label customers lowering prices for their products. That means a $2 box of private label pepper is competing with a $2.50 box of McCormick pepper. The company is actually fine with that and encourages private label distributors to adjust prices to whatever price point generates the most sales. Apparently, McCormick is perfectly happy growing market share at a reduced revenue rate. They are still making money on private label products and those products are capturing market share.

Shares sold off from $107 to $100 in the month following the earnings report. After putting in a double bottom at $100 the stock is moving higher and a break over $102 could see the gains accelerate. This is a good stable company paying a $1.72 annual dividend without a lot of drama along the way. I expect it to return to the highs, market willing.

position 8/22/16 with a MKC trade at $102.15

Long Dec $105 call @ $2.40. See portfolio graphic for stop loss.


OC - Owens Corning - Company Profile

Comments:

No specific news. Minor retracement from Friday's move.

Original Trade Description: August 24th.

Owens Corning produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabric and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction, and specialty applications.

For Q2 they reported earnings of $1.29 that beat estimates for 85 cents. Revenue of $1.55 billion also beat estimates for $1.47 billion. They repurchased one million shares in the quarter with 2.8 million left on the current authorization. They projected second half shipments of roofing to be flat after a 20% surge in the first six months of 2016. This is a seasonal business. Hail storms that cause roof replacements are heaviest in April-July.

Earnings Oct 26th.

Shares were very volatile after the earnings with a range of $50.88 to $58.69. After the volatility passed the stock found support at $53 and moved sideways for four weeks. This week shares have started to climb out of the consolidation and the stock closed at $54.81 on Wednesday and actually posted a gain in a weak market. That was a four-week high.

This is a low volatility stock and could be a safe location to wait out any market volatility over the next six weeks.

Position 8/25/16

Long Nov $55 call @ $2.35, see portfolio graphic for stop loss.


PAG - Penske Automotive Group - Company Profile

Comments:

Roger did not report any new buys on Tuesday but a news report said his total holdings rose to 32.2 million as of the end of August. Shares hit a new 8-month high.

Original Trade Description: August 10th.

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other. It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand. The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products. The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. At the end of 2015 they operated 355 automotive retail franchises with 181 in the USA, and 174 outside the US, primarily in the UK.

For Q2 they reported earnings of $1.11 and beat estimates for $1.08. Revenue rose 6.8% to $5.3 billion and also beating estimates for $5.1 billion. On a constant currency basis revenue rose 9.2%. They sold 115,106 vehicles in Q2. Gross profits rose 5.5% to $771.3 million. Cash on hand rose from $62 million to $97 million.

On July 27th Penske Automotive acquired an additional 14.4% interest in Penske Truck Leasing from GE Capital for $498.7 million. That raised their ownership to 23.4%. They expect this to add 25 cents to earnings on annual basis. In April a Penske subsidiary, Premier Truck Group acquired Harper Truck Centers, a commercial truck dealership in Ontario Canada. The acquisition will add $130 million in annual revenue.

On August 2nd Chairman and CEO, Roger Penske, acquired 710,121 shares for an averge price of $39.10 for a total value of $27,765,730. Since 2010 Roger had sold 501,326 shares in three transactions. That makes his recent buy even more important because if marks a change in sentiment.

Update: On August 10th CEO Roger Penske bought another 151,412 shares for $6 million. Roger Penske acquired another 50,000 shares on August 11th at an average price of $41.40. He is on a buying binge with new positions every 2-3 days. Just in August he has purchased nearly one million shares for roughly $40 million. That brings his total ownership to 31,066,574 shares. There are only 85 million outstanding. It looks like he may be taking the company private, one bite at a time.

Update: On August 22nd, Roger Penske bought another 300,000 shares at $42.55 for $12.8 million. No other news and the stock spiked 4%. That raises his holdings to roughly 31.5 million shares and there are only 85 million outstanding. His ownership is now over 37%. He has purchased more than 1.5 million shares in the last month.

Update: On August 29th, Roger Penske bought another 478,000 shares for $21,132,400. That lifts his ownership to roughly 32 million shares.

Update: On September 1st, Roger Penske bought another 187,764 shares worth $8.5 million.

Earnings Oct 27th.

PAG shares are about to break over long-term resistance at $40. Shares closed at $40.20 and that complicates the trade. If we buy the $45 call, which is only $1, the stock has to move $5 to really make a difference in the option price. If we buy the ITM call at $40, which is $2.95 we are paying an ATM premium that will decline as it moves farther into the money. However, for every $1 the stock raises the option will appreciate significantly. Currently the $35 call is $6.30. That is what we could expect the $40 call to be worth if the stock rises to $45. At the same time, the $45 call would rise from the current $1 to $2.95. Do we invest $3 to make $3 or do we invest $1 to make $2? I am going to recommend the $45 call because of the lower cost, lower risk and higher percentage return if PAG rises to $45. The risk is that it stalls somewhere between $40 and $45 and we never reach the ITM premium level before the Oct earnings. I believe this chart is worth the risk. I am going to put a $41 trigger on it to make sure it breaks through that resistance.

Position 8/11/16 with a PAG trade at $41.00

Long Nov $45 call @ $1.35, no initial stop loss.


SMG - Scotts Miracle-Gro - Company Profile

Comments:

No specific news. The position was triggered with a trade at $83.25 at the open.

Original Trade Description: August 31st.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas.

For Q2 they reported earnings of $2.16 compared to estimates for $2.08. Revenue of $994.1 million missed estimates for $1.04 billion. The company said miserable weather in April/May caused a significant decline in sales as gardeners and homeowners put off buying until June. The continuous rain turned everything green and that depressed fertilizer sales. Going into early April sales for the year were up +14% but after May they had declined -2%. There was also a shift of six days in the company's fiscal calendar.

The company raised earnings estimates for the full year to $3.75-$3.95 but reduced full year revenue forecast as a result of the spring slump. Shares soared on the guidance as the company was very bullish on the business.

They acquired a 75% stake in Gavita, a hydroponic products distributor. They also signed a definitive agreement to acquire Botanicare, a producer of fertilizer and hydroponic systems. They entered into a third transaction that has not yet been announced. They also increased their relationship with AeroGrow International, a consumer direct indoor gardening and hydroponic supplies business.

SMG is rapidly beefing up its lighting division, expanding on hydroponics and adding new products that will help indoor growers. They expect sales of hydroponics equipment to reach $250 million for the year. During the year, they also completed the sale of the Scotts LawnService business into a joint venture with Truegreen and received a $196 million cash distribution from the venture.

Along with earnings, they announced a $500 million share buyback in addition to the $400 million remaining on a prior authorization. "Our priorities for uses of cash are beginning to shift and we expect to begin a more aggressive share repurchase plan in the upcoming quarters."

Earnings Nov 3rd.

Shares spiked to $83 after earnings and moved sideways for the last month. After dipping back to $81 last week it looks like shares are preparing to move higher. A breakout over $83.25 would be a new high.

Position 9/6/15 with a SMG trade at $83.25

Long Dec $85 call @ $2.25, sese portfolio graphic for stop loss.


SWKS - Skyworks Solutions - Company Profile

Comments:

No specific news. Shares fell -1.61 on no news. This stopped us out for a minor gain at $72.75.

Original Trade Description: August 18th.

Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.

In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.

They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.

Earnings Nov 3rd.

CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.

Shares were up strongly on Thursday despite the weak market. They are poised to break over resistance at $72 and retest the $79 level. Because of the gain the option premiums are inflated so I am recommending a call spread. The October strikes will not be available until next week so we have to go with November.

Position 8/19/16 with a SWKS trade at $72.05

Closed 9/6/16: Long Nov $75 call @ $3.70, exit $3.84, +.14 gain.
Closed 9/6/16: Short Nov $82.50 call @ $1.66, exit $1.35, +.31 gain.
Net gain 45 cents.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow Jones ETF - ETF Profile

Comments:

Only a minor gain and still locked in the consolidation range. If we do not get a breakdown by Wednesday evening, I am going to close the position.

The six weeks after August option expiration are the most volatile of the entire year.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25


HSY - Hershey Co - Company Profile

Comments:

No specific news. Only a minor rebound.

The position remains unopened until a trade at $98.75.

Original Trade Description: September 3rd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hershey's, Reese's, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands. It markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores. The Hershey Company was founded in 1894 and is headquartered in Hershey, Pennsylvania. Company description from FinViz.com.

Mondelez offered $107 per share for Hershey in June. Shares spiked to $110-$115 in anticipation of an upgraded offer. After two months of discussions they finally got around to price. The Hershey board said it would need a lot higher price to get the deal approved. Mondelez thought about it and came back saying "maybe they could go to $115" if some conditions were met. Hershey replied that was not high enough and it would take at least $125 to continue the discussion. Mondelez immediately broke off negotiations saying there was no "actionable path" to a conclusion.

Hershey is struggling. Sales have been slowing as new competition slowly erodes market share. The Hershey Trust owns 80% of the voting stock so even if the Hershey board decided to consider an offer the trust would have to approve it along with the Pennsylvania Attorney General, which has power over the trust. There will not be another deal and the trust board is being reconstituted in 2017 as demanded by the AG so no major actions will be approved.

Hershey is going to have to deal with its own market share losses and slowing sales. This means the outlook for Hershey shares is negative. Last week Bank America reiterated an underperform rating with a price target of $100 and shares closed the week at $99. The outlook is underwhelming and the stock should decline back to the $90 range where it was stuck before the Mondelez offer.

Earnings Nov 1st.

With a HSY trade at $98.75

Buy Nov $95 put, currently $1.60. Initial stop loss $101.25.


IBM - IBM Corporation - Company Profile

Comments:

IBM and Box announced a new product called Box Relay and shares spiked at the open to $160.85 and with our stop at $160.50 for a minor loss of 85 cents.

Original Trade Description: Aug 23rd.

International Business Machines Corporation provides information technology (IT) products and services worldwide. The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company's Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources. The business was started in 1924.

This is not a bearish recommendation on IBM's business. This is a trading recommendation based on its chart pattern and the impact on the Dow. IBM has posted revenue declines for 17 consecutive quarters. The business format is changing and IBM is adapting. However, turning IBM around is like turning a VLCC tanker around. They carry 2 million barrels of oil and it takes miles to slow and turn because of their momentum.

IBM is making the turn and their cloud business is growing rapidly but it could take years before the restructuring is complete.

The problem for the market is that IBM is an expensive Dow component. At $160 per share it carries a lot of weight. After they reported earnings showing a big jump in cloud revenue and a major investment from Warren Buffett, the stock rallied to $163 where it stalled for the last two months. At Tuesday's close it was resting on support at $160 and as the Dow dropped to close at the low for the day.

The problem as I see it is this. There is no reason to buy IBM shares. They will post another revenue decline this quarter. That makes it a sell candidate for portfolio managers trying to raise cash for their end of year buys. It is also a high dollar stock so they get a lot of cash back when they sell it compared to selling a GE or a Pfizer. When you need to raise cash you sell the biggest stock with the least promising outlook.

The Dow is the weakest of the major indexes. If the market ever decides to correct over the next six weeks, you can bet the Dow will be the leader to the downside. That means IBM will likely be the leader inside the Dow because there is no real reason to own it when there are so many better stocks in rally mode.

I am recommending we buy the Oct $155 put with an IBM trade at $159. That will be below the support at $160 and potentially the start of a decline that could dip to $150 depending on the market.

Position 8/24/16 with an IBM trade at $159

Stopped 9/6/16: Long Oct $155 put @ $3.25, exit $2.40, -.85 loss.




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