Option Investor
Newsletter

Daily Newsletter, Thursday, 11/17/2016

Table of Contents

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

Market Wrap

Houston, We Are Ready For Lift Off

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Economic data and Fed rhetoric point to a December FOMC interest rate hike, but how much will it be? I ask this because today's data is pretty strong and with Trumponomics on the way the signs are pointing to some robust growth next year. The CME's Fed Watch Tool gives a 90% chance of a quarter point hike but I think the debate may turn to the possibility of more. At any rate the news supported the market but did not inspire a morning rally, traders being cautious ahead of testimony from Janet Yellen. In her prepared remarks she says that a hike is appropriate "relatively soon" and cites many dangers of waiting too long. During the Q&A she seemed to favor a rate hike and went on to say that slow business investment "isn't our fault", echoing their long running stance that more than fiscal policy was needed to spur the economy.

International markets were basically flat in today's session, the Japanese Nikkei really flat with a gain/loss of 0.00%. Asian indices were mixed but very near to 0.00% regardless of gains or losses. European indices closed largely in the green with gains in the range of 0.20% to 0.60%.

Market Statistics

Futures trading indicated a flat to mildly positive all morning and was fairly steady concerning the earnings and economic reports released before the opening bell. Once the bell sounded trading was choppy for the first hour or so but took on a slightly more bullish tone once Yellen's testimony was concluded for the day. By 12:30PM a high near 0.5% for the SPX had been set and the market was pulling back a bit. By 3PM support had been met and index prices were back near or setting new highs for the day, where they remained into the close of the session.

Economic Calendar

The Economy

There was a raft of data today and it all points to more robust economic growth and higher interest rates. Starting it off, Initial Claims for unemployment. Initial claims fell an unexpected -19,000 to hit 235,000. Last week's figures were not revised, this weeks figure is a new low dating back to 11/4/1973. The four week moving average also fell, -6,500, to hit 253,000 and is on the way to testing its long term lows. On a not adjusted basis this week's claims fell -12.9% versus the expected -5.7% and are down -14.8% over this same time last year. This is the widest margin between this year and last year not adjusted claims in about 10 months. This data is good and consistent with labor market strength.


Continuing claims fell by a larger than expected -66,000 to hit 1.977 million, the lowest reading since 4/15/2000. The previous week was revised up by 2,000, the four week moving average fell by -19,250 and also set a new low. This metric continues to trend lower and is consistent with improvement in an already strengthening labor force.

The total number of unemployment claims rose by 23,556 to hit 1.806 million. This gain is in-line with seasonal trends and likely to continue into the end of the year. The important thing to note is that the total number of Americans on unemployment has been trending lower over the last 2 years and more, how high this rise takes us is far more important than that the total number of claims is on the rise. Looking at my chart, I'd say that it should top out between 2.5 and 2.75 million. On a year over year basis total claims are down -7.3%.


The Consumer Price Index came in at a seasonally adjusted +0.4% in October, in line with expectations. On a not adjusted basis CPI is up 1.6% over the trailing twelve month period. Housing(+0.4%) and gasoline (+7.0%) were the largest contributors. The energy index rose by 3.5%, food was unchanged. Ex-food and energy up 0.1% month to month but holding steady above the Fed's 2% target on a year over year basis.


Today's housing data, starts/permits/completions, is what is really exiting, I think anyway. Housing starts jumped 25.5% on a month to month and 23.3% year over year to the highest level in 9 years. There is a large margin of error but nonetheless a bit of positive news. Withe the data single family homes start also saw a rather large increase, 10.7%. Permits rose at a more modest 0.3% month to month and 4.6% year over year, completions 5.5% in the month and 7.2% year over year. Economist have long theorized that rising employment, rising wages, rising demand and low, low inventory of new and existing homes would/could/should spur new construction . . . it looks like they could be right. If so it will feed the cycle of labor market improvement/housing market improvement that has led to last month's surge in starts.

The Dollar Index

Today's data, Yellen's statements and testimony have strengthened the dollar. The Dollar Index surged more than 0.5% to hit a new long term high and looks like it could extend the gains. The risk now is that we may have entered a period of buy-the-rumor-sell-the-news, unless of course the FOMC surprises with more tightening than expected. Both indicators are bullish and on the rise, stochastic showing some strength. Next upside target, as projected by Mr. Fibonacci, is near $102.50 but I wouldn't expect to see it get there in a straight line. There is likely to be at least some consolidation or test of support now that the index is breaking out.


The Oil Index

Oil prices spent a choppy day trading around the $46 level, closing near the lows of the day near $45.50. Today's action was driven by the oh so trustworthy Saudi's who are said to be "optimistic" about a production cut deal. WTI was first up on the news, gaining about 1%, and then later faded as the reality of over-supply and the enormous size an OPEC cut would have to be to really do anything to change the situation. They may keep trying to talk the market up but I don't trust it, not until they actually cut production to a level below that of January,2016 and that cut shows up in the data.

The traders of oil companies seem to share my skepticism. The Oil Index began the day trading just above the upper boundary of the 8 month trading range only to take a dive from that level and confirm resistance. The index is range bound and likely to remain so until this issue with oil supply/production/demand and prices gets settled. Support is near the middle of the range, between 1,120 and 1,150.


The Gold Index

Gold prices sank with a strong dollar dragging them down. Spot gold fell roughly -1% to hit a new low just above $1,210. With FOMC outlook so strong, the dollar rising and economic data in support it seems likely that gold will continue to fall. The risk I think here is reverse to that of the Dollar Index, sell the rumor and buy the news. Support target is $1,200 for now, a break below there could spell doom for gold bulls.

The Gold Miners ETF GDX fell nearly -4% on today's action, confirming resistance at the 50% retracement level. This now brings a possible full retracement to the table but with no time horizon offered. The indicators remain bearish and weak, consistent with a fall from resistance within a down trend and suggestive of lower prices. First target is the current low near $20, a break below here would have a target near $16.50.


In The News, Story Stocks and Earnings

Walmart reported before the bell and continues the story that where one retailer does well, another isn't. The company beat on the bottom line, barely, but fell short on revenue and guided next quarter to a range just below consensus. While all major metrics showed growth currency conversion hurt net income by nearly -2% and will continue to weigh on earnings into the future. Shares of the stock fell -3.5% on the news.


Union Pacific made an announcement intraday that helped support the stock. The board of directors approved a 10% increase to the quarterly dividend and renewed a 120 million share repurchase program. Under the new terms the company is authorized to repurchase up to 15% of shares outstanding, or about $12.2 billion. Shares of the stock gained 0.85% in today's session and look set to move higher, possible upside target near $108.


This is a big week for retail earnings in general. As mentioned, the story is mixed. Some are doing well and some are not, some are giving good guidance and some are not and the disparity exists even between competitors. One example is Home Depot and Lowe's, the one beat expectations and the other fell well short of them. Ross reported after the bell and delivered strong results with weak guidance. Williams Sonoma the same. The sector as a whole though seems to be in decent shape and is supported by labor trends, rising wages and outlook. The XRT Retail Sector gained just over 1% in today's session, extending the Trump Rally to 11.5%.


The Indices

Today's action was relatively light but significant in it's bullishness. Price action was led by the NASDAQ Composite which gained 0.74% and came within a half point of the all time high. The index looks like it is on a run higher and the indicators both confirm. The only thing standing in the way now is the current all time high which could act as resistance. A break above this level would be bullish and could lead to gains in the short, medium and long term.


The Dow Jones Transportation Average made the second largest gain today, just shy of 0.50%. The index made a small gain, but it is the third day of consolidation at this level, following a brisk rally, and looks a lot like a bull flag. Both indicators are bullish and strong but consistent with this consolidation/test for resistance. A continuation of the rally would be bullish and could take the index to 9,600.


The S&P 500 comes in third today, a tenth of a point behind the transports. The broad market index created a small white candle and extending the Trump Rally. The index is fast approaching the current all time highs and is supported by the indicators. Both MACD and stochastic are both bullish and on the rise, stochastic reconfirming an earlier signal with %D Line bounce from the upper signal line. Upside target is the all time high, near 2,193, a break above here would be bullish and could take the index up to 2,350 in the near to short term.


The Dow Jones Industrial Average made the smallest gain today, only 0.20%, but looks as bullish as any of the major indices. The index has consolidated for 4 days at this level and appears to be waving the same bull flag as the transports. The indicators are strongly bullish, MACD consistent with a peak or consolidation, and support higher prices in the near to short term. The MACD peak isn't incredibly strong but it is a 1 year extreme and significant in that. A continuation of the Trump Rally from here could go as high as 19,800 in the near term and much higher in the short to long.


All signs point to go and on more than one level. The economy and the Fed are signaling rate hike in December, the FOMC and the data are signaling health and expansion in the economy, labor market health and housing market health are fueling each other, earnings growth is back and expected to expand and the charts are looking bullish. The first wave of what could be a long running bull market has crashed, all we need now is some follow through and it looks like it is on the way. The risk now is that the data will cool, the holiday shopping season will be weak and that earnings won't grow but those are bricks in the wall of worry, at least for now. I'm still cautious, I've been waiting for this a long time, but very optimistic, looking to buy on weakness and getting more bullish day by day.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Friday Frenzy

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's can be dangerous after a couple weeks of strong gains. Traders start looking at their implied profits and begin to worry about potential weekend events. Overbought Fridays can begin with a gain but then fade into the close as stop losses are hit and investors start thinking about cashing out their winners and moving into something that is not so overbought. I am recommending we not add to our risk until we see what Friday brings. The S&P futures are down -4 as I type this.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Nearing a New Record

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P gained another 10 points to put the index only 3 points below a new record high. There are two alternatives when the S&P hits 2,190.16 and a new record high close. The first would be a continued move higher where all the shorts still in denial frantically race to cover their positions and fund managers with any cash chase prices even higher to avoid being left behind.

The second alternative is that 2,190 turns into a double top sell signal and the market rolls over for a much needed period of profit taking.

Obviously, I hope it is the first option but we need to be prepared just in case option number two comes to pass. I raised some of the stop losses again.



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


AAPL - Apple Inc

The long call position was entered at the open.



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BULLISH Play Updates


AAPL - Apple Inc - Company Profile

Comments:

No specific news. Gene Munster of Piper Jaffray said the decline was a "rare opportunity" to buy a big cap tech stock.

Original Trade Description: November 16th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. Company description from FinViz.com.

Apple shares have been under pressure since topping at $118.25 before their Q3 earnings. Q4 estimates are rising thanks to the problems with the Samsung Note 7 that forced its removal from the market. Sales are said to be booming despite tight supply. Apple cannot make enough phones to fill the demand going into the holiday season and that suggests it should be a good quarter.

The company is also expected to announce some new products soon including "digital glasses." The rumors breaking about the next iPhone model to be announced next September already have Apple fanatics excited. Those include full frontal screens without any edges. This will allow full use of the phone's screen and allow for smaller phones overall sizes while keeping the screen sizes the same. There is rumored to be a 4.7 inch, 5.0 inch and 5.5 inch model. The 5.5 inch model is said to be an OLED screen with curved edges.

Regardless of the future new product rumors, several high profile funds have increased positions in the stock. Steve Cohen and Ray Dalio have reportedly increased their stakes.

Apple shares dipped to $104 on Monday and touched the 200-day average. That has been support/resistance dating back to September 2013. Since Monday's dip, which was seen as the last bout of climax selling for the big cap tech stocks, Apple shares have risen for two days.

Today, with Apple at $108, somebody bought 160,000 contracts of the December $115 calls. Even at the average price of 75 cents that was a $12 million dollar bet that Apple is going higher over the next 30 days. That takes some serious conviction. I am recommending we follow them only use the January option just in case they are wrong about the timing.

Earnings January 24th.

Position 11/17/16:

Long Jan $115 call @ $1.85, no initial stop loss.


FB - Facebook - Company Profile

Comments:

No specific news. Gene Munster of Piper Jaffray said the decline was a "rare opportunity" to buy a big cap tech stock.

Original Trade Description: November 12th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Position 11/16/16:

Long Feb $125 call @ $3.05, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Profile

Comments:

Excellent relative strength continued. The Russell 2000 is now up 9 consecutive days.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, see portfolio graphic for stop loss.


SMG - Scotts Miracle Grow - Company Profile

Comments:

No specific news. Shares continue their rebound from the dip last week.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Still testing resistance at $60. Investor Ken Heebner disclosed a purchase of 1,008,000 shares. The stock price still fell after fighting resistance at $60 for several days.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.


XBI - Biotech ETF ETF Profile

Comments:

We dodged a bullet this morning. The XBI declined at the open to $64.89 and our stop loss was $64.85. Shares rebounded to close at $66.52 and a gain of $1 for the day.

Original Trade Description: October 29th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

Position 11/8/16 with a XBI trade at $58

Long Jan $60 call @ $2.37, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

CERN - Cerner - Company Profile

Comments:

No specific news. Shares gained 66 cents. The constantly positive market is making it hard to profit from shorts. Anything not already up 5% is starting to look like a bargain.

Original Trade Description: November 14th.

Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. Company description from FinViz.com.

When the company reported earnings on November 1st they missed on all three metrics. Earnings of 59 cents missed estimates by a penny. Revenue of $1.18 billion missed estimates for $1.24 billion. They guided for Q4 earnings of 60-62 cents and analysts were expecting 65 cents. They guided for revenue of $1.23-$1.30 billion and analysts expected $1.32 billion. Bookings fell -10% to $1.43 billion and below Cerner's own guidance for $1.45-$1.60 billion.

Shares fell after the report then fell again after the election on uncertainty over what the health care changes will do to existing programs and services. With potentially sweeping changes to the sector and Cerner already under pressure the stock began to decline again.

Earnings Jan 31st.

With shares declining in a bullish market and setting a new 3-year low on Friday, I expect them to continue lower as the bullishness wears off.

Position 11/15/16

Long Jan $47.50 put @ $1.65, see portfolio graphic for stop loss.


VXX - VIX Futures ETF - Company Profile

Comments:

New historic low.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.


YUM - YUM Brands - Company Profile

Comments:

After the close YUM added $2 billion to their stock buyback program. Shares were up +$1.15 in afterhours. This is another oversold stock that is starting to look like a bargain to confused investors.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.




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