The monster move higher this morning had the Dow up +198 and the S&P +20 before the FOMC trap door opened beneath the market. We were having a great day with many of our positions at new highs before the market imploded. Unfortunately, monster reversals tend to crush investor sentiment and that means we could see another big move down on Thursday unless calmer heads prevail and the dip buyers come rushing back.
The market reversal was a knee jerk reaction to the Fed comments about a faster series of rate hikes and the potential for them to begin unwinding their $4.5 trillion in stimulus. We knew this was going to happen eventually and there are no immediate plans but it would be market negative when/if those plans actually appeared. The other problem was the desire by some Fed officials to increase the pace of rate hikes. While the unofficial Fed position is "gradual" with the likelihood of two additional hikes this year, the market is not prepared for a faster pace until the economy improves.
The biotech sector imploded with a -2% decline and that knocked the Nasdaq and Russell 2000 to large losses. The overnight session for the S&P futures opened negative and slipped to -4.50 at 8:30.
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.
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
AZN - AstraSenaca
The long call position was stopped out at $30.75.
PRGO - Perrigo
CLOSE THE LONG PUT POSITION
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
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Long and short equity trades = Premier Investor
BULLISH Play Updates
ADBE - Adobe Systems - Company Profile
No specific news. Traded at a new high until the FOMC minutes.
Original Trade Description: March 23rd.
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.
Everybody knows Adobe or at least they did 20 years ago. Photoshop and Illustrator were the key pieces of software everyone needed to create content for magazines and print media. What would Sports Illustrated have done without Photoshop for their Swimsuit Edition?
Fast forward to 2017 and Adobe has so many different pieces and partners that you cannot even describe them all. With annual revenue at $7 billion and growing they are rapidly outpacing everyone's earnings expectations.
Adobe is hosting its annual Digital Marketing Summit. At that event they announced several new partnerships and the integration of multiple "cloud" entities into one platform.
This description is from a Real Money article.
Headlining these moves is the creation of a common platform, known as the Experience Cloud for all of the products that to date had been grouped within Adobe's "Marketing Cloud." Going forward, Marketing Cloud will comprise one of three parts of Experience Cloud, and feature products such as Experience Manager (used to create and manage marketing content across platforms), Target (lets marketers personalize user experiences) and Social (used to run social media marketing campaigns).
Another part of Experience Cloud, known as Advertising Cloud, lets companies run and optimize search, display and video ad campaigns. It pairs Adobe's Media Optimizer search and display ad-buying tools with recently-acquired TubeMogul's video ad-buying platform. The third part, known as Analytics Cloud, combines the popular Adobe Analytics tool for uncovering insights from customer data with Audience Manager, a platform for creating customer/audience profiles.
Advertising Cloud has gotten a lot of attention, since it more firmly makes Adobe a player in an ad tech space where Alphabet/Google (GOOGL) and Facebook (FB) loom large, and where independent players such as The Trade Desk (TTD) and The Rubicon Project (RUBI) are also present. Adobe is pitching itself as an independent alternative to Google and Facebook, which of course are also giant sellers of ad inventory, while arguing that integrations between the three parts of Experience Cloud set it apart from both independent ad tech players and marketing software rivals such as Salesforce.com (CRM) and Oracle (ORCL).
In their earnings last week, they reported a 21.6% rise in revenue to $1.68 billion and the 12th consecutive increase in revenue from the Creative Cloud graphics software. Earnings were 94 cents and analysts had been expecting 87 cents and $1.645 billion in revenue. Adobe said annualized recurring revenue rose by $265 million to $4.25 billion. That is based on continuing subscription growth.
Earnings June 15th.
Shares spiked after earnings from $122 to $130 and then faded back to $125 over the next week. They have started to rebound again because finding 20% revenue growth in the market is hard to do.
Position 3/24/17 with an ADBE trade at $127.50
Long May $130 call @ $2.61, see portfolio graphic for stop loss.
ADP - Automatic Data Processing - Company Profile
Shares moved sharply higher after the ADP Employment number soared by 263,000. Every new job is money in ADP's pocket. The company also declared a quarterly dividend of 57 cents payable July 1st to holders on June 9th.
The option has declined to only 10 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain nothing by exiting now.
Original Trade Description: March 17th.
Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.
ADP reported earnings of 87 cents that rose 57% and beat estimates for 81 cents. Revenue of $2.99 billion rose 6.4% but missed estimates for $3.01 billion. They surprised analysts with revenue growth guidance for 2017 at 6%, down from prior forecasts of 7% to 8%. They blamed the revenue miss and lowered guidance on uncertainty over the elections and the impact of the Trump election. They also see a 1% revenue hit from the sale of their CHSA and COBRA businesses in 2016. They guided for earnings growth of 15% to 17% for the full year.
They currently serve 637,000 clients in 125 nations. The number of employees serviced rose 2.3%. PEO Services employees rose 12% to 452,000. These are "co-owned" employees managed by ADP for clients.
They repurchased 4.6 million shares at a cost of $422 million. They expect to repurchase $1.2-$1.4 billion in shares in 2017.
Earnings May 3rd.
ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.
ADP rallied nearly $1 on Friday in a weak market and closed at $105.12 and a new high. It was also just over the $105 strike. I am recommending we reach out to the $110 strike since it appears ADP is about to move higher after three weeks of consolidation. This option price is very cheap and there will be no initial stop loss.
Long May $110 call @ 75 cents, see portfolio graphic for stop loss.
AZN - AstraZenaca - Company Profile
No specific news. The stock broke support at $31 at the open to stop us out at $30.75 as the biotech sector imploded on the FOMC news.
Original Trade Description: March 2nd
AstraZeneca PLC engages in the discovery, development, and commercialization of prescription medicines for the treatment of respiratory, inflammation, autoimmune, cardiovascular, metabolic, oncology, infection, neuroscience, and gastrointestinal diseases worldwide. Its marketed products comprise Accolate, Bricanyl Respules, Bricanyl Turbuhaler, Daliresp, Duaklir Genuair, Eklira Genuair/Tudorza/Bretaris, Oxis Turbuhaler, Pulmicort Turbuhaler/Pulmicort Flexhaler, Pulmicort Respules, Rhinocort, Symbicort pMDI, and Symbicort Turbuhaler for respiratory, inflammation, and autoimmunity diseases; Atacand1/Atacand HCT/Atacand Plus, Brilinta/Brilique, Crestor2, Plendil, Seloken/Toprol-XL, Tenormin3, and Zestril4 for cardiovascular disease; and Bydureon, Byetta, Farxiga/Forxiga, Kombiglyze XR, Komboglyze, Onglyza, Symlin, Xigduo, and Xigduo XR for metabolic disease. The company's marketed products also include Arimidex, Faslodex, Iressa, Lynparza, Nolvadex, Tagrisso, and Zoladex, as well as Casodex, Cosudex for oncology disease; Fluenz/FluMist, Fluenz Tetra/FluMist Quadrivalent1, Merrem/Meronem2, Synagis3, and Zinforo4 for infection disease; Diprivan, EMLA, Movantik/Moventig, Naropin, Seroquel IR, Seroquel XR, Vimovo1, Xylocaine, and Zomig for neuroscience disease; and Losec/Prilosec and Nexium for gastrointestinal disease. It serves primary care and specialty care physicians through distributors and local representative offices. The company's pipeline includes 146 projects, of which 125 are in the clinical phase of development. It has collaboration agreements with Celgene Corporation; Immunocore Limited; Heptares Ltd.; Foundation Medicine, Inc., French National Institute of Health and Medical Research (Inserm); and FibroGen and Astellas, as well as a research agreement with Eli Lilly. Company description from FinViz.com.
In their recent earnings AZN reported $1.21 compared to estimates for $1.14. Revenue of $5.585 billion was in line with estimates.
Shares fell after the CEO warned that generic sales of Crestor were crushing sales of the original drug. Sales of Crestor were down 53% in the quarter. The company said because of the Crestor decline there would be low to mid single-digit declines in revenue in 2017 and low to mid-teens percentage decline in core EPS.
However, the company has a lot of drugs coming to market and several are "life changing" for cancer, respiratory and metabolic diseases. He said AZN was at an inflection point for the anticipated return to long-term growth built on a solid pipeline.
Earnings May 4th.
AZN just received approval from the FDA on a type-2 diabetes drug called Qtern, a once daily tablet for a disease that affects 29 million Americans. They also said Lynparza, a breast cancer treatment, proved to be more effective than chemotherapy in treating metastic breast cancer.
Investors are buying AZN for the pipeline and ignoring the decline in Crestor. They have had years for that decline to appear and now it is old news.
AZN is a slow mover and the options are cheap. If the market rolls over we will not have much at risk. If the market rebounds we should be in the money in a couple days.
Update 3/3/17: AZN entered into a deal with Sanofi to market MEDI8897 for the prevention of resipiratory synctial virus (RSV) in newborns and infants. AZN will get 120 million euros up front and 495 million upon the achievement of sales related milestones. All costs will be shared equally.
Update 3/13/17: Good article in the WSJ about AZN helped to power the stock through resistance. Read it here.
Update 3/14/17: AZN released results of a study where the ovarian cancer drug Lynparza sharply slowed disease progression. Women with the disease lived an average of 19.1 months on the drug compared to 5.5 months for those on a placebo. Another report by the Society of Gynecologic Oncology said the number was 30.2 months. This is a new class of PARP drug that blocks enzymes involved in repairing damaged DNA and thereby helping to kill cancer cells. This is the first drug of its class to be approved by the FDA and reach the market.
Update 3/17/17: AZN received its second rejection letter from the FDA on the ZS-9 drug intended to treat high potassium levels in the blood. The letter does not require any new trials. The first rejection was due to some manufacturing issues. There are no details on the second letter but analysts believe it is still related to manufacturing controls since there is no requirement for new drugs trials or data. AZN will resubmit a new application when the issues are corrected. Shares still posted a gain even with the rejection.
Update 3/20/17: AZN released the results of a study for type 2 diabetes showing that treatment with SGLT-2 inhibitors reduced the rate of hospitalization for heart problems by 39% and death by any cause by 51%. This was a study with a population of 300,000 across six countries. This could mean that AZN could apply to sell the drug under more than one diagnosis for different types of treatment.
Update 3/29/17: AZN said the FDA had accepted their NDA for Lynparza for ovarian cancer. The drug was also granted priority review status with a PDUFA date of Q3-2017.
Update 4/3/17: A drug spun off by AZN was found to be very effective in a drug trial for hot flashes. The MLE4901 drug was licensed to Millendo and AZN holds a stake in the drug and the company.
Closed 4/5/17: Long May $30 Call @ $1.10, exit $1.50, +.40 gain.
DIS - Walt Disney - Company Profile
No specific news and only a minor decline.
Original Trade Description: March 13th.
The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company's Media Networks segment operates cable programming services, including the ESPN, Disney channels, and Freeform networks; broadcast businesses, which include the ABC TV Network and eight owned television stations; radio businesses consisting of the ESPN Radio Network; and the Radio Disney network. It also produces and sells original live-action and animated television programming to first-run syndication and other television markets, as well as subscription video on demand services and in home entertainment formats, such as DVD, Blu-Ray, and iTunes. Its Parks and Resorts segment owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. This segment also operates Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and manages Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. The company's Studio Entertainment segment produces and acquires live-action and animated motion pictures for distribution in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. This segment also produces stage plays and musical recordings; licenses and produces live entertainment events; and provides visual and audio effects, and other post-production services. Its Consumer Products & Interactive Media segment licenses its trade names, characters, and visual and literary properties; develops and publishes games for mobile platforms; and sells its products through The Disney Store, DisneyStore.com, and MarvelStore.com, as well as directly to retailers. Company description from FinViz.com
Disney reported earnings of $1.55 on revenue of $14.78 billion. Analysts were expecting $1.49 and $15.26 billion. The comparisons to the year ago quarter were tough because of Frozen and Star Wars, The Force Awakens in that period. Star Wars was the first billion dollar film for the current fiscal year. The studio segment generated $2.52 billion in revenue. In January, after the December quarter ended, the company said it had more than $7.6 billion in global box office gross thanks to Star Wars: Rogue One, Captain America: Civil War and Finding Dory. CEO Bob Iger downplayed the concerns over ESPN saying they were very overblown because ESPN was still in demand by consumers, networks and advertisers.
Shares have recovered from the post earnings depression and are poised to continue making new highs, market permitting.
Update 3/15/17: Disney has upped its ownership to 85.7% and said it was going to buy out the rest of the investors and offered them a premium to the current value of their shares. Some investors are complaining. Euro Disney has significant debt and Disney said it would recapitalize 1.5 billion euros once it had full control. The actual park management loves the plan because it would put Disney back into control and provide it solid financial backing. This is just a temporary hiccup in the stock.
Update 3/20/17: Beauty & the Beast took in $170 million in ticket sales on its opening weekend. That was a record high for a family film. Disney has 11 other animated classics that it is planning to remake with human actors. The success of Beauty & the Beast will make theses 11 films a reality.
Mulan, Aladdin, Lion King, 101 Dalmatians, Little Mermaid, Pinocchio, Sword in the Stone, Peter Pan, Snow White and the Seven Dwarfs, Dumbo and a sequel to Marry Poppins.
Update 3/23/17: CEO Bob Iger agreed to a one-year contract extension until July 2019. He was previously going to retire in July 2018.
Update 3/24/17: Rumors and suggestions are starting to circulate suggesting Apple could buy Disney instead of Netflix in order to acquire a content generating machine and level out the earnings/cash flow. Currently Apple has very big fluctuations in revenue because of their cyclical production nature. If they owned a company like Disney they would have steady and predictable earnings. Disney has a market cap of $177 billion and Apple has $230 billion in cash. Liberty Media Chairman John Malone suggested if Disney spun off ESPN, Apple would buy Disney. That suggests an outright Apple purchase would also resort in an ESPN spinoff.
Update 3/30/17: Disney is relaunching Club Penguin, a game with hundreds of millions of users into Club Penguin Island. The original game had to be shutdown when browser technology began to limit what developers wanted to do inside the game. Now they are restarting in an app for Android and IOS. The basic game will be free but there is a $4.99 per month subscription fee it you want the advanced features. If only 100 million of the prior users signed up for the advanced package that would be $500 million a month in additional revenue. What kid cannot get dad to pay $4.99 per month for hours of peace and quiet?
Earnings May 9th.
Long May $115 call @ $1.83, see portfolio graphic for stop loss.
HLF - Herbalife - Company Profile
No specific news. The company revised its anticipated earnings date to May 4th. Shares erased Tuesday's decline at the open but gave back the gains in the afternoon.
Original Trade Description: March 15th.
Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The company's weight management product portfolio includes meal replacement products, protein shakes, drink mixes, weight loss enhancers, and healthy snacks; targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients; and outer nutrition products consist of facial skin, body, and hair care products. It also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. The company offers its products through retail stores, sales representatives, sales officers, and independent service providers. It operates in North America, Mexico, South and Central America, Europe, the Middle East, Africa, the Asia Pacific, and China. Company description from FinViz.com.
It is well known that Bill Ackman has a $1.5 billion short on Herbalife. He has had it for a couple years. It is also well known that Carl Icahn does not like Ackman.
Ackman took a major hit in Valeant when he announced on Monday he had closed his 27.2 million share position for a loss of more than a $3 billion. Ackman is hurting because several of his recent high profile positions have gone against him and investors are pulling out their money or at least sending him hate mail suggesting he get his act together. He is also holding a massive long position in Chipotle and the stock is moving lower.
On Monday, Ackman announced he closed the Valeant position. Immediately, Carl Icahn announced he was buying 372,000 more Herbalife shares and had asked the SEC for permission to acquire up to 50% of the company. He already owns 24.6%. This is killing the short position held by Ackman. Shares are rising on the Icahn news.
While this seems like the perfect long position where Icahn is going to force Ackman to cover, there is one big problem. On March 17th a movie called "Betting on Zero" which profiles Ackman's short thesis, will open in a national release. Remember, everyone has known about this movie for a year. It played in a few single venues and the stock did not decline. When it was picked up for national release about 6 months ago, everyone thought this would be the end of the company. However, in late 2016 the company settled with the FTC for $200 million on a probe into their marketing practices. They dodged another large bullet since the probe was also based on Ackman's short thesis.
Shares collapsed in late February on a guidance miss and bottomed last Friday. They have been rebounding since Icahn made his recent announcement.
I am recommending a short term strangle. The odds are good that the stock is going to be directional after the film begins showing on the 17th. Everyone will either say OMG and dump the stock or they will say, "so what is the big deal" and buy the stock. Since Icahn has $1.5 billion invested, you know he is going to be very vocal about it and will probably publicize any further purchases if the stock declines. We do not care which way the stock moves. We just need it to move significantly.
Long April $57.50 call @ $1.11, no stop loss.
Long April $52.50 put @ $1.36, no stop loss.
JACK - Jack in the Box - Company Profile
No specific news. Strong open to $103.14 but faded when the market imploded.
Original Trade Description: March 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 October 02, 2016, it operated and franchised approximately 2,255 Jack in the Box restaurants in 21 states and Guam; and approximately 699 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951 and is based in San Diego, California. Company description from FinViz.com.
JACK reported earnings of $1.18 but that missed estimates for $1.24. Revenue of $487.9 million rose 3.6% but missed estimates for $500.1 million. The earnings include a $2 million restructuring charge for facility closing costs and employee severance pay. Same store sales rose 3.1% for the quarter. This compared to the retail tracking group NPD SalesTrack which showed similar chains averaged 1.6% for the quarter. The average check also rose 4.9%.
JACK guided for Q1 same store sales to be flat to down -2% at Jack in the Box stores and down 1% to 3% at Qdoba stores. For the full year they guided for sames store sales growth of 2% at Jack stores and flat at Qdoba stores. They guided for earnings of $4.25-$4.45 and well below estimates for $4.71. Shares were crushed for a 10% loss.
Earnings May 24th.
However, in case you did not know there is a restaurant recession in progress. All the restaurant chains reported negative sales comps citing excessive competition and strong discounting. At JACK operating earnings rose 27% for the quarter and very few of the other chains were even close.
Like everyone else they blamed the delayed tax refunds for a sharp slowdown in sales in February. They also suffered from the record rainfall and flooding in California where the chain has a large presence.
They plan to open 20 to 25 new Jack in the Box stores in 2017 and 50-60 new Qdoba stores.
There is nothing wrong with this company that justified a 10% drop in the stock. Now that shares are rebounding, it should attract a lot of buyers expecting a return to the pre earnings levels.
Long June $110 calls @ $1.85. See portfolio graphic for stop loss.
SLCA - U.S. Silica Holdings - Company Profile
No specific news. Shares down hard on the Fed news after being up strongly at the open. Rising interest rates would be negative for the energy sector.
Original Trade Description: March 9th
U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.
Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.
Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.
Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.
U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.
They were crushed again this week when oil prices fell 7% in just two days to the lows for the year.
Oil prices are down on record inventory levels. Inventories rose by 8.2 million barrels to 528.4 million barrels on Wednesday. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.
If I could, I would buy a longer dated call and hold on to this position until fall. However, this newsletter is not a buy and hold strategy. I am going to recommend the June calls and we will exit before the May earnings.
Earnings May 24th.
The decline over the last two days knocked the stock back to the 200-day and support from November.
Update 4/4/17: SLCA rallied $1.24 on news they acquired a division of National Coatings that supplies roofing products with high thermal resistance and emittance. They reduce energy consumption and increase the durability of the roof. SLCA already supplies more than 260 products to industry with frack sand only one of those products.
Long June $50 call @ $3.20, see portfolio graphic for stop loss.
SYMC - Symantec - Company Profile
No specific news. Not a material move but support is holding.
Original Trade Description: March 16th
Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Security and Enterprise Security. The Consumer Security segment offers Norton-branded services that provide multi-layer security and identity protection on desktop and mobile operating systems to defend against online threats to individuals, families, and small businesses. Its Norton Security products help customers protect against complex threats and address the need for identity protection, while also managing mobile and digital data, such as personal financial records, photos, music, and videos. The Enterprise Security segment provides threat protection products, information protection products, cyber security services, and Website security offerings. Its products protect customer data from threats, such as advanced protection threats, malicious spam and phishing attacks, malware, drive-by Website infections, hackers, and cyber criminals; prevent the loss of confidential data by insiders; and help customers achieve and maintain compliance with laws and regulations. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, e-commerce platforms, distributors, direct marketers, Internet-based resellers, system builders, Internet service providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com.
You cannot even turn on your phone or PC without being subjected to dozens if not hundreds of potential attackers. Worse than stealing your ID and maybe being able to cause you grief down the road, the biggest attacks today are the ransom ware attacks. If you click on an email link or leave your PC unguarded by a security program, the hacker encrypts all your files and charges you a fee to get them back. All of your documents, pictures, bank account info, Quickbooks, etc, all disappear in a heartbeat. Even if you pay the blackmail, you still may not get them back.
Symantec is the leading cybersecurity vendor for personal computers and small business servers. Enterprise class operations will normally go with higher fee organizations like Fire Eye, Palo Alto Networks, etc. Symantec has the entire personal computer space to themselves. There are some competitors like PC Magic and McAfee but they are distant competitors. Since Intel partnered with McAfee an TPG in September, they are improving but Symantec has a big head start.
Because of the daily headlines on cyberattacks, more and more consumers are reaching out and deploying more sophisticated antivirus programs. It is not just for the closet geeks anymore. Everyone needs a real security program.
Strangely, the biggest risk is still the individual. In a recent study of 19,000 individuals by Intel Security they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.
Update 3/23/17: Morgan Stanley raised their price target from $33 to $37 saying Symantec's recent wave of acquisitions, including Blue Coat Systems and LifeLock, have improved Symantec's position with their rivals. In June, they bought Blue Coat for $4.65 billion to beef up their enterprise offerings. In February, they paid $2.3 billion for LifeLock to enhance their consumer security business. Morgan Stanley expects Symantec to make more acquisitions after their recent $1 billion debt offering.
Symantec should continue to emerge as the big winner in personal computer security.
Earnings May 3rd.
Long July $32 call @ $1.29, see portfolio graphic for stop loss.
VAR - Varian Medical systems - Company Profile
Varian named Gary Bischoping of Dell Technologies as CFO effective May 8th. He is replacing Elisha Finney, CFO for 18 years, when he retires.
Original Trade Description: February 18th
Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.
Varian reported lower than expected earnings on January 26th and shares fell -$6 to $87. Two days later, they spun off Varex and shares fell to $77 as a result of the separation. Since that split the stock has been moving higher and the rate of climb has accelerated over the last two weeks as they signed multiple new deals around the world.
Varian guided for earnings of $2.94-$3.06 for Q2 through Q4. For Q2 earnings are expected to be 84-90 cents on a 4% to 5% increase in revenues. The split at the end of January complicates apples to apples comparisons for Q1.
Earnings April 26th.
On February 13th the company announced competitive bid wins for six Shanghai hospitals. Varian is the leading manufacturer of medical devices and software for treating cancer and will provide its state of the art advanced radiotherapy technology to those hospitals. On February 14th, Varian's Eclipse treatment planning software was named the 2017 category leader for oncology treatment planning by KLAS. KLAS is an independent research firm specializing in monitoring and reporting on healthcare vendors.
Varian announced the sale of its advanced linear accelerators to Hungary's National Institute of Oncology.
Varian is on track to return to its pre-split price of $90 if the current rally continues. Because of its decline in February, I believe it offers some protection against a potential market decline.
Long May $85 call @ $2.75, see portfolio graphic for stop loss.
$VIX - Volatility Index - Index Description
The VIX spiked more than 9% on the FOMC news and with futures negative, we could see another dip at the open. Our exit target on the April position is $14.
With Congress going on nearly a two-week recess starting on the 10th, we will have a much less chance of a politically stimulated event. However, when they get back on the 21st, they only have 7 days to get a funding bill passed and raise the debt ceiling. The political sparing has already started.
While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.
Original Trade Description: Jan 26th
The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.
The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.
There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.
The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.
Long Apr $13 call @ $2.30, no stop loss, profit target $17.
Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Long July $14 call @ $2.55, no stop loss.
WDC - Western Digital - Company Profile
No specific news. Opened at a new high but faded with the market.
Original Trade Description: March 29th.
Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.
Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.
Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.
They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.
Update 3/30/17: Shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future.
Update 4/4/17: WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.
Earnings April 26th.
After two months of post earnings depression, shares closed back at $81.39 and a new high on Wednesday. I believe a breakout is imminent. Earnings are four-weeks away and we could see a pre-earnings ramp on strong expectations.
Long May $85 call @ $3.25, see portfolio graphic for stop loss.
BEARISH Play Updates (Alpha by Symbol)
AN - Autonation - Company Profile
No specific news. Shares still falling on constant stream of negative headlines about the auto industry and "peak auto."
Original Trade Description: March 27th.
AutoNation, Inc., through its subsidiaries, operates as an automotive retailer in the United States. The company operates in three segments: Domestic, Import, and Premium Luxury. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance services, and wholesale parts and collision services. The company also provides automotive finance and insurance products comprising vehicle services and other protection products, and arrangement of finance for vehicle purchases through third-party finance sources. As of December 31, 2016, it owned and operated 371 new vehicle franchises from 260 stores located primarily in metropolitan markets in the Sunbelt region of the United States. Company description from FinViz.com.
Autonation reported earnings of 95 cents that missed estimates by a penny. Revenue of $5.48 billion also missed estimates for $5.6 billion.
The company said demand for cars was falling while truck/SUV demand remained strong but under pressure. Gross profit margins on new vehicles fell from 5.6% to 5.2%. Used vehicle profits fell from 7.3% to 6.3%. The slowing demand for cars meant discounting was rising, which reduced another $100 per car from gains in the quarter. They see that pressure continuing in 2017.
Earnings May 5th.
Despite the positive economy, consumers are defaulting on the most car loans since the great recession. When interest rates were really low, banks and finance companies were giving auto loans to anyone with a pulse in order to write the higher interest loans. Now that the cars are 2-3 years old and people are tired of those cars, they are no longer making the payments. This puts more repossessed cars into the wholesale market and depresses prices.
Since more people are defaulting the credit criteria for a car loan has risen dramatically. Banks realized the error of their ways and they are making it harder to get approved. That reduces the number of people that can qualify for a loan and the number of people that can buy a car.
Auto prices have been on a permanent path higher but suddenly, very few people are willing to pay the outlandish prices for a car they will be underwater on the loan for the next five years.
This is causing strain on retailer profits. Shares of car dealers are in decline. Karmax (KMX) is widely expected to miss estimates when they report earnings on April 6th. By utilizing a put position on Autonation we can benefit from any disappointment by Karmax. Even if the dealers are not an apples and apples comparison, Autonation will be painted by the same broad brush that punishes Karmax.
Update 4/3/17: Competitor Carmax (KMX) was hit by a story in Barron's saying shares could fall 20% as charge offs increase for risky loans. KMX shares fell -4.3% and AN shares fell -3.2%. Carmax reports earnings on Thursday.
Long May $41 put @ $1.40, see portfolio graphic for stop loss.
PRGO - Perrigo Plc - Company Profile
No specific news. Shares opened strongly to $68 and then only declined back to flat despite a 2% drop in the biotech sector. If it did not decline today, it may not decline at all.
I am recommending we close this position a 22 cent loss rather than hold it and hope.
Original Trade Description: April 1st.
Perrigo Company plc, together with its subsidiaries, develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. The company operates through Consumer Healthcare (CHC), Branded Consumer Healthcare (BCH), Prescription Pharmaceuticals (Rx), Specialty Sciences, and Other segments. The CHC segment offers OTC products in various categories, including analgesics, cough/cold/allergy/sinus, gastrointestinal, infant nutritional, smoking cessation, animal health, feminine hygiene, diabetes and dermatological care, diagnostic, scar management, and other healthcare products, as well as vitamins, minerals, and dietary supplements (VMS); and contract manufacturing services. It serves retail drug, supermarket, mass merchandise chains, and wholesalers through sales force and industry brokers. The BCH segment provides branded OTC products in the natural health and VMS; cough, cold, flu, and allergy; personal care and derma-therapeutics; lifestyle; pain relief, nasal decongestants, and cold sore management; and anti-parasite areas, as well as offers generic pharmaceutical products. It serves pharmacies, drug, and grocery stores through pharmacy sales force, as well as a network of pharmacists. The Rx segment offers generic and specialty pharmaceutical prescription drugs in various dosage forms, such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, powders, controlled substances, injectables, hormones, women's health products, oral solid dosage forms, and oral liquid formulations; and ORx products. It serves wholesalers; retail drug, supermarket, and mass merchandise chains; hospitals; and pharmacies. The Specialty Sciences segment offers Tysabri to treat multiple sclerosis. The Other segment offers active pharmaceutical ingredients used by generic and branded pharmaceutical companies. Company description from FinViz.com.
Perrigo was already in trouble with investors for not filing its 10K and the Nasdaq had issued a default notice and posted them for delisting. The company said it was "investigating" revenue recognition practices for royalties derived from the drug Tysabri. Strike one for the stock.
In the middle of this revenue recognition problem they announced they had sold their royalty stream to RPI Finance Trust for $2.2 billion and some incentive bonuses to be paid later on December 31st 2018 and December 31st 2020. Investors did not like that either. Strike two for the stock.
There are valid reasons for selling a royalty stream. Companies spending a lot of money on research and marketing can sell royalties to fund that research. However, nobody buys anything unless they feel like they are going to make money on the deal and that means the seller is offering a large discount. When you are talking as much as $2.8 billion over the next three years, that discount had to be large in order to get a finance company to cough up the cash. Investors thought Perrigo was giving up too much to raise cash quickly. They also did not explain what they were going to do with the cash. That always makes investors nervous.
At the same time they announced the sale of the royalties, they said the CFO had resigned, effective immediately. That is never good.
The combination of no financials and the rush job to sell the royalties while they are in the middle of an investigation on those same royalties, smells bad. Shares closed at a 6-year low on Friday after they announced they closed the sale on Thursday.
They did not report earnings as scheduled on February 27th and there is no current schedule. That is strike three for the stock.
You may remember they were offered $195 per share by Mylan in 2015 and turned it down.
Long May $65 put @ $2.72, see portfolio graphic for stop loss.
SPY - S&P-500 SPDR ETF - ETF Profile
The S&P was up strongly by almost 20 points before the FOMC minutes were released. It gave back all those gains to close with a -7 point loss. The intraday low was 2,350 and potential support but the magnitude of the reversal "should" carry through the open on Thursday. We could easily see a retest of 2,340.
Original Trade Description: March 25th.
The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.
The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.
I believe if the market goes lower next week it could be the beginning of a major decline.
Long May $230 put @ $3.49, see portfolio graphic for stop loss.
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