Option Investor
Newsletter

Daily Newsletter, Sunday, 11/23/2014

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Another Week, Another Record High

by James Brown

Click here to email James Brown

Last week's market was driven by economic data overseas and foreign central bank action. Japan fell back into recession with a widely unexpected drop in GDP growth. Yet the U.S. market remains resilient. Surprise news that China's central bank cut rates help spur equities higher on Friday. Meanwhile the European Central Bank President Mario Draghi continues to issue dovish comments telling the markets he is ready to do whatever it takes to save the Eurozone. Stocks reacted with gains. The S&P 500 posted a +1.1% gain on the week. That's the fifth weekly gain in a row and the best five-week rally since April 2009.

Both the S&P 500 and the Dow Jones Industrial Average closed the week at new record highs. The NASDAQ extended its gains while the small cap Russell 2000 struggled and posted a weekly loss. Transports continued to rally and the Dow Jones Transportation Average is now up +22.8% for the year. The semiconductor stocks showed relative strength with the SOX index up +2.69% on the week, which boosted the index's 2014 gains to +23.9%. Biotechs rallied as well with a +2.7% weekly gain and a stellar +43.4% 2014 gain.

The U.S. dollar continued to rally as the Japanese yen and the EU's euro sinking lower. Commodities bounce in spite of the dollar's strength. Crude oil rose nearly +1% for the week and that inspired big bounces in the oil and oil service stocks. The OIX was up +3.3% and the OSX index was up +2.29%. Yet crude oil, the OIX, and the OSX all remain in negative territory for the year. Crude oil is down -22% in 2014 and closed near $76.50 a barrel on Friday.

Overseas Economic Data

We are going to look at overseas data first. China's HSBC manufacturing index slipped to a six-month low to close right at the 50.0 mark. That is the dividing line between growth and contraction. The latest data on China's real estate market showed house prices fell -2.6% following a -1.3% decline. The country has fallen to its slowest rate of growth since 1990. Leaders are despite to stop the slide.

On Friday the People's Bank of China (central bank) surprised everyone by cutting rates. They reduced the deposit rate by 25 basis points to 2.75% and they cut the one-year lending rate by 40 basis points to 5.6%. It was the first rate cut by the PBOC since July 2012.

China isn't the only Asian country that's dealing with a slowdown. Japan is now officially back in recession. Economists were expecting Japan to see +0.5% GDP growth in the third quarter. Unfortunately the latest report unveiled a -0.4% decline in Q3 GDP. That follows a -1.9% contraction in Japan's second quarter. Year over year GDP growth was -1.6% versus estimates for +2.1%. Japan's government has canceled a proposed tax increase scheduled for 2015 following these disappointing economic numbers.

Regular readers in this newsletter already know that Europe is really struggling with slow or negative growth. Last week's numbers didn't help. Germany's manufacturing PMI dipped from 51.4 to 50.0. France's manufacturing PMI fell from 48.5 to 47.6. The regional Eurozone manufacturing PMI declined from 50.6 to 50.4. Numbers below 50.0 suggest economic contraction and they're all declining.

ECB President Draghi is desperately worried the EU could fall back into recession (some of the EU countries are already in recession). Draghi spoke at a conference in Germany last week saying, "We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires." Draghi noted that inflation readings in the EU have fallen too low. The market is interpreting his words in the last couple of weeks to mean the ECB is on the verge of launching a more powerful form of QE to stimulate the economy. The next ECB meeting is about two weeks away.

Economic Data

Back home in the U.S. the economic data was mostly bullish. The headline consumer price index (CPI) was flat (+0.0%) while the core CPI rose +0.2%. The wholesale gauge for inflation, the producer price index (PPI), rose +0.2% in October and the core PPI was up +0.4%.

Real estate data was good. The weekly mortgage application index saw the applications to purchase a home surged +11.7%. The annual pace of existing home sales hit 5.26 million. That was better than expected and up from September's 5.18 million. The NAHB home builder sentiment index came in better than expected with a rise from 54 to 58.

We also had a few regional Federal Reserve surveys. The New York manufacturing index dipped below expectations at 10.2. Yet the Kansas City Fed manufacturing survey rose from 4.0 in October to 7.0 in November. The Philadelphia Fed survey was a huge surprise. Analysts were expecting the Philly Fed number to drop from October's 20.7 to 18.3. Yet November's reading surged to 40.8. That is the biggest one-month rise since 2009 and the highest level since 1980. Immediately market pundits called it an aberration and forecasted it will likely reverse sharply lower in December.




Major Indices:

The S&P 500 managed yet another again and continues to grow more overbought. The big cap index is up five weeks in a row. It's also up 243 points from the mid October low of 1820. That's a +13.3% move. Without a doubt this index is very overbought and due for a pullback. Yet part of the magic of the market is that stocks can always remain overbought (or oversold) a lot longer than anyone thinks is normal.

We can look for the 2040, 2020, and 2000 levels to act as possible short-term support. Overhead resistance is most likely 2080 and 2100. Year to date the S&P 500 has extended its gains to +11.6%.

chart of the S&P 500 index:

The NASDAQ continued to rally and managed to breakout past recent resistance in the 4700 area. These are new 14-year highs for the tech-heavy index. The 4750 and 4800 levels are likely overhead resistance. Very short-term support would be 4700 but I would focus on 4600 as the support level to watch. Year to date the NASDAQ is up +12.8%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has not been seeing the same strength as its large-cap peers. The $RUT actually posted a loss for the week. Although if you're feeling optimistic it did bounce from the 1150 level and Thursday's session was technically a bullish engulfing candlestick reversal pattern.

The 1185-1190 zone has turned into new resistance. If the $RUT can breakout higher it could race toward its 2014 highs in the 1210-1215 area. The $RUT is definitely underperforming the large cap indices with a +0.7% gain in 2014.

chart of the Russell 2000 index



Economic Data & Event Calendar

The last trading week for November 2014 will see more data on the U.S. housing market. Yet the only economic event that might be considered a market mover is the U.S. Q3 GDP estimate that comes out on Tuesday. Economists are expecting the previous Q3 estimates of +3.5% growth to be revised down into the 2.9% to 3.1% range.

The real events for the week are likely overseas. Monday, November 24th is the deadline for the Iran nuclear talks. Thursday is the next Organization of the Petroleum Exporting Countries (OPEC) meeting.

The Iran talks will ratchet up the geopolitical tensions for the market. These talks have been going on for years and Iran always delays and there is never any real progress because the country wants nuclear weapons. Meanwhile the P5+1 nations (United States, Russia, China, United Kingdom, France, and Germany) do not want Iran to get nuclear weapons although Russia and China are dubious allies in these talks, especially now with Russia's aggression in the Ukraine.

As you might expect the OPEC meeting could influence the price of crude oil. Thursday's meeting is to discuss production quotas. Do they cut production to try and lift oil prices from four-year lows or do they leave production unchanged and try and starve out the shale-oil industry inside the U.S.?

Bloomberg polled 20 energy analysts and they are evenly split down the middle on what OPEC will do. They would dearly love to price the shale-oil producers in the U.S. out of the market but to do that they need to see oil prices fall even farther. There is talk oil could drop toward $60 a barrel. Of course if they don't cut production these countries will continue to lose billions of dollars from depressed oil prices.

Let's not forget that the U.S. markets are closed on Thursday for the Thanksgiving holiday and they close early on Friday at 1:00 p.m.

Economic and Event Calendar

- Monday, November 24 -
Iran nuclear talks deadline

- Tuesday, November 25 -
U.S. Q3 GDP estimate
Richmond Federal Reserve regional survey
Case-Shiller 20 city home price index
Consumer Confidence survey

- Wednesday, November 26 -
Durable Goods Orders
Personal Income & Spending
Chicago PMI
New Home Sales
Pending Home Sales

- Thursday, November 27 -
OPEC meeting
U.S. market closed for Thanksgiving

- Friday, November 28 -
U.S. markets close early (at 1 p.m.)

Additional Events to be aware of:

December 17: FOMC meeting

Looking Ahead:

As we look ahead the economic picture is unchanged. We already knew that Europe was slowing down and on the verge of recession. We already knew that China was slowing down and growing at its slowest pace in years. We already knew that Japan was struggling and that's why the Bank of Japan announced its record-breaking stimulus program on Halloween.

The U.S. economy continues to look like the best house in an ugly neighborhood. The U.S. market's new highs illustrate that global investors are aware of this and putting their money into the U.S. However, we are severely overbought with the U.S. stock market in a nearly non-stop rally from its October lows (with the exception of the small cap Russell 2000).

On the plus side we have central banks willing to keep the QE party going. The U.S. Federal Reserve has officially ended its QE program but it's still replacing any U.S. bonds they own as they expire, which is an under the radar form of QE. We have Japan desperately trying to stimulate their economy with massive QE. China just cut rates. Now we expect Europe to announce stronger QE measures.

What worries me now is the geopolitical picture, which has been quiet lately. Fighting continues in Ukraine between Russia, Russian-backed rebels and Ukraine forces. We just don't see it on the front page any more. Russia is growing increasingly belligerent. The North Atlantic Treaty Organization (NATO) has had to scramble their military jets more than 400 times this year to counter Russian incursions into Europe's airspace. That's up more than 50% from last year. As we move deeper into winter, a winter that will likely be as bad or worse than last year's extremely cold winter, we could see Russia use their natural gas exports as an economic weapon against Europe.

Another challenge is the Iran nuclear talks I mentioned earlier. The head of the United Nation's nuclear agency, the International Atomic Energy Agency (IAEA), said that Iran will not explain their constant exploration toward nuclear weapons. Iran has been pulling the wool over the eyes of the West for years and they're not going to stop now. What's scary is the country's leaders have already said they will attack Israel once they get nukes. Israel believes them and this weekend an article in the Jerusalem Post said the Israeli government is once again considering military action aimed at Iran's nuclear facilities. If we see fighting break out over this issue it's going to turn the hostilities in the Middle East up to eleven*! Fortunately for investors the U.S. market has been ignoring geopolitical issues all year long so there is no reason for it to start now although if Israel bombs Iran that could change the game.

Not to sound like a broken record but on a short-term basis the U.S. large cap indices are overbought and way overdue for some profit taking. The good news is that any dip should be bought. The average hedge fund is still down -1% in 2014. That's amazing when you consider the S&P 500 is up +11.6% this year. What's more amazing is that the average hedge fund has underperformed the U.S. market six years in a row. What that means for us is money managers will be chasing performance throughout the rest of this year.

We only have about 31 shopping days left until Christmas. Big name retail stocks like Wal-Mart (WMT) and Target (TGT) have been soaring recently. According to CNBC personality Jim Cramer there is a bull market in shoe stocks as Nike (NKE) leads the industry higher. There seems to be a generally optimistic tone as we head into the holiday shopping season. However it will still be a war among the retailers fighting for every consumer dollar. Williams Sonoma (WSM) and Best Buy (BBY) both noted that this season will be very promotional (a.k.a. heavily discounted) and it will be a tough environment for retailers, especially as they fight with online rivals.

Speaking of online shopping, the media has convinced us that Cyber Monday, the Monday after the Thanksgiving weekend (and after Black Friday), is the best time to buy stuff online. Yet that may not be true. According to Adobe's 2014 Digital Index Online Shopping Forecast the best day might be Thanksgiving itself. Adobe's forecast estimates that prices will be discounted 24% on Thanksgiving versus 23% on Black Friday and only 20% on Cyber Monday.

Happy shopping and count your blessings! We have much to be thankful for.

~ James


* "up to eleven" is a Spinal Tap reference.





Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Stocks continued to rally last week. Investors shrugged off news that Japan fell back into recession. A surprise rate hike by the Chinese helped spur the U.S. market to new highs.

RH and UA have graduated from the watch list to the play list below.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Bullish Bias But Short-Term Overbought

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(November 23, 2014)

The U.S. market continues to rally. Investors are ignoring slowing growth in Europe, Japan, and China. A slowdown overseas makes the U.S. market look more attractive. Markets also love QE. While QE might be officially over in the U.S. it's warming up in Europe and Japan. Now as a bonus we have China lowering rates.

The outlook for U.S. stocks is bullish but on a short-term basis the market is very overbought. We really need to see a pullback. That's why I hesitate to add new trades tonight.

This past week our watch list was successful and add two candidates RH and UA to our active play list. Tonight I'm adding RTN as a new watch list candidate.

Radar Screen:
Here is a list of stocks on my radar screen. These have potential to be LEAPS trades down the road if the right entry point presents itself. In no particular order:

WFC, SBUX, AA, COST, NKE, NOC, APD, COL, LRCX, MON, NSC, CVS, MA, ESRX, and TM



Play Updates

Stocks Continue To Drift Higher

by James Brown

Click here to email James Brown

Editor's Note:

We want to exit our DVA trade on Monday, November 24th.


Closed Plays



None. No closed plays this week.




Play Updates


Checkpoint Software Tech. - CHKP - close: 76.72

Comments:
11/23/14: Thanks to the rally on Friday CHKP managed to stretch its gains to six up weeks in a row. The stock spent most of last week consolidating gains in a sideways churn between $76.00 and $77.25.

The strength is encouraging but CHKP still looks a bit overbought even after consolidating sideways a few days. I'm not suggesting new positions at this time.

If you're holding the 2015 calls you might want to consider an early exit if CHKP nears $80.

NOTE: The 2015 January calls only have about eight weeks left.

Earlier Comments: September 14, 2014:
CHKP is another technology stock and it is similar to AKAM in that both have beaten earnings estimates every quarter this year and both are trading near 14-year highs. While AKAM facilitates Internet traffic, CHKP seeks to guard its clients against Internet hazards.

The company describes itself as, "the worldwide leader in securing the Internet, provides customers with uncompromised protection against all types of threats, reduces security complexity and lowers total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology."

"Today, Check Point continues to develop new innovations based on the Software Blade Architecture, providing customers with flexible and simple solutions that can be fully customized to meet the exact security needs of any organization. Check Point is the only vendor to go beyond technology and define security as a business process. Check Point 3D Security uniquely combines policy, people and enforcement for greater protection of information assets and helps organizations implement a blueprint for security that aligns with business needs. Customers include tens of thousands of organizations of all sizes, including all Fortune and Global 100 companies. Check Point's award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft."

It feels like a week doesn't go by that we don't hear about another major hacking scandal in the business world. It's not going away and corporations have to constantly update their cyber defense. CHKP has been working cyber security since 1993.

Shares of CHKP spent much of this year consolidating gains from 2013. However, the last week of August produced a crucial breakout past resistance near $70.00. Tonight I am suggesting a trigger to buy calls if CHKP can close above $72.50. We'll start with a stop at $69.45. The point & figure chart is bullish and currently forecasting an $89.00 target. We'll start with a long-term target in the $95-100 zone (our target to exit the 2015 calls will be lower).

- Suggested Positions -
OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 1.35*
symbol: CHKP150117C75 2015 JAN $75 call - current bid/ask $2.90/3.10

- or -

OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 4.80*
symbol: CHKP160115C80 2016 JAN $80 call - current bid/ask $5.90/6.30

10/27/14 trade begins. CHKP opens at $72.56
10/24/14 CHKP meets our entry point requirement with a close at $72.70. Trigger was a close above $72.50
10/05/14 Friday's move might signal the end of the pullback.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Current Target: CHKP @ 95.00-100.00 zone
Current Stop loss: 69.45
Play Entered on: 10/27/14
Originally listed on the Watch List: 09/14/14


China Mobile Limited - CHL - close: $62.55

Comments:
11/23/14: It was a bumpy ride for CHL bulls last week. Shares retested their 50-dma and almost hit $60.00 before rebounding. The Chinese government's new attempts to stop the slowdown in their economy should be bullish for CHL. Meanwhile Barclay's said CHL is on track to hit 70 million new 4G subscribes by year-end.

The $63.25 area has been recent resistance. Investors may want to wait for CHL to close above this level before initiating new positions.

Earlier Comments: November 9, 2014:
China Mobile (CHL) is the boasts both the largest mobile network on the planet and the biggest mobile customer base. At the end of the third quarter they had 799.1 million customers. Of that 244.4 million are 3G users and 40.9 million are new 4G users. That last number is significant since the Chinese government just approved 4G licenses this year. CHL had zero 4G customers at the start of 2014 and only 13.9 million at the end of the second quarter.

CHL reported earnings on October 20th and the results were worse than expected. Q3 revenues were down -2% from a year ago to 156.6 billion yuan. That was below analysts' estimates. Yet profits managed to beat expectations at 24.9 billion yuan. The company said that the big drop was due to a sharp decline in SMS (text message) usage. This is due to strong competition in the SMS market from other companies like Tencent's WeChat application. A new VAT tax that started in June also hurt results.

Investors seem to be ignoring CHL's recent earnings miss and focusing on their 4G growth. The company has been investing heavily in its 4G networking and it seems to be paying off. The shocking growth of CHL's 4G customer basis has analysts raising estimates. One firm was estimating 50 million 4G customers this year but have since raised that to 70 million. They also expect CHL will add another 130 million next year to end 2015 at 200 million new 4G customers. This should boost the company's profitability since 4G customers use more data.

The stock bounced near $56.60-57.00 last month, which was a 50% retracement of the July-September rally. The lows in October look like a bullish double bottom and the point & figure chart is bullish and forecasting a long-term target of $108.

Tonight I am suggesting we wait for CHL to close above $62.65 and buy calls the next morning with a stop loss at $56.40. However, I am suggesting we keep our position size small. CHL is a foreign company and its stock will gap open, up or down, every morning as it adjusts for trading in the Chinese markets.

- Suggested Positions -
NOV 11, 2014 - entry price on CHL @ 61.39, option @ 2.80
symbol: CHL160115C70 2016 JAN $70 call - current bid/ask $3.00/3.40

11/11/14 trade begins. CHL gaps down at $61.39
11/10/14 CHL closes at $62.68, above our trigger of $62.65
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined (likely the $75-85 range)
Current Stop loss: 56.40
Play Entered on: 11/11/14
Originally listed on the Watch List: 11/09/14


DaVita Healthcare Partners - DVA - close: 74.54

Comments:
11/23/14: I warned readers that we could see DVA fill the gap and reverse lower. Such a move is bearish. That's exactly what we are seeing. The stock has been underperforming the market the last several days. Friday's move looks ugly as well with a nice reversal off its gap open higher.

Technically shares of DVA should find support near its rising 150-dma currently in the $72.50 area. The stock does still have a bullish trend of higher lows. Yet the volatility and relative weakness seem like a warning signal to bullish investors. We can blame the volatility on earnings but the relative weakness remains an issue.

Tonight I am suggesting an immediate exit on Monday morning, November 24th to close this trade. More aggressive investors could always keep the play alive and just move the stop closer to the trend of higher lows.

- Suggested Positions -
(Closed on October 16, 2014)
JUN 04, 2014 - entry price on DVA @ 71.44, option @ 2.65*
symbol: DVA150117C75 2015 JAN $75 call - exit $1.65** (-37.7%)

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $4.10/5.60

11/23/14 prepare to exit on Monday, November 24th
11/16/14 new stop @ 72.40, seeing DVA fill the gap and roll over is bearish.
11/07/14 DVA gapped down following earnings the night before
11/02/14 new stop @ 71.40
10/16/14 DVA hit our stop at $71.75 to close our 2015 calls.
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 adjusting stop loss strategy:
Use a stop at $71.75 for the 2015 calls.
Use a stop at $69.85 for the 2016 calls.
08/24/14 new stop at $69.85
07/31/14 DVA reports better than expected bottom and top line results
07/20/14 new stop @ 69.00
06/04/14 trade begins. DVA opens at $71.44
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/03/14 DVA closed at $71.47, above our trigger of $71.25
Option Format: symbol-year-month-day-call-strike

Current Target: DVA @ 85.00
Current Stop loss: 71.40 for the 2016 calls,
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14



FedEx Corp. - FDX - close: 174.46

Comments:
11/23/14: FDX continues to deliver gains. After consolidating sideways for almost two weeks in the $170-173 zone the stock broke out on Friday. This is a new record high for the stock and shares are up six weeks in a row.

On a short-term basis I would expect FDX to retest $173 as new support. More conservative investors may want to raise their stop loss. Keep in mind that FDX could be volatile after they report earnings on December 17th.

I am not suggesting new positions at this time.

Earlier Comments: October 19, 2014:
FDX is one of the largest package delivery companies in the world. The company's most recent earnings report showed improvement. FDX beat Wall Street's estimates on both the top and bottom line. Profits were up +24% from a year ago and it was the second quarter in a row that FDX beat estimates.

Management said their 2015 fiscal year was off to a great start. The company has enough demand they have recently raised prices on some services.

The plunge in crude oil and fuel prices is a huge tailwind for FDX. As a transportation company the cost of fuel is a major expense. With oil at four-year lows it should be a boost to FDX margins.

FDX should also benefit from the growth in online shopping. Last year there was a huge last minute surge in Christmas sales that needed to be delivered quickly by companies like UPS and FDX. This year online shopping is expected to grow +17%. That's another bonus for FDX.

The stock has been volatile thanks to the market's big swings but FDX is still respecting its long-term bullish trend of higher lows.

Tonight I am suggesting we wait for a close above $158.00 and buy calls the next morning with a stop loss at $148.50.

- Suggested Positions -
OCT 22, 2014 - entry price on FDX @ 160.74, option @ 12.65*
symbol: FDX160115C170 2016 JAN $170 call - current bid/ask $18.50/19.00

11/09/14 new stop @ $158.00
11/02/14 new stop @ $154.00
10/22/14 trade begins. FDX opens at $160.74
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered with a close at $159.88, above our trigger of $158.00
Option Format: symbol-year-month-day-call-strike

Current Target: FDX @ TBD
Current Stop loss: 158.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Humana Inc. - HUM - close: 136.42

Comments:
11/23/14: HUM offered a mercurial performance last week. The midweek rally failed at resistance near its highs and shares retested support in the $135 area. More conservative investors might want to consider a new stop closer to the November low near $129.30.

I am not suggesting new positions at this time.

Earlier Comments: October 19, 2014:
HUM is in the healthcare sector. The company offer health insurance. Right now that's a good spot to be as the system irons out the kinks in the Affordable Care Act (a.k.a. Obamacare). Thus far Obamacare has been a boon to insurers as more and more Americans sign up for health insurance.

Shares of HUM did see a pullback from its recent highs near $136 down to $121 (a -11% correction) but now HUM is on the rebound. Even with the pullback HUM still has a long-term bullish trend of higher lows. The point & figure chart is bullish and suggesting a long-term target of $173.00.

Tonight I am suggesting we wait for HUM to close above $130.25 and then buy calls the next morning with a stop loss at $119.75. I do want to warn you that HUM is scheduled to report earnings on November 7th but several of its peers (AET, CI, and WLP) will report earnings in the next two weeks (before the end of October). Their quarterly results and guidance (good or bad) could influence shares of HUM.

- Suggested Positions -
OCT 22, 2014 - entry price on HUM @ 133.75, option @ 13.25*
symbol: HUM160115C140 2016 JAN $140 call - current bid/ask $13.70/16.00

11/09/14 new stop @ 124.00
10/22/14 trade begins. HUM opens at $133.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered. HUM closed @ 133.27, above our suggested entry above $130.25
Option Format: symbol-year-month-day-call-strike

Current Target: HUM @ TBD
Current Stop loss: 124.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Restoration Hardware - RH - close: 84.74

Comments:
11/23/14: RH is a watch list candidate that has graduated to our active play list. The plan was to wait for shares breakout past resistance and close above $84.25 and then buy calls the next morning.

The stock did breakout like we wanted but the breakout rally was a lot stronger than we expected. Williams Sonoma (WSM) reported earnings on Wednesday night and their results helped send RH higher on Thursday. RH soared to $87.48 at Thursday's close. That met our entry trigger. Now combine the Chinese central bank move on Friday morning and the U.S. market spiked higher with a lot of stocks gapping open. RH gapped open at $88.93 on Friday morning, our new entry price. Profit taking hit and RH plunged back toward $85.

With a long-term perspective these volatile two-day moves shouldn't matter but it's frustrating when a trade starts on the wrong foot. If RH bounces from here I would be tempted to buy calls on a new close above $86.00.

Earlier Comments: November 16, 2014:
RH is in the services sector. They operate in the home furnishing industry. The company describes itself as "Restoration Hardware is a luxury brand in the home furnishings marketplace offering furniture, lighting, textiles, bathware, décor, outdoor and garden, as well as baby & child products. RH operates an integrated business with multiple channels of distribution including Galleries, Source Books and websites."

"We believe RH is one of the most innovative and fastest growing luxury brands in the home furnishings marketplace. We believe our brand stands alone and is redefining this highly fragmented and growing market, contributing to our superior sales growth and market share gains over the past several years as compared to industry growth rates. Our ability to innovate, curate and integrate products, categories, services and businesses with a completely authentic and distinctive point of view, then rapidly scale them across our fully integrated multi-channel infrastructure is a powerful platform for continued long-term growth. We evolved our brand to become RH, positioning our Company to curate a lifestyle beyond the four walls of the home. Our unique product development, go-to-market and supply chain capabilities, together with our significant scale, enable us to offer a compelling combination of design, quality and value that we believe is unparalleled in the marketplace."

If you look at a daily chart of RH you'll likely see the big gap higher in June. That was a reaction to the company's earnings report . They beat Wall Street's estimates on both the top and bottom line. Management also guided higher. The post-earnings rally peaked in June and RH has been slowly consolidating lower for the last four months.

Their most recent earnings report was September 10th. Analysts were expecting a profit of $0.64 a share on revenues of $454 million. RH beat estimates with earnings up +37% from a year ago to $0.67 a share. Yet revenues were a miss at $433.8 million. RH blamed the revenue miss on a later than usual catalog mailing. While it was a disappointment RH's Q2 sales still grew +13.5% while margins increased 240 basis points to 11.3%, a record for the company. Investors should also note that the +13% surge in sales followed a +30% jump in sales a year ago. Gary Friedman, RH's Chairman and Chief Executive Officer, commented,

"Our ability to innovate, curate and integrate new products, categories and businesses, then test and rapidly scale them across our multi-channel platform, is at the core of RH becoming a disruptive brand in the home furnishings marketplace. In the second quarter, we achieved a record operating margin of 11.3%, a 240 basis point improvement versus last year, and the driver of our earnings over-performance. Comparable brand revenue for the quarter increased 13% on top of a 30% increase a year ago – representing an industry-best 43% gain over the two-year period."

RH raised their Q3 guidance above Wall Street's estimates on both the top and bottom line. Their 2015 guidance was only in-line with consensus estimates. A couple of weeks later the stock was rising on news that its CEO had purchased almost 26,000 shares around $77.

Technically shares of RH have bounced at a long-term trend of higher lows. It's also breaking out past resistance near $80, past resistance at its 50-dma, and now it's 100-dma. The recent rally has created a buy signal and a $93 price target on the point & figure chart.

Bears will argue that RH is too expensive. They have a point. The stock has a P/E around 49. Yet growth names can sport pretty high valuations. If you have been reading the newsletter commentary then you already know that holiday spending should be stronger than normal this year. Online shopping is expected to be very strong, which should benefit RH, who has a big catalog business.

If this rally continues the stock could see some serious short covering. The most recent data listed short interest at 32.4% of the small 32.4 million share float.

More aggressive investors may want to buy calls now. I am suggesting we wait for RH to close above $84.25 and then buy calls the next morning with a stop at $76.40. I will warn you that RH will likely report earnings in mid December and shares will probably be volatile following this report.

- Suggested Positions -
NOV 22, 2014 - entry price on RH @ 88.93, option @ 15.70*
symbol: RH160115C90 2016 JAN $90 call - current bid/ask $11.90/15.00

11/21/14 trade begins. RH gaps higher at $88.93
11/20/14 triggered with a close at $87.48, above our trigger at $84.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Chart of RH:

Current Target: RH @ TBD
Current Stop loss: 76.40
Play Entered on: 11/21/14
Originally listed on the Watch List: 11/16/14


Under Armour, Inc. - UA - close: 69.30

Comments:
11/23/14: UA is another watch list candidate that has met our entry point requirement. The plan was to wait for shares to close above $70.25 and then buy calls. UA closed at $70.48 on Wednesday. Our trade began on Thursday when UA opened at $70.20. Most of the market spiked or gapped open higher on Friday morning and UA was no exception. Unfortunately UA reversed and closed with a -1.5% loss on Friday. I don't see any news to account for this relative weakness. Technically Friday's move is a potential one-day bearish reversal pattern.

Currently I would wait for a close above $71.25 before considering new positions. Nimble, more aggressive traders may want to consider buying a dip near $65.00 but our stop loss is at $64.85.

Earlier Comments: November 16, 2014:
UA is in the consumer goods sector. "Under Armour, the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. Under Armour's wholly owned subsidiary, MapMyFitness, powers one of the world's largest Connected Fitness communities. The Under Armour global headquarters is in Baltimore, Maryland." (source: company press release)

Apparel sales can be tricky as fashion fads come and go. Yet right now athletic wear has been gaining traction. As a whole sales of athletic wear are up +9% in the past year. Two giants in this industry, Nike (NKE) and Under Armour (UA), are outperforming the group.

NKE is the giant with annual sales of $28.8 billion. UA is a tenth the size of NKE at $2.87 billion a year in sales. It's not surprising to see UA outgrowing its rival. NKE managed +15% sales growth in the third quarter. UA delivered 30%. NKE reported gross margins of 46.6%. UA has gross margins of 49.6%. Both companies delivered earnings growth of more than 20% year over year.

UA is impressive because its apparel sales have been rising +30% for the last three quarters in a row. Apparel is important because it's 75% of UA's business. Investors were a little concerned when apparel sales only grew +25.6% in the third quarter. However, UA has been consistently beating Wall Street's earnings estimates on both the top and bottom line four quarters in a row. They have also raised guidance four quarters in a row.

Their most recent report was October 23rd. UA reported earnings of $0.41 a share with revenues up +29.7% to $937.9 million. Analysts were only expecting $0.40 on revenues of $925 million.

Management raised their Q4 guidance but they warned that growth would slowdown to only +22% in 2015. It's worth noting that UA has a history of under promising and over delivering. The stock initially sold off on this guidance but investors quickly bought the dip. Shares of UA have broken through the two-month trend line of lower highs and technical resistance at the 50-dma. The point and figure chart is bullish and forecasting an $87 target.

The plunge in gasoline prices is a tailwind for retailers and it should be a strong holiday shopping season. Another bonus for UA could be the weather. Last year winter was colder than normal and UA had strong sales of their coldgear line. This year we could see the coldest winter in decades, which could also bode well for UA.

Currently UA is sitting just below potential round-number resistance at $70.00. I am suggesting we wait for UA to close above $70.25 and then buy calls the next day with a stop loss at $64.85. More conservative investors may want to consider an alternative and wait for UA to close above its September highs near $73.40 before initiating positions.

- Suggested Positions -
NOV 20, 2014 - entry price on UA @ 70.20, option @ 6.95
symbol: UA160115C80 2016 JAN $80 call - current bid/ask $ 6.10/ 6.50

11/20/14 trade begins. UA opens at $70.20
11/19/14 UA closes at $70.48, above our trigger at $70.25
Option Format: symbol-year-month-day-call-strike

Chart of UA:

Current Target: UA @ TBD
Current Stop loss: 64.85
Play Entered on: 11/20/14
Originally listed on the Watch List: 11/16/14



Watch

Defense Industry Strength

by James Brown

Click here to email James Brown


New Watch List Entries

RTN - Raytheon Company


Active Watch List Candidates

AAPL - Apple Inc.

BAC - Bank of America

CELG - Celgene Corp.

DIS - The Walt Disney Company

GD - General Dynamics

GS - Goldman Sachs

IP - International Paper


Dropped Watch List Entries

RH and UA graduated to our active play list.



New Watch List Candidates:

Raytheon Co. - RTN - close: $105.78

Company Info

RTN is in the industrial goods sector. They are part of the aerospace and defense industry. The company has four main businesses: integrated defense systems; intelligence, information and services; missile systems; and space and airborne systems.

A company press release describes RTN as "Raytheon Company, with 2013 sales of $24 billion and 63,000 employees worldwide, is a technology and innovation leader specializing in defense, security and civil markets throughout the world. With a history of innovation spanning 92 years, Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as cyber security and a broad range of mission support services."

The defense stocks have managed to perform exceptionally well last year and still outperform the major market indices this year in spite of reduced defense budgets from Washington. Revenues have been down from year ago levels but these companies are leaner and more profitable.

RTN's most recent earnings report was October 23rd. Wall Street was expecting a profit of $1.60 a share. RTN delivered $1.65, which was up from $1.51 a year ago. RTN's backlog hit $33.2 billion, up $1 billion from a year ago. The company narrowed their prior 2014 guidance. While not inspiring the stock rallied anyway.

A couple of weeks later RTN announced they had acquired privately held Blackbird Technologies for $420 million. Blackbird provides cybersecurity, surveillance, and secure communications to America's spy agencies. According to RTN, "Blackbird Technologies also provides key synergies with Raytheon's existing cybersecurity, sensor, communications and command and control capabilities. With this transaction, Raytheon becomes one of the top industry partners to SOCOM."

Shares of RTN have spent the last three weeks digesting its gains in a $102-106 trading range. The stock displayed relative strength on Friday and looks poised to breakout past resistance. These are new all-time highs for the stock.

We want to be ready to catch the breakout. I am suggesting we wait for RTN to close above $106.50 and then buy calls the next morning with a stop loss at $99.00. Our target is the $135-140 zone.

Breakout trigger: Close above $106.50
Buy calls the next morning with a stop at $99.00.

BUY the 2016 Jan $115 call (RTN160115c115) current ask $4.50

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

Chart of RTN:

Originally listed on the Watch List: 11/23/14


Active Watch List Candidates:



Apple Inc. - AAPL - close: 116.47

Comments:
11/23/14: AAPL continues to soar with shares posting another weekly gain and hitting a new round of record highs. We didn't want to chase it earlier and we definitely do not want to chase it now. Eventually even AAPL shares will see a pullback.

Right now our suggested buy-the-dip entry point is $108.00 but more aggressive traders may want to consider a dip near $110.00-110.50 instead.

Earlier Comments: November 2, 2014:
Love it or hate it AAPL always has Wall Street's attention. It has a cult-like following. The company's success has turned AAPL's stock into the biggest big cap in the U.S. markets with a current valuation of more than $633 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

The company's latest earnings report was super strong. AAPL reported its Q4 (calendar Q3) results on October 20th. Wall Street was expecting a profit of $1.31 a share on revenues of $39.84 billion. The company delivered a profit f $1.42 a share with revenues up +12.4% to $42.12 billion. The EPS number was a +20% improvement from a year ago. Gross margins were up +1% from a year ago to 38%. International sales were 60% of the company's revenues.

AAPL's iPhone sales exceeded estimates at 39.27 million in the quarter and up nearly 16% from a year ago. The only soft spot in their ecosystem seems to be iPad sales, which have declined several quarters in a row. The company hopes to rejuvenate its tablet sales with a refresh of the iPad models. More importantly AAPL management raised their Q1 (calendar Q4) guidance as they expect revenues in the $63.5-66.5 billion in the quarter. Recent news would suggest that AAPL might deliver an incredible 50 million iPhone 6s in 2014. That's not counting their new iPhone 6+.

The better than expected results and bullish guidance sent the stock to new highs. The rally has created a quadruple top breakout buy signal on its point & figure chart that is currently forecasting at $133 target. Yet we do not want to chase AAPL here. The stock is up $12 from its October low. We do want to be ready if shares see a pullback.

Tonight I am suggesting a buy-the-dip trigger to buy calls at $103.50 with a stop loss at $98.90.

Buy-the-dip trigger @ $108.00, stop loss @ 98.90

BUY the 2016 Jan. $120 call (AAPL160115c120)

11/16/14 raise the buy-the-dip entry trigger to $108.00
Adjust the strike price to the 2016 Jan $120 call.
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/02/14


Bank of America - BAC - close: $17.12

Comments:
11/23/14: Shares of BAC are virtually unchanged for the week. Traders did buy the dip near its rising 50-dma. We are still on the sidelines and want to see BAC close above $17.55.

Earlier Comments: November 09, 2014:
BAC is one of the biggest banks on the planet. They provide banking services to individuals, small business, big business, institutions, and governments. They have over 5,000 locations and over 16,000 ATMs.

The company's most recent earnings report was October 15th. They managed to beat Wall Street's estimates on both the top and bottom line with a loss of only $0.01 per share on revenues of $21.43 billion. The loss was due to a $5.3 billion settlement with the U.S. Department of Justice, part of the larger, record-breaking $16.7 billion settlement over the mortgage scandal dating back to Countrywide and the financial crisis of the last decade. BAC actually made $168 million for the quarter and that's including the huge $5 billion settlement payment but when you account for the $238 million it paid in dividends the final profit number was negative (-$0.01).

Legal issues have been a black cloud for the banking industry for years and a shadow over BAC but following the $16.7 billion settlement with the DoJ the worst is probably behind it for the big bank. While the industry may still see volatile headlines about future fiascos BAC management has been building up their litigation reserves to handle it.

Banking stocks as a group should help lead the market higher as the U.S. economy continues to improve. When the Federal Reserve finally starts raising interest rates next year it should also be another tailwind for the banks.

Tonight I am suggesting we wait for BAC to close above $17.55 and buy calls the next morning with a stop loss at $15.35. More conservative investors may want to wait for BAC to close above previous resistance at $18.00 as an alternative entry point.

trigger: Wait for BAC to close above $17.55 and then buy calls the next morning with a stop at $15.35.

BUY the 2016 Jan $20 call (BAC160115c20)

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

Originally listed on the Watch List: 11/09/14


Celgene Corp. - CELG - close: 108.20

Comments:
11/23/14: Biotech stocks delivered a big bounce last week. CELG helped with gains five days in a row. The stock is once again testing resistance in the $109.25 area. We do not want to chase it here. The biotech index is up more than +40% this year and when the group corrects it could be sharp. There is no change from my prior comments.

Earlier Comments: November 2, 2014:
We previously had CELG on our LEAPStrader newsletter but got stopped out during the market's extreme volatility and correction in the first half of October. The bullish story on CELG has not changed. We'd like to reopen bullish positions again. However, CELG is extremely short-term overbought. The biotechs have been showing major relative strength and soaring to new highs. I'm suggesting a buy-the-dip trigger at $100.00 with a stop loss at $94.90.

I am listing our previous play description below with an update on its most recent earnings report.

(Earlier play description)
If you're looking for opportunity it's hard to beat some of the biotech names. CELG is one of the strongest. According to their press release, "Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation."

What makes CELG so attractive is the company's pipeline. Developing drugs is an expensive business. A lot of older firms are buying other companies for their pipeline. Meanwhile CELG is developing a very strong pipeline. You can view the company's current progress on this webpage.

CELG is also growing earnings. The company's Q2 report was July 24th. Wall Street was looking for a profit of 89 cents a share on revenues of $1.84 billion. CELG beat estimates with a profit of 90 cents and revenues rising +17.1% to $1.87 billion. Earnings per share are up +18% from a year ago. Management raised their guidance for 2014. Wall Street was a little disappointed with the guidance because analysts are more optimistic.

The latest earnings report was October 23rd. Analysts were looking for a profit of $0.94 on revenues of $1.95 billion. CELG beat estimates with $0.97 as revenues grew +18.4% to $1.98 billion. Management then raised their EPS and revenue guidance above Wall Street's estimates.

Multiple firms raised their price target on CELG following the Q3 results and the P&F chart is now forecasting at $157 target. We do not want to buy calls here. Wait for a pullback.

Buy-the-dip trigger @ $97.50, stop loss @ 89.00

BUY the 2016 Jan. $120 call (CELG160115c120)

11/16/14 Adjust the buy-the-dip trigger from $100.00 to $97.50. Move the stop loss from $94.75 to $89.00
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/02/14


The Walt Disney Company - DIS - close: $88.96

Comments:
11/23/14: It's a little bit surprising to see DIS showing relative weakness last week. If this pullback continues we may have to re-evaluate our strategy on DIS. Currently we are waiting for a breakout to new highs.

Earlier Comments: November 9, 2014:
DIS is considered a diversified entertainment company. The company with its subsidiaries is an international family entertainment giant. Their media networks division includes the Disney/ABC Television Group and ESPN Inc. Their Parks and Resorts business runs 11 theme parks and 44 resorts. Their studio business has been making movies for over 90 years. Their acquisition of Marvel Studios was a genius move and they recently purchased Lucasfilm which brought the Star Wars franchise into Disney's stable of intellectual property. DIS' consumer products division makes everything from toys to books to fine art based on their massive library of content and characters.

The company has been a consistent winner in the earnings camp. DIS beat Wall Street's earnings estimates the last four quarters in a row. They've beaten on both the top and bottom line the last three quarters in a row. Their most recent earnings report was November 6th, which was DIS' fourth quarter result for 2014. According to DIS' CEO their fiscal 2014 was another record setting year for profits and marked their fourth year in a row of record performances.

DIS's results last year were driven by the studio division, which saw operating profits more than double. The company has seriously been knocking it out of the park with their movies. 2013 had some pretty big hits but Frozen, which came out n November 2013, is one of the biggest animated movies of all time and helped drive results well into 2014. Other big winners for the studio division were Capitan America: Winter Soldier, Maleficent, and the hit of the summer Guardians of the Galaxy. This weekend DIS' new animated movie Big Hero Six is already beating the competition and outpaced Interstellar in their opening weekend.

Next year should be another banner year for DIS' studio division with blockbusters like the next Avenger's movie, another Pixar film, and the next chapter in the Star Wars saga, episode seven (comes out in December 2015). All of these films help fuel business for Disney's theme parks, consumer products, and video games.

Wall Street was looking for DIS to report their Q4 earnings of $0.88 on revenues of $12.37 billion. The company beat estimates with a profit of $0.89 (+12%) and revenues rising +7.1% to $12.39 billion. Looking back over 2014 DIS said their earnings results were up 26% above 2013.

The stock is only a couple of points from all-time highs and the point & figure chart is bullish with a $119 long-term target. We recently concluded a successful trade on DIS back in October. We would like to hop on board again if shares can breakout past resistance at the $92 level.

Tonight I am suggesting a trigger to buy calls if DIS can close above $92.25. We'll start with a stop loss at $87.25.

Breakout trigger: Wait for DIS to close above $92.25
Then buy calls the next morning with a stop at $87.25

BUY the 2016 Jan $100 call (DIS160115c100)

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

Originally listed on the Watch List: 11/09/14


General Dynamics - GD - close: 144.59

Comments:
11/23/14: Another week, another record high for shares of GD. We do not want to chase it. Wait for a correction. Currently, our suggested entry point is a dip at $132.00.

Earlier Comments: November 2, 2014:
GD is another really strong stock that we got stopped out of during the sharp market pullback in the first half of October. Since then shares of GD have not only recovered but have sprinted to new highs.

GD is considered part of the industrial goods sector. The company is a huge aerospace and defense company. They have four significant segments: aerospace, combat systems, information systems, and marine systems (ships and submarines). The defense industry in the U.S. has been saddled with significant budget cuts due to the 2011 sequestration deal that will shave $500 billion from U.S. defense spending from 2012 through 2021. The industry has managed to thrive in spite of these budget cuts.

GD has beaten Wall Street's earnings estimates five quarters in a row. The company is also seeing margin improvement. Their Q2 report was on July 23rd and it not only beat analysts' estimates but management raised their EPS and revenue guidance for 2014. Multiple analysts raised their price target on GD following this announcement.

We see a similar trend with the latest earnings report on October 22nd. GD reported their Q3 results with a profit of $2.05 per share. That beat analysts' estimates by 14 cents. Margins continued to improve, up 50 basis points from the same quarter a year ago. GD's backlog of orders soared +56% to $74.4 billion in the quarter. Management then raised their 2014 earnings guidance above Wall Street's estimate (again).

The stock has been in rocket-mode with shares in a non-stop rally from $115 to $140. We do not want to buy calls here. GD is very short-term overbought. Tonight I am suggesting patience and a buy-the-dip trigger at $132.00 with a stop loss at $124.75.

Buy-the-dip trigger @ $132.00, stop loss @ 124.75

BUY the 2016 Jan. $140 call (GD160115c140)

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

Originally listed on the Watch List: 11/02/14


The Goldman Sachs Group, Inc. - GS - close: $189.59

Comments:
11/23/14: Shares of GS are virtually unchanged for the week. The stock has been consolidating sideways in the $188-192 zone for three weeks in a row. Currently the plan is to buy calls on a dip at $185.00.

Earlier Comments: October 26, 2014:
Goldman is in the financial sector. They are considered part of the national investment brokerage industry. Goldman was founded in the year 1869 and is headquartered in New York. The company provides investment banking and management services to corporations, other financial institutions, governments and high-net-worth individuals. The lion share of their business is institutional client services where GS makes markets in fixed income, equities, currencies, and commodities.

The company's recent earnings report was strong. GS announced its Q3 results on October 16th. As of the first nine months of 2014 their revenues were up $1.4 billion above the same period a year ago. Management has managed to boost profits by reducing costs. A strong mergers and acquisitions market in 2014 has helped drive GS' results as the company is gaining market share.

Looking at their recent results Wall Street expected a profit of $3.21 per share on revenues of $7.8 billion for the quarter. GS delivered $4.57 per shares, a +59% increase from a year ago. Revenues soared +25% to $8.4 billion. GS saw $20 billion in net inflows bumping client assets to $1.15 trillion.

The company does have a habit of crushing analysts' earnings estimates so the market wasn't that surprised. The stock actually sank on these results but the initial weakness is over and GS is rebounding.

The stock experienced a -10% correction from its early October high to the mid October low. The recent breakout past resistance near $180 and all of its key moving averages is encouraging. I would be tempted to buy calls right now. However, I suspect the market might see some mild profit taking after last week's big rally.

Tonight I am suggesting a buy-the-dip entry point at $180.50 with a stop loss at $174.50. Our long-term target is the $220-230 zone.

Buy-a-dip at $185.00 with a stop at $174.50

BUY the 2016 Jan $200 call (GS160115c200)

11/09/14 adjust buy-the-dip trigger from $183.50 to $185.00
11/02/14 adjust buy-the-dip trigger from $180.50 to $183.50
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 10/26/14


International Paper - IP - close: $53.62

Comments:
11/23/14: Good news! We want shares of IP to correct lower so we can buy calls on a dip at $51.00. It looks like that correction has started.

Earlier Comments: November 16, 2014:
IP is part of the consumer goods sector. According to a company press release "International Paper (IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging and uncoated papers. Headquartered in Memphis, Tenn., the company employs approximately 65,000 people and is strategically located in more than 24 countries serving customers worldwide. International Paper net sales for 2013 were $29 billion (which included our now divested xpedx business)."

The company has been facing a lot of headwinds this year but they still managed to beat Wall Street's earnings estimates three quarters in a row. Their most recent earnings report was November 4th. Analysts were expecting a profit of $0.89 per share on revenues of $6.0 billion. IP reported a profit of $0.95 with revenues beating estimates at $6.05 billion.

The company saw significant improvements in its operating profits in all three categories: industrial packaging, printing papers, and consumer packaging. Management expects a surge in packaging orders in the fourth quarter.

Wall Street loves the company's focus on delivering value to shareholders. IP is almost done with their $1.5 billion stock buyback program they announced in September 2013. They also raised their dividend 14% from $1.40 to $1.60. This is IP's third consecutive fourth quarter double-digit dividend increase. The stock now sports a 3.0% yield.

IP's CEO said they were looking seriously at converting part of their business into a master-limited partnership (MLP). This would be another shareholder friendly step as MLPs do not pay federal tax if the return most of their cash to shareholders.

The stock's current rally has produced a buy signal on the point & figure chart with a long-term target at $73.00. This month has seen shares of IP break out to new multi-year highs.

IP is currently up five weeks in a row. We do not want to chase it here. Instead we'd like to buy long-term calls on a dip. The prior highs in the $51 area should offer some support. Tonight I'm suggesting a buy-the-dip trigger at $51.00 with a stop loss at $47.90.

Buy-a-dip @ $51.00, start with a stop at $47.90

BUY the 2016 Jan $55 call (IP160115c55)

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

Originally listed on the Watch List: 11/16/14