Option Investor
Newsletter

Daily Newsletter, Sunday, 6/14/2015

Table of Contents

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

Leaps Trader Commentary

Eleventh Hour For Greece

by James Brown

Click here to email James Brown

Improving economic data was overshadowed by the ups and downs in the EU's negotiations with Greece. The U.S. market delivered a choppy week and ended on a sour note albeit relatively unchanged for the week. Banking stocks held up reasonably well with a +1.6% gain for the group. The normally strong biotechs turned lower with a -1.38% decline. The oversold bounce in the transportation stocks rolled over last week.

The U.S. dollar traded lower and that boosted crude oil prices to a +2.0% gain with oil closing near $60 a barrel. The rally in oil failed to do much for energy stocks, which lagged behind the commodity. Meanwhile uncertainty regarding Greece may have played a part in money looking for safety in American bonds. The U.S. bond market hit new 2015 lows on Wednesday but managed a rebound into positive territory for the week. The yield on the 10-year note retreated from 2.49% on Wednesday to 2.39% by Friday's closing bell.

Greece

I've been writing about the Greece story in this market commentary for five years and look forward to a day when it is no longer market news. This Greek tragedy might finally be nearing an end for Europe. Sadly the Greek people will likely suffer for several more years whether they exit the Eurozone or not.

Greek leaders have been meeting with their European counterparts and members of the Troika (EU, IMF, ECB) all week long. On Wednesday Bloomberg reported on a rumor that Germany might be willing to offer some sort of deal to Greece that would avoid a default. This sparked very widespread stock market rallies in Europe and the U.S. Unfortunately the very next day the negotiating team from the International Monetary Fund (IMF) said they were giving up.

IMF representatives actually left Brussels and headed back home to Washington D.C. because Greece wasn't cooperating. IMF spokesman Gerry Rice said, "We are well away from an agreement." It sounds like the IMF was pointing a few fingers at Europe as well for not being as accommodating as the IMF wanted. That same day (Thursday) Jens Weidmann, President of Bundesbank, a large German bank, said that the risk of a Greek default was rising every day. Standard & Poor's downgraded their credit rating on Greece from CCC+ to CCC as they expect the country to default within the next 12 months.

The IMF team was not the only group that had grown tired of Greece's stubbornness. Europe has been kicking the Greek-debt-default can down the road for five years. European leaders have been negotiating heavily the last four months after the new Syriza party rose to power in Greece early this year. On Thursday European Council President Donald Tusk condemned Greek Prime Minister Alexis Tsipras for stalling on a debt agreement deal. According to Bloomberg, Tusk told reporters, "There is no more time for gambling... The day is coming, I am afraid, that someone says the game is over." Tusk said they needed a deal before this week's Eurogroup meeting.

EU officials are also preparing for the worst. They met on Friday to discuss how to handle a Greek default and/or a Greek exit from the Eurozone. It was their first formal talks on a potential Greek default. You may recall two weeks ago the IMF chief said it is possible for Greece to leave the Eurozone.

Just in case you somehow forgot some of the key points in this story Greece recently postponed some of their payments to the IMF. Instead of making payments every week in June they have lumped them all together. The country needs to pay about 1.5 billion euros to the IMF on June 30th. On top of that Greece owes almost 7 billion euros in debt payments to the ECB through July and August this year. We already know that Greece is out of money and may not have enough to make their 1.5 billion payment to the IMF and meet their other bills (like salaries and pensions) for next month.

The EU has already provided up to 7.2 billion euros in additional bailout funds if Greece complies with new reforms. If Greece does not then the current bailout plan expires on June 30th. There is a Eurogroup meeting on June 18th and an EU summit on June 25-26th. Any deal that Europe agrees to needs to be ratified by some of its member nations and that takes a few days. Some are suggesting that this coming Friday, June 19th, is the real deadline for a deal in order to give Europe time to approve a deal before June 30th.

A few analysts have speculated that if Greece did default on its debts to the IMF or ECB it does not automatically eject them from the Eurozone. There is some sort of grace period (30 days, some say 60 days). During that time capital controls would be enacted to prevent people from pulling or transferring money out of Greek banks (which is kind of funny since people have been taking money out for several months). Bloomberg has posted an article on what could happen if there is no deal. You can read it here .

The Greek bond market is forecasting a default. Normally when a country's 10-year bond has a yield above 7% it's a major red flag of an impending default. Currently the yield on a Greek 10-year bond is 11.5%. Their two-year bonds have a yield above 20%.

Economic Data

Believe it or not but most of the U.S. economic data last week was relatively positive. The National Federation of Independent Business reported on Tuesday that U.S. small business confidence hit a five-month high in May with a reading at 98.3. The Job Openings and Labor Turnover (JOLTS) Survey said there were 5.37 million job openings in April. That is the highest reading since December 2000.

The Producer Price Index (PPI), a wholesale gauge for inflation, rose +0.5% in May. That was higher than expected and up sharply from April's -0.4% decline. It was the biggest one-month jump since April 2011 thanks to a surge in energy costs. Gasoline prices spiked +17% in May and that boosted the energy component up +5.9%. The core-PPI, which excludes more volatile food and energy prices, was only up +0.1% in May.

The University of Michigan Consumer Sentiment index improved from 90.7 in May to a preliminary 94.6 in June. The present conditions component and the expectations component both improved. The Commerce Department said that retail sales in May surged +1.2%. April was revised higher from +0.0% to +0.2%. Automobile sales were strong with a +2.0% jump.

Investors may want to swallow that retail sales number with a huge grain of salt. The Commerce Department normally applies a seasonal adjustment to the retail sales number. Over the last ten years the government's seasonal adjustment to the May retail sales number has ranged from 73.4% to 114.6%. This year the seasonal adjustment to May's retail sales was 275.5%.

That seasonal adjustment isn't stopping the better than expected retail sales figure from inspiring some GDP forecasts. Multiple analysts have raised their Q2 GDP predictions. The current average is +2.65% growth compared to the -0.7% contraction in the first quarter. The Atlanta Fed, which pretty much nailed their Q1 GDP estimate, is currently estimating +1.9% growth in the second quarter. That's a big improvement from their forecast of +0.7% two weeks ago.

Atlanta Fed's GDPNow forecast:

Overseas Economic Data

It was a relatively quiet week for economic data overseas and what we did get out of Europe was likely overlooked due to the focus on Greece. Eurozone reported their Q1 GDP rose +0.4% versus the prior quarter. This was in-line with estimates. France said their Industrial Production for April fell -0.9%. Italy's Industrial Production dropped -0.3%. Both of these were below estimates. The Eurozone saw its Industrial Production for April rise +0.1% when economists were expecting +0.3%.

Japan reported their Industrial Production for April was up +1.2% for the month. Their Core Machinery Orders surged +3.8% in April. Both of these reports were above estimates. China said their retail sales in May were up +10.1% from a year ago, which was in-line. China's Industrial Production for May was up +6.1%. Inflation is still falling in China with their PPI down -4.6% and their CPI down -0.2%. Both of these inflation gauges were lower than expected.

It's a bit funny to think that China, the world's second largest economy and soon to be the biggest, is still considered an emerging market. Last week saw investors yank money out of emerging-market equities with a total of $9.3 billion in outflows. That's the biggest one-week extraction since 2008. About $6.8 billion of that was removed from Chinese equities. The MSCI Emerging Markets Index fell 12 days in a row, through June 9th, the longest losing streak since 1990. You can read more about the story here .

The U.S. central bank is poised to raise rates but the rest of the world is still lowering rates to try and stimulate their economies. Last week saw the Reserve Bank of New Zealand and the Bank of Korea both cut their main lending rate by 25 basis points.

Many believe that the People's Bank of China is about to lower the reserve-requirement ratio for banks. China's economy is growing at the slowest pace in years. May saw exports fall for the third month in a row. One way to stimulate growth is lower reserve ratios for banks to they'll lend more. The China Merchants Bank Co., HSBC holdings, and Goldman Sachs all expect the country's central bank to reduce this rate soon.




Major Indices:

It was a bumpy week for stocks. The S&P 500 dipped into the 2,070-2,075 range and then bounced up to 2,115 at Thursday's peak. This looks like a failure at the three-week trend of lower highs. The pattern suggest we could see the S&P 500 retest support in the 2,070 region. If that fails then 2,040 is potential support.

Five-Day chart of the S&P 500 index:

chart of the S&P 500 index:

Here's a crazy statistic for you. The S&P 500 is only 41 points or 1.9% away from a new all-time record high. Yet 100 stocks, one fifth of the index, are in a bear market with declines of more than -20% from their peaks. A year ago only 4% of the S&P 500 was in a bear market.

20% of the S&P 500 are in a bear market

The NASDAQ composite is holding up relatively well. It is down three weeks in a row but that's just timing of the calendar. The index is only about 65 points away from a new 15-year high. It has essentially been churning sideways the last three weeks in a row. This index bounced near its trend of higher lows on Tuesday.

The 5,100-5,110 area is overhead resistance. If last week's low near 4,975 fails the nearest support is probably 4,900. Beyond that then 4,800 and its 200-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 actually looks like one of the healthier indices. This index is up five out of the last six weeks and closed above resistance near 1,260 on Friday. It's only about 15 points away from a new all-time high. A failure near 1,280 would look like a potential bearish double top but in the mean time the path of least resistance seems to be higher.

chart of the Russell 2000 index



Economic Data & Event Calendar

Economic data for the week ahead is going to skew towards real estate. However, these reports will likely be overlooked. Investors will be focused on the FOMC meeting, Yellen's press conference, and if Greece can reach a deal by Friday's Eurogroup meeting.

No one expects the FOMC to change interest rates so the market will be interested in the committee's statement and their comments on the economy. Yellen's press conference is also a potential wildcard since she could also misspeak and spark a move one way or the other. Normally Fed meetings can be major, market-moving events. Yet even this one will likely be dwarfed by the Greece situation.

Q2 earnings season is only about three weeks away. Alcoa (AA) kicks it off on July 8th.

- Monday, June 15 -
Industrial Production
NAHB Housing Market Index (builder sentiment)
New York Empire State manufacturing survey

- Tuesday, June 16 -
Housing Starts & Building Permits

- Wednesday, June 17 -
FOMC interest rate decision
Fed Chairman Yellen's press conference

Eurozone CPI

- Thursday, June 18 -
Consumer Price Index (CPI)
Philadelphia Fed survey

- Friday, June 19 -
Bank of Japan interest rate decision
Eurogroup meeting about Greece

Additional Events to be aware of:

June 24th: final Q1 GDP estimate
June 25-26th: EU summit
July 3rd: U.S. market closed for Independence Day

Looking Ahead:

The Wall Street Journal ran a small article last week on how the market hasn't gone anywhere this year. I don't normally focus on the Dow Jones Industrial Average ($INDU) since it only has 30 stocks in it. However, a lot of the financial media still follows it closely. According to the WSJ article the $INDU has crossed the unchanged mark 16 times in 2015. There has never been that many crosses back and forth across unchanged for the year in the entire 119-year history. The $INDU isn't the only index that isn't moving much. The S&P 500 is up less than 1.75% for the year. The lack of movement, one way or the other, is a good reason why so many investors are currently neutral on the market.

Chart of the Dow Jones Industrial Average

The latest AAII Investor Sentiment survey saw some interesting changes. Bullish sentiment plunged -7.3% to just 20.0%. Where did those bullish investors go? It looks like they all turned bearish with bearish sentiment up +8% to 32.6%. Charles Rotblut, the Vice President of AAII, defines unusually low levels of bullish optimism as anything below 28.6%. He commented on the survey's most recent poll numbers and on Thursday said, "Bullish sentiment readings below 28.6 percent are unusually low, and unusually low levels of optimism have typically been followed by better-than-average six- and 12-month returns for the S&P 500."

Current AAII Investor Sentiment

According to the American Association of Individual Investors we haven't seen bullish sentiment this low since April 2013. The high levels of neutral sentiment are also extraordinary. Any neutral reading above 45% is considered unusual and the poll just marked its 10th week in a row with neutral sentiment above this key level. They surveyors also note that elevated levels of neutral sentiment tend to be followed by bullish stock market performances six and 12-months down the road.

Russell Rebalancing

The annual Russell rebalancing or reconstitution is almost here. Trillions of dollars track the Russell indices. Their decisions on what stocks to add or subtract is definitely a market event. The Russell 3000, which includes the big cap Russell 1000 and the small cap Russell 2000, represents 98% of the investable U.S. equity market. They just announced their final additions and deletions for this year and the changes will take place on Friday, June 26th, after the closing bell.

The NASDAQ market issued a description of the Russell rebalancing and discussed how it impacts the market a few years ago. Here's an excerpt from their post in June 2010:

The annual Russell Reconstitution is usually one of the most highly-anticipated and heaviest trading days in the US equity markets. Each year, the Russell Investment Group rebalances its indexes during its annual reconstitution — commonly known as the Russell Reconstitution or the Russell Rebalance. On Friday, June 25, 2010, Russell will reconstitute its 25 US indexes in order to accurately weight the 4,000 largest companies in the US stock markets by market capitalization (of float) and in so doing provide a truer reflection of stock market activity and performance. Russell also has global indexes which will be reconstituted at the same time.

The reconstitution is usually one of the most highly-anticipated and heaviest trading days in the US equity markets, as index and other asset managers seek to reconfigure their portfolios to reflect the composition of Russell's indexes. Buying and selling activity by money managers will be influenced by companies being added and deleted from the Russell 3000 and Microcap Indexes as well as the changes in the weightings among component companies. Companies which are switched between the Russell 1000 and Russell 2000 indexes in the annual re-ranking may also experience elevated trading activity as there are different levels of assets managed to these indexes.

Russell calculates total market capitalization of US common stocks and ranks them from largest to smallest to determine whether they are large enough for inclusion in one or more of the Russell indexes. The largest 4,000 companies, which satisfy all of Russell's eligibility requirements, become members of the Russell indexes. After membership is determined, the shares of the securities are adjusted to include only those shares available to the public or otherwise referred to as "float." Stocks are subsequently weighted in the Russell US indexes by their available float-adjusted market capitalization.

Composition of the Russell 3000 and Microcap Indexes are as follows: The Russell 3000 Index consists of the Russell 1000 and 2000 Indexes. The Russell 1000 is comprised of the first 1000 companies in the Russell 3000 and represents the largest US companies. The Russell 2000 is comprised of companies numbered 1001 through 3000 within the Russell 3000 and is generally viewed as the benchmark index for small-cap companies. The Russell Microcap Index includes the smallest 1,000 securities in the Russell 2000 plus the next 1,000 securities.
source .

Link to this year's additions and deletions: here .

This rebalancing tends to have a negative effect on the market as investors and funds sell the stocks being removed.

The week ahead will be dominated by the Fed meeting, Yellen's press conference, and the Greek crisis. However, it's worth noting that Friday will be an quadruple-witching expiration. Stock options, stock index options, single-stock futures, and index futures will all expire at the same time on June 19th. These quadruple witchings occur four times a year. Volume tends to surge as investors and traders adjust or close positions ahead of expiration.

It would be nice to think that after this week the U.S. market might see some end of quarter window dressing. However, according to Jeff Hirsch with the Stock Trader's Almanac, the week after quadruple witching is normally down. The Dow Industrials have been down 22 of the last 25 years with an average loss of -1.1%. The S&P 500 and the NASDAQ also tend to be down although not as bad as the Industrials.

If you consider all the potentially negative events in the next two weeks it might be a good time to enjoy your summer vacation and not trade for a while. Stocks are likely stuck churning sideways until one of these events knocks them lower or the unthinkable happens and Greece actually agrees to some sort of deal.

It could be a good time to get out there and grill up some expensive hamburgers. Beef prices have been surging with a +30% rise in the past two years. The price of beef just hit an all-time high in May.

~ James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market ignored positive economic data and chose to focus on headlines regarding the volatile situation with Greece. Time is running short for Greece and investors are growing more nervous.

The ASH trade was closed on Monday, June 8th.

EWG and SCTY were stopped out.

I have updated stop losses on DATA and GILD.

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

Greek Stalemate Nears Endgame

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(June 14, 2015)

The next couple of weeks could be challenging for the equity markets. The situation with Greece could finally reach a climax.

Europe has been dealing with Greece's fragile financial state for years. For the last five years they have been kicking the can down the road. Finally the Eurozone has decided that they don't want to throw away any more money on Greek bailouts without some serious reforms in Greece. The two sides have been at a stalemate because the new Greek government was elected on its no new austerity platform.

June 30th is a major deadline for Greece but it takes time to get a deal done. Thus the next two weeks could be crucial for the situation. I anticipate a lot more volatility in the stock market. Investors should not be in a rush to launch new long-term positions.

I'm not adding any new trades tonight. Last week we saw COF graduate to our active play list. Tonight I've added HBI and UA as new watch list candidates.



Watch

Underwear & Sports Apparel

by James Brown

Click here to email James Brown


New Watch List Entries

HBI - Hanesbrand Inc.

UA - Under Armour, Inc.


Active Watch List Candidates

ADI - Analog Devices Inc.

ATVI - Activision Blizzard Inc.

DNKN - Dunkin Brands Group

STZ - Constellation Brands


Dropped Watch List Entries

COF has graduated to our active play list.



New Watch List Candidates:

Hanesbrands Inc. - HBI - close: 32.68

Company Info

HBI was founded back in 1901. Today you will find Hanes products in more than 80 percent of U.S. homes.

HBI is in the consumer goods sector. According to the company, "HanesBrands, an S&P 500 company, is a socially responsible leading marketer of everyday basic apparel in the Americas, Europe and Asia under some of the world’s strongest apparel brands, including Hanes, Champion, Playtex, DIM, Bali, Maidenform, Flexees, JMS/Just My Size, Wonderbra, Nur Die/Nur Der, Lovable and Gear for Sports.

We sell bras, panties, shapewear, sheer hosiery, men's underwear, children's underwear, socks, T-shirts and other activewear in the United States, Canada, Mexico and other leading markets in the Americas, Asia and Europe. In the United States, we sell more units of intimate apparel, male underwear, socks, shapewear, hosiery and T-shirts than any other company."

What makes HBI different than most of its competitors is that HBI owns and operates its own manufacturing facilities. About 90% of their apparel comes from company-run plants. That helps them control costs throughout the production process.

This year the company has been very shareholder friendly. Back in January they raised their dividend 33% and announced a 4-for-1 split. The stock split took place in March this year.

HBI's most recent earnings report was April 23rd. HBI reported their Q1 earnings were up +16% from a year ago to $0.22 a share. That missed estimates of $0.23. Revenues were up +14% to $1.21 billion. This was just below expectations of $1.22 billion.

In the company press release HBI Chairman and CEO Richard Noll commented on their results, saying, "We are off to a great start in 2015, once again delivering a double-digit increase in EPS, while tracking to our full-year growth plans. Our acquisition strategy continues to create value with DBApparel, Maidenform and Gear for Sports all contributing substantially to our double-digit growth. In addition, we are raising our 2015 performance outlook to reflect the recent acquisition of Knights Apparel."

Management raised their earnings guidance for 2015 from $1.58-1.63 to $1.61-1.66 per share. Wall Street estimates were at $1.64. HBI also raised their 2015 revenue guidance from $5.78-5.83 billion to $5.90-5.95 billion. Consensus estimates were already at $5.95 billion.

The stock was hammered on the earning miss as investors ignored the improved earnings and revenue guidance. The stock corrected from about $34.60 to under $31.00 in four days (-10% correction).

Analysts' reaction to HBI's results have been positive. Some have noted that Q1 is normally a slower season for HBI. They see the pullback in HBI's stock as a buying opportunity. Multiple firms have raised their price target since the earnings report (new targets are $37, $38, and $40 per share).

Technically HBI has been consolidating sideways the last few weeks. However, this past week the stock displayed relative strength. Not only did it rally past resistance near $32.50 but it closed technical resistance at its 50-dma. Tonight I am suggesting we wait for HBI to close above $33.00 and then buy calls the next morning. The stock does have resistance in the $34.75 area so we'll have to keep an eye on that level. Currently the point & figure chart is forecasting at $41.00 target.

Breakout trigger: Wait for a close above $33.00
Then buy calls the next morning with a stop at $29.90

BUY the 2016 Jan $35 call (HBI160115C35) current ask $1.50

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

Chart of HBI:

Originally listed on the Watch List: 06/14/15


Under Armour, Inc. - UA - close: 81.29

Company Info

UA is in the consumer goods sector. They make shoes and athletic wear. According to the company, "Under Armour (UA), 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. The Under Armour Connected Fitnessâ„¢ platform powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal."

The athletic shoe and athletic apparel business is very competitive. Nike (NKE) has dominated the space for years. UA is about 10% the size of NKE but it's actively fighting for market share and recently overtook Adidas as the second biggest athletic wear brand inside the United States. Nike had sales of $27.8 billion in 2014. UA is a fraction of that with 2014 sales of $3.08 billion but they saw growth of +32%.

UA has been firing on all cylinders with its earnings results. Most of last year saw the company not only beating Wall Street's estimates but also raising guidance. UA reported their 2014 Q4 results on February 4th. The company reported a profit of $0.40 a share with revenues climbing +31% to $895 million, which was above estimates for $849 million. UA's CEO Kevin Plank, in a recent interview, said his company will grow at 20%-plus in 2015. The company's current estimates are $3.76 billion in sales for the year.

There was a steady stream of analysts raising their price targets on UA after its February earnings report. The company's most recent earnings report was April 21st when UA announced Q1 results. After raising guidance back in February the company reported earnings of $0.05 per share, which was in-line with Wall Street's new estimates. Revenues were up +25.4% to $804.9 million, which beat expectations.

UA management raised their outlook again. They expect 2015 operating income to improve +13-to-15%. UA expects 2015 revenues to rise +23% to $3.78 billion. The stock has rallied sharply into its earnings report and shares suffered some post-earnings depression with a -$12.00 drop (-13.6%) in the next two weeks. The price target upgrades continued but UA spent most of May consolidating sideways inside a narrow range. Finally on June 5th shares of UA broke out past multiple layers of resistance on another upgrade. The stock was upgraded to a "buy" with a $91 price target. Since then UA has been digesting its gains in a sideways consolidation between what should be support at $80 and short-term resistance near $82.00.

Tonight I am suggesting we wait for UA to close above $82.25 and then buy calls the next morning with a stop loss at $75.90.

FYI: I am listing the 2016 calls but investors may want to consider the 2017 January calls if you're willing to pay for the time premium.

Breakout trigger: Wait for a close above $82.25
Then buy calls the next morning with a stop at $75.90

BUY the 2016 Jan $90 call (UA160115C90) current ask $3.90

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

Chart of UA:

Originally listed on the Watch List: 06/14/15


Active Watch List Candidates:



Analog Devices - ADI - close: 66.26

Comments:
06/14/15: ADI almost hit our entry trigger on Tuesday's decline. I thought for a moment we had missed our entry point with Wednesday's big bounce but there was no follow through.

Tonight I am adjusting our entry trigger lower. Move the trigger from $65.10 down to $64.10. We'll leave the stop loss unchanged at $59.85.

Trade Description: May 24, 2015:
Shares of ADI are hitting 15-year highs as investors react positively to its most recent earnings report.

ADI is in the technology sector. They are part of the semiconductor industry. According to the company, "Analog Devices (NASDAQ: ADI) is a world leader in the design, manufacture, and marketing of a broad portfolio of high performance analog, mixed-signal, and digital signal processing (DSP) integrated circuits (ICs) used in virtually all types of electronic equipment. Since our inception in 1965, we have focused on solving the engineering challenges associated with signal processing in electronic equipment.

Used by over 100,000 customers worldwide, our signal processing products play a fundamental role in converting, conditioning, and processing real-world phenomena such as temperature, pressure, sound, light, speed, and motion into electrical signals to be used in a wide array of electronic devices. We focus on key strategic markets where our signal processing technology is often a critical differentiator in our customers' products, namely the industrial, automotive, communications, and consumer markets.

We currently produce a wide range of innovative products—including data converters, amplifiers and linear products, radio frequency (RF) ICs, power management products, sensors based on microelectromechanical systems (MEMS) technology and other sensors, and processing products, including DSP and other processors—that are designed to meet the needs of our broad base of customers."

The company's earnings performance has definitely improved in the last few quarters. Last August they reported earnings that were in-line with estimates as revenues rose +7.9%. The next three quarters in a row have seen ADI beat Wall Street estimates on both the top and the bottom line. Revenues were up +20%, +22.9% and +18.2%, respectively.

Their most recent report was May 19th when ADI reported its Q2 results. Earnings were up +23.7% from a year ago to $0.73 a share, which was a penny above estimates. Management's guidance was in-line with Wall Street estimates and the stock rallied.

ADI's President and CEO Vincent Roche commented on his company's quarterly performance, "We had a very successful second quarter driven by the quality of our innovation, the diversity of our business, and our strong execution. Revenue increased to a record $821 million, and our operating model generated strong cash flows and diluted earnings per share growth that was well ahead of revenue growth. Looking ahead, our book to bill ratio was positive in the second quarter and we are seeing stable order rates across all our end markets. As a result, we are planning for sequential growth in the third quarter and for revenue to be in the range of $825 million to $865 million."

Multiple analyst firms raised their price target on ADI following this report. Shares rallied to multi-year highs. We do not want to chase it here. Broken resistance in the $64-65 zone should be new support. Tonight I am suggesting a buy-the-dip trigger to buy calls at $65.10. We will try and limit our risk with a stop loss at $59.85.

Buy-a-dip trigger: $64.10 (intraday trigger, stop 59.85)

BUY the 2016 Jan $70 call (ADI160115C70)

06/14/15 adjust the entry trigger lower fro $65.10 to $64.10
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 05/24/15


Activision Blizzard, Inc. - ATVI - close: 25.40

Comments:
06/14/15: ATVI slowly faded lower but failed to breakdown under the $25.00 level. Let's give ATVI more time to see how it handles the E3 event.

The Electronic Entertainment Expo, better known as E3, is a massive show for the video game industry. More than 300 companies will exhibit their games with almost 50,000 video game industry professionals and journalists looking at the future of gaming. The convention is June 16-18th.

Our entry trigger on ATVI is $24.15.

Trade Description: May 24, 2015:
Consumer spend more money on video games than they do at the movie theater. ATVI is the biggest with annual sales of $4.58 billion. Electronic Arts (EA) is hot on its heels with revenues of $4.52 billion a year.

ATVI is home to some of the biggest franchises in video game history. According to the company, "Activision Blizzard, Inc. is the largest and most profitable western interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty , Call of Duty Online, Destiny , Skylanders, World of Warcraft , StarCraft , Diablo, and Hearthstone: Heroes of Warcraft. Headquartered in Santa Monica, California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world."

Investors have been pretty forgiving when it comes to ATVI's recent earnings reports. On February 5th they beat the bottom line estimate but missed the revenue number. Revenues were down -2.6% from a year ago. ATVI blamed currency headwinds for the revenue miss since half of their sales are outside the U.S. and represent a significant chunk of their profits. Plus, the video game business is prone to lumpy quarters as sales rise and fall on new releases and expansions. Management lowered their Q1 and 2015 guidance.

ATVI just reported its Q1 results on May 6th. Earnings per share fell -15.7% from a year ago to $0.16 but that was actually 9 cents better than expected. Revenues fell again, this time down -8.9%. Management lowered their Q2 guidance but they raised their fiscal 2015 earnings guidance above Wall Street estimates. That was enough to send shares of ATVI higher. A few analysts have commented that ATVI's 2015 guidance is too conservative.

Bobby Kotick, Chief Executive Officer of Activision Blizzard, commented on his company's quarterly results, "...This deepening level of engagement with a widening base of players across our franchises is what drove another successful quarter. We delivered better-than-expected Q1 results, increased our 2015 non-GAAP revenue outlook to $4.425 billion and earnings per share outlook to $1.20. Last quarter, on a non-GAAP basis, we delivered record higher-margin digital revenues of over half a billion dollars a Q1 record on an absolute basis and an all-time high on a percentage basis."

There were a number of headlines about how ATVI's Warcraft MMORPG saw its subscriber numbers fall from 10 million to 7.1 million in the last quarter. Investors don't seem to care. The Warcraft game is a cash cow but it's 11 years old. Investors could be looking forward.

ATVI said their new Destiny sci-fi shooter game and the Blizzard's fantasy card game have more than 50 million registered players (between them) with over $1 billion in sales.

ATVI also has several new titles coming out. They're on the verge of releasing "Heroes of the Storm", which will take on the current category champion "League of Legends" for the MOBA-style video game. More than ten million people have already signed up for the Heroes beta. ATVI has announced the next iteration of their Call of Duty franchise (CoD), which will be "Call of Duty: Black Ops III", which is another major cash-generating franchise. ATVI is also launching a new game called "Overwatch" and they'll release a new version of "Guitar Hero", which had 40 million players at its peak.

Currently shares of ATVI are up three weeks in a row and look a little bit overbought. Broken resistance near $24.00 should be significant support. Tonight I am suggesting a buy-the-dip trigger at $24.25 with a stop loss at $21.85.

Buy-a-dip trigger: $24.15 (intraday trigger, stop 21.85)

BUY the 2016 Jan $25 call (ATVI160115C25)

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

Originally listed on the Watch List: 05/24/15


Dunkin' Brands Group - DNKN - close: 53.10

Comments:
06/14/15: DNKN rebounded off its lows near $51.50 and once again looks poised to breakout past resistance. Currently we are waiting for a close above $54.25.

Trade Description: May 31, 2015:
Investors appear to be in the mood for donuts this year. Shares of DNKN are significantly outperforming the broader market with its stock up about +26% year to date versus the S&P 500's +2.3% gain.

The company is in the services sector. According to the company, "Founded in 1950, Dunkin' Donuts is America's favorite all-day, everyday stop for coffee and baked goods. Dunkin' Donuts is a market leader in the hot regular/decaf/flavored coffee, iced coffee, donut, bagel and muffin categories. Dunkin' Donuts has earned the No. 1 ranking for customer loyalty in the coffee category by Brand Keys for nine years running. The company has more than 11,300 restaurants in 37 countries worldwide. Based in Canton, Mass., Dunkin' Donuts is part of the Dunkin' Brands Group, Inc. (DNKN) family of companies."

DNKN also owns the Baskin Robbins franchise, which has more than 7,500 retail locations in almost 50 countries.

The company seems to be undergoing a turnaround in its earnings results. Back in December shares plunged on an earnings warning when management lowered their 2015 guidance. When they reported their Q4 results in February they missed by a penny with revenues in-line (+5.5%). Their donut store comps were +1.4% but their ice cream store comps were +9.3%. Management raised their dividend +15% and announced a $700 million stock buy back program.

Results improved significantly in the first quarter of 2015. Analysts were expecting a profit of $0.35 a share on revenues of $180.7 million. DNKN reported earnings of $0.40 a share, which is a +21% improvement from a year ago. Margins improved 310 basis points to 47.1%. Their revenues rose +8.1% to $185.9 million, above estimates. Their donut store comps improved to +2.7% while their ice cream store comps hit +8.0%. Management raised their 2015 earnings estimates above Wall Street's consensus.

The stock soared to new all-time highs following this earnings report in late April. Since then shares have seen a correction but investors have bought the dip. Analysts have begun to raise their price targets. The point & figure chart is very bullish with a long-term target of $78.00. Currently shares of DNKN are hovering below resistance in the $54.00 area. Tonight I am suggesting we wait for DNKN to close above $54.25 and buy calls the next morning.

Breakout trigger: Wait for a close above $54.25
Then buy calls the next morning with a stop at $49.65

BUY the 2016 Jan $60 call (DNKN160115C60)

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

Originally listed on the Watch List: 05/31/15


Constellation Brands - STZ - close: 120.52

Comments:
06/14/15: STZ garnered some bullish analyst comments and a new $149 price target last week. The stock briefly traded at new all-time highs above $122.00 but failed to close above this level.

Currently we are waiting for STZ to close in the $122-123 zone. If that occurs we want to buy calls the next morning.

More conservative investors may want to wait until after STZ reports earnings on July 1st. You could evaluate an entry point after you see the market's reaction to STZ's earnings results and guidance.

Trade Description: June 7, 2015:
Major beer brands have suffered from the boom in craft beers. Yet STZ's Corona and Modelo have seen significant growth, especially in the U.S. The company's earnings and revenue growth has fueled a rally in the stock that has outpaced the major marker indices.

STZ is in the consumer goods sector. According to the company, "Constellation Brands (NYSE:STZ and STZ.B) is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world`s leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company`s premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky.

Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,200 talented employees."

This past January STZ reported their fiscal year 2015 Q3 results that beat analysts' estimates on both the top and bottom line. Management raised their 2015 guidance. Their Q4 results were announced on April 9th. Earnings were up +37% from a year ago to $1.03 per share. That was 9 cents above estimates. Revenues were up +5% to $1.35 billion. Gross margins improved to 44%.

STZ said they're seeing strong demand for their Mexican beer brands Corona and Modelo. They're gaining market share in both the spirits and wine categories as well.

The company said 2015 sales were up +24% from the prior year to $6.03 billion. STZ's management guided in-line for fiscal 2016 and forecast earnings of $4.70 to $4.90 per share. That compares to 2015's profit of $4.17 per share (essentially +12% to +17.5% earnings growth).

Since their most recent earnings report a couple of analysts have upgraded their price targets for STZ into the $140-142 region.

Technically the stock's pullback this past week actually looks like the second half to a bearish double top pattern. Yet shares have not broken the bullish trend of higher lows just yet. If STZ bounces we could see it hitting new all-time highs soon. The resistance to watch is in the $121.85 region. I am suggesting we wait for STZ to close in the $122.00-123.00 range and then buy calls the next morning with a stop loss at $116.85.

Investors should note that STZ is scheduled to report earnings on July 1st, before the opening bell. More conservative traders may want to hesitate on launching any trades until after we see how the market reacts to this earnings report.

Breakout trigger: Wait for a close in the $122-123 zone
Then buy calls the next day with a stop at $116.85

BUY the 2016 Jan $125 call (STZ160115C125)

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

Originally listed on the Watch List: 06/07/15