Option Investor
Newsletter

Daily Newsletter, Sunday, 1/24/2016

Table of Contents

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

Leaps Trader Commentary

We Need a MarketVane

by Jim Brown

Click here to email Jim Brown
Farmers had a weathervane on top of their house or barn that told them which way the wind was blowing and give them an idea of what weather to expect. We need a MarketVane to tell us market direction.

The market had a very volatile week with the Dow down -2,300 points from its December 29th high as of the low at 15,450 on Wednesday. The rebound on Thursday was lackluster but buying picked up on Friday after the overseas markets exploded higher. Those same markets are higher on Sunday night but the S&P futures are down. Has the rebound run its course?

The answer to that question probably has more to do with oil prices than earnings, China or the FOMC meeting on Wednesday. Crude prices are the current driver of the market. When crude prices are in free fall the market tends to follow. The chart below shows that oil leads the equity markets. Crude prices are flat on Sunday evening but that may be temporary. The fundamentals in oil have not changed since the $26.55 low on Wednesday. Only the contract month changed and caused a short squeeze.


Crude prices are just one weight on the market. Over the last year the market has created a rounding top that could be the preview of things to come. The S&P decline last week to the October 2014 lows at 1,820 was met with an eventual short squeeze but it did not come the day after those lows. It was a delayed reaction and had more to do with Asia than a technical rebound.

In the chart below you can clearly see the rounding top in 2015 and the lower low on the S&P. If you had followed the strategy on that chart you would have been in/out of the market for the majority of all the gains and losses since 1995. That indicator is about to cross to the downside again for the first time since 2008. Obviously, we could see a miraculous recovery at any time that takes us to new highs but there are significant resistance levels above us that will take a significant change in investor sentiment to overcome.


Our "marketvane" for the next several weeks should be the S&P levels 1,950 and 1,867. If the S&P breaks out of that range that will likely predict our direction for the next couple of months. A break over 1,950 would trigger short covering by long time shorts and price chasing by funds. The fund managers cannot afford to let the market run away from them. The vast majority lost money in 2015 and they will be chasing performance in 2016 in order to redeem themselves in the eyes of management and investors.

If the S&P breaks below the August low at 1,867 it would suggest there are bigger problems in the market and the economy. Anyone left holding on to stocks they did not want to part with over the last three weeks would probably be racing for the exits on a new dip below 1,867.

I am not trying to scare anyone about market direction over the next few weeks. Nobody can accurately predict market direction routinely. The market exists to make fools out of the most people possible on any given day.

I only want everyone to understand the potential for further declines so they can make accurate decisions about their portfolios. The 7th year of a presidential election cycle is typically negative. There are too many last chance things a president wants to accomplish before his term ends and the candidates are giving long lists of thing they will change if elected. The long-term economic outlook in the 7th year is cloudy at best and normally turbulent.

The economic calendar for next week has two major events. The first is the FOMC meeting announcement on Wednesday. Nobody expects the Fed to hike rates after the market volatility and the meltdown in Asia. March is the next target date or even June for another rate hike. However, we never know how the Fed will phrase its statement and how the market will react.

The day before a Fed announcement is typically bullish in a trend called the Pre Announcement Drift. "Since 1994 more than 80% of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding FOMC announcements." Since the meetings only occur 8 months out of the year, that is a significant gain and it has been repeatable. This suggests we could see further gains ahead of Wednesday, assuming oil prices do not implode.


The second item on the calendar is the GDP on Friday. The Atlanta Fed is projecting a GDP of +0.7% and the second lowest reading of the year. That would put the full year GDP at +1.78% and below the Fed's expectations.

Economic Calendar


About the only thing we can count on next week is indecision. I would continue to suggest patience in adding new positions until we have a better idea on market direction. Being bored is a lot better than being broke.

Jim Brown

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Portfolio

Portfolio Update

by Jim Brown

Click here to email Jim Brown
The rocky market is giving us some excellent entry points for new trades. Last week's market crash removed some plays to make room for new ones.



Current Portfolio





Current Position Changes


ADBE, PPC, SBUX, TSN were stopped out


Macy's and General Electric became active plays.


Stop Loss Updates

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




New Plays

Patience Pays

by Jim Brown

Click here to email Jim Brown
We do not know if the rebound from last week was the start of a new rally to return us to higher levels or just a short squeeze that has run its course.

We were knocked out of all but two plays in the portfolio over the last three weeks by the -15% decline in the markets. To simply jump back into a bunch of plays, even though the prices are better today, would be foolish. Two days of gains 14 days of decline does not make a new trend. The trend is still down until proven otherwise by a move in the S&P-500 over 1,950.

I am not recommending any new plays this week. I did add three plays to the watch list and we will enter those plays when/if the market goes up and they are triggered. If we do get another week of gains we still have plenty of time to add more plays with 11 months remaining in 2016. We are also facing the busiest earnings week of the Q4 cycle and depending on those results the market could become directional again. We just do not know today which direction that will be.


Play Updates

Tough Three Weeks

by Jim Brown

Click here to email Jim Brown
Editors Note:

Macy's and General Electric were both added to the play list after Macy's rebounded from the $35 lows at the beginning of January. General Electric dipped on the market crash on Wednesday to trigger our entry at $28 and then reported earnings on Friday.

The market decline has given us many opportunities to buy some good companies at reasonable prices. Our portfolio declined significantly over the last three weeks as stop losses were hit. It is always good to refresh the play list but it is also painful. Our hopes and aspirations for prior position are dashed but we get to add new positions at ideal entry points.

The market rebound may not be lasting but the damage has been severe to many stocks. Any further declines could be less dramatic.



Current Portfolio





Current Position Changes


ADBE, PPC, SBUX, TSN were stopped out


Macy's and General Electric became active plays.


Stop Loss Updates

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



Original Play Recommendations (Alpha by Symbol)


ADBE - Adobe Systems (CLOSED)

Company Info

Comments:

Adobe was stopped out at $85.75 on Wednesday when the market crashed to 15-month lows. This was market related and nothing specific to Adobe.

Original Trade Description: October 11, 2015

Back in the old days you used to buy software in a store, bring it home, and install it on to your personal computer. You paid for it. It was your copy to use forever - a perpetual license. Today the business model has changed, especially at ADBE. Nowadays you download the software from the internet to your computer and pay for it on a monthly, subscription basis.

If you're not familiar with ADBE here's a brief company description: "Adobe is changing the world through digital experiences. Content built and optimized with Adobe products is everywhere you look - from websites, video games, and smartphones to televisions, tablets, and beyond. Adobe Creative Cloud software offers the most innovative tools for creating digital media, while Adobe Marketing Cloud delivers groundbreaking solutions for data-driven marketing. Our leadership in these two emerging categories, Digital Media and Digital Marketing, provides our customers with a real competitive advantage, positioning Adobe for continued growth well into the future. As one of the largest software companies in the world, Adobe achieved revenue of more than US$4 billion in 2013."

The company's Q1 earnings report was March 17th. Results were $0.44 a share, which was five cents better than expected. Revenues were up +10.9% to $1.11 billion, also above expectations. The company continues to see success with their subscription model and added 517,000 new creative cloud subscriptions, a +28% improvement from a year ago.

Q2 results came out on June 16th. ADBE beat the bottom line with earnings of $0.48 a share (3 cents above estimates). Revenues were up +8.8% to $1.16 billion, which was in-line with expectations. Management lowered their Q3 and 2015 guidance. This sparked a one-day sell-off that traders quickly used to buy the dip.

The company delivered a similar performance in its fiscal Q3. ADBE reported on September 17th. They beat estimates by four cents. Revenues improved +21% from a year ago to $1.22 billion, slightly ahead of estimates. Yet management lowered their Q4 estimate again. The stock gapped down the next day and then rallied.

This past week ADBE lowered their guidance yet again. This time they adjusted their fiscal 2016 numbers below estimates. What happened? Wall Street defends the stock and shares see a one-day decline. There seems to be a trend of investors buying bad news. It's probably because these are all short-term issues for ADBE and a good chunk of the problem is foreign currency headwinds. ADBE is still forecasting double-digit percentage gains for most of its businesses through 2018. Revenues growth is forecasted to grow +20% while earnings are forecasted to grow +30% over the next few years.

Technically ADBE is still in a long-term up trend in spite of some volatile moves in the last few months. Shares are only a few points away from new all-time highs. The peak is $87.25 set in August this year. Tonight I am suggesting we wait for ADBE to close in the $87.50-89.00 range and buy calls the next morning with a stop loss at $77.85.

Position 10/19/15

Closed: Long Jan 2017 $100 call, entry $6.80, exit $5.35, -$1.45 loss

History
12/11/15 shares garner several upgrades
12/10/15 ADBE reports Q4 earnings above estimates
11/29/15 new stop @ 85.75
11/22/15 new stop @ 84.75
11/08/15 new stop @ 81.75
10/19/15: Trade begins.
10/16/15: Triggered. ADBE @ $88.67, in the $87.50-89.00 entry range



GE - General Electric

Company Info

Comments:

GE dipped on Wednesday with the market to trade under our intraday entry trigger at $28.00. Earnings on Friday were mixed with the company beating on earnings but missing on revenue because of a delay in shipping some turbines in the December quarter. That revenue will now be counted in the March quarter.

Original Trade Description: December 20, 2015:

GE has been slowly drifting higher since the 2009 market lows. Most of 2014 and 2015 the stock was stuck churning sideways. The situation changed in early October this year after a big activist investor got more involved. It's making a difference. The S&P 500 is down -2.6% year to date. Yet GE is up +20% in 2015 and should continue to outperform in 2016.

GE is in the industrial goods sector. According to the company, "GE is the world's Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the 'GE Store,' through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. www.ge.com"

One of the biggest changes at GE has been the company's long-term transformation to get rid of its financial assets that have been an albatross around its neck for so long. Management is focusing on the company's roots, which is industrial products and innovation.

The company recently held their annual meeting with analysts. The year ahead brings a lot of challenges. The global market is still struggling. The U.S. economy is limping along at +2% growth. Plus the strong dollar hurts sales outside the U.S. In spite of these headwinds GE's CEO Jeffery Immelt is bullish on 2016.

Management is forecasting 2016 earnings to rise +15% on revenue growth of +2% to +4%. That is impressive for such a massive company like GE who does so much business overseas. They also foresee paying investors $8 billion in dividends and spending $18 billion on stock buybacks in 2016. GE provided a long-term 2018 earnings forecast of more than $2.00 per share compared to $1.30-1.20 a share in 2015. They expect to return $55 billion to shareholders in dividends and buybacks between now and 2018. That sort of investor-friendly action could help GE weather any market volatility in 2016.

The stock has been showing relative strength the last few months. The stock held up pretty last week too during the market's volatile moves. GE tagged multi-year highs on Wednesday. The point & figure chart is bearish and forecasting a long-term target at $53.00.

The action in GE's stock over the last few weeks is either a new top or it's a new base. We are betting it is the latter. Tonight I am suggesting investors wait for GE to close above $31.35 and then buy calls the next morning.

Recommendation: Buy-the-dip @ $28.00 (intraday trigger) start with a stop at $25.85.

Position 1/20/16:

Long Jan 2017 $30 call, entry $1.30, initial stop loss $25.85



KMB - Kimberly Clark

Company Info

Comments:

KMB bounced right at support at $123 and skillfully avoided our current stop loss at $119.40. The stock showed good relative strength in a rough week. Let's hope the earnings are good on Monday.

KMB has earnings coming up on January 25th.

Original Trade Description: December 6, 2015:

There are not many public companies that have been around as long as KMB. The company has a history going back more than 140 years. It looks like investors are still bullish on it with KMB trading near all-time highs.

KMB is in the consumer goods sector. According to the company, "Kimberly-Clark (KMB) and its well-known global brands are an indispensable part of life for people in more than 175 countries. Every day, nearly a quarter of the world's population trust K-C's brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in 80 countries."

The company has beaten Wall Street's earnings estimates the last three quarters in a row. A stronger labor market in the U.S. combined with lower gasoline prices should be a tailwind for consumer spending in the globe's biggest economy. Meanwhile KMB is pursuing high-growth opportunities in emerging markets.

Technically the stock has been trading sideways in the $117.00-123.00 zone the last seven weeks. The recent bounce near the bottom of its trading range might suggest a bullish breakout soon. The point & figure chart is bullish and forecasting at $163 target. Tonight I am suggesting investors wait for KMB to close above $123.00 and then buy calls the next morning with an initial stop loss at $116.95.

Position 12/16/15:

Long Jan 2017 $130 Call, entry $7.50

History
12/27/15 new stop @ 119.40
12/16/15 Trade begins. KMB opens at $124.75
12/15/15 Triggered with KMB @ $124.44, above our $123.00 trigger



M - Macy's

Company Info

Comments:

Macy's closed above the $40.75 trigger price and the position will be entered at the open on Monday.

Original Trade Description: January 17th, 2016

Leading up to the 2008 financial crisis shares of Macy's (M) were already in decline. The stock fell nearly -90% from its 2007 highs and by late 2008 M traded near $5.00 a share. The market didn't bottom until early 2009. At that time M was trading about $6.25. The stock rallied the next six years in a row. It looked like 2015 would make it seven years in a row. Then momentum suddenly reversed in July 2015. The stock surged to all-time highs near $73.00 on rumors of an activist investors getting involved. That proved to be the peak. Macy's collapsed from about $73.00 in July to $34.50 in December - a 52% plunge. Recent action suggest Macy's has bottomed and all the bad news is priced in.

M is part of the services sector. They are in the department story industry. According to the company, "Macy's, Inc., with corporate offices in Cincinnati and New York, is one of the nation's premier retailers, with fiscal 2014 sales of $28.015 billion. The company operates about 900 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bloomingdale's Outlet, Macy's Backstage and Bluemercury, as well as the macys.com, bloomingdales.com and bluemercury.com websites. Bloomingdale's in Dubai is operated by Al Tayer Group LLC under a license agreement."

U.S. retail sales were very disappointing last year. All of 2015 saw retail sales rise +2.1%. That's down from the five-year average of +5.1%. All year long analysts were expecting consumers to spend more because they were saving more money at the gasoline pump due to falling oil prices. That extra spending never showed up. This lack of spending weighed on several retailers and M's stock continued to sink. Macy's management took advantage of their falling stock price and bought back over 30 million shares last year.

Of course stock buybacks will also do so much. On January 6th Macy's slashed their full-year guidance due to weak sales during the holiday shopping season. Cold weather apparel and goods were not selling due to an unusually warm winter. Macy's said their comparable-store sales dropped -4.7% during the November-December time frame. The company reduced their full-year outlook from $4.20-4.30 a share down to $3.85-3.90 a share. Wall Street was expecting $4.24. That same night Macy's announced a major restructuring program. They will close 36 stores this spring. Plus they will reduce staff and cut costs in an effort to save $400 million a year. Shares rallied the next day.

If a company can cut its earnings guidance and rally then all the bad news is probably priced in. If you haven't noticed lately the stock market is plunging. The S&P 500 is already down -8.0% in the first ten trading days of 2016. Shares of Macy's are moving the opposite direction and the stock is up +8.2% year to date. The recent lows near $34.00 look like a bottom. However, we would like to see M breakout past technical resistance at its 50-dma and past its recent highs.

Breakout trigger: Macy's closed above $40.75 at Friday's close.
Buy calls Monday morning with an initial stop at $36.45.

BUY the 2017 Jan $45 call (M170120C45) current ask $3.90



PPC - Pilgrims Pride (CLOSED)

Company Info

Comments:

PPC was a new trade entered the prior week. The bird flu story appeared just as the market crashed last week. The combination knocked PPC below out stop loss at $20.65. Support was $21 and the Wednesday market crash forced a penetration of that level. The stock rebounded and looks like it will try another breakout. I am not adding it back at the present time but a move over $24 would be buyable.

Original Trade Description: January 10, 2016:

PPC is an aggressive, technical trade. Shares had a terrible 2015 but it looks like all the bad news is priced in.

PPC is in the consumer goods sector. According to the company, "For over six decades, Pilgrim's has produced healthy, high-quality food products that go into some of the world's finest recipes. Working with approximately over 4,000 family farms throughout the U.S. and Mexico, we are dedicated to providing these wholesome, high-quality products at a great value. As the second-largest chicken producer in the world Pilgrim's has the capacity to process more than 34 million birds per week for a total of more than over 7 billion pounds of live chicken annually. With corporate headquarters located in Greeley, Colorado, we have operations in 12 U.S. states as well as in Mexico and Puerto Rico. We are committed to the 35,000 plus team members who work with us to provide products to foodservice, retail and frozen entree customers. The company's primary distribution is through retailers, foodservice distributors and restaurants as well as through the export of chicken products to customers all over the world. Pilgrim's Pride is a part of the JBS USA family. JBS S.A., the world's largest protein company, owns 75.5% of our outstanding common stock."

PPC's most recent earnings report was October 28th. The company delivered their Q3 results and missed estimates. Wall Street was expecting a profit of $0.69 a share on revenues of $2.17 billion. PPC missed both estimates with earnings of $0.58 a share. Revenues fell -6.9% to $2.11 billion.

The industry as a whole has been suffering from the widespread avian flu last year that forced business owners to destroy millions of birds. PPC is also facing serious competition from a handful of competitors. Management is actively seeking ways to reduce their costs and make their business more competitive and their financial results more stable.

It looks like investors might believe the worst is behind it for PPC. Their Q3 earnings came out on October 28th and the stock plunged to new two-year lows on October 29th. That proved to be the low for the year. Investors have since been buying the dips. It is important to note that there is still a large camp of traders who are bearish on PPC. The most recent data listed short interest at 56% of the 59.0 million share float. That much bearishness can work against them. If PPC continues to rally the stock could see a short squeeze.

The intermediate trend is up and the point & figure chart is bullish with a $33 target. PPC managed to ignore the market's sell-off on Thursday and Friday last week. The stock actually broke through resistance on Friday. Tonight I am suggesting small bullish positions if PPC can trade at $23.55. This is an intraday trigger. We will start with a stop loss at $20.65.

Position 1/11/16:

Closed: Long Jan 2017 $25 call, entry $3.00, exit $1.65, -$1.35 loss.



SBUX - Starbucks (CLOSED)

Company Info

Comments:

Starbucks dipped below our stop loss on the Wednesday market crash by ONE PENNY. The stop was $54.95 and the low for the day was $54.94. I am adding Starbucks back to the Watch List as an active play candidate above $60. They reported earnings that were strong and they have an aggressive growth plan.


Original Trade Description: September 20, 2015

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX continues to serve up strong earnings and revenue growth too. The fourth quarter of 2014 saw a huge jump in SBUX gift cards. One out of every seven Americans received a SBUX gift card. SBUX has been reporting very strong overseas sales growth and consistently healthy same-store sales growth globally.

Shares were very steady performers for much of 2015 and then during the market's correction in late August the stock just collapsed. It was shocking to see SBUX erase six month's worth of gains in just a few days. Of course it bounced back almost as fast. Tonight I want to use SBUX's volatility to our advantage. If the market declines over the next couple of weeks SBUX might be unfairly punished. The $50-52 area should be support. We want to use a buy-the-dip trigger at $52.00.

Position 10/12/15:

Closed: Long Jan 2017 $70 call, entry $3.91, exit $1.57, -2.34 loss.

History
11/22/15 new stop loss @ 54.95
11/21/15 short-term November put has expired
10/29/15 SBUX reported Q4 earnings
10/28/15 buy the Nov. $57.50 put, cost $0.61
10/25/15 prepare to buy short-term puts on Wednesday (Oct. 28th)
10/12/15 Trade begins. SBUX opens @ $60.35
10/09/15 SBUX closed at $60.07, above our suggested entry of a close above $60.00



STZ - Constellation Brands

Company Info

Comments:

Constellation was the outperformer of the week with a massive $5.31 gain on Friday. The 50-day average remains support.

Original Trade Description: January 10, 2016

New Year's was just a few days ago and many people were thinking hard about their new year's resolutions. For most folks it's a desire to be healthier. Instead of working hard for six-pack abs you may want to just stop by the store for a six pack of whatever STZ is selling. This company appears to be running at full speed and the stock shows it.

STZ is in the consumer goods sector. According to the company, "Constellation Brands 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 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level. The market's current decline, should it continue, will likely pull STZ back toward $145.00, which should be new support. Tonight I am suggesting a trigger to buy calls on a dip at $145.00. We'll start with a stop loss at $139.45. More conservative investors may want to wait and see if STZ dips closer to the $140-142 area as an alternative entry point.

Position 1/11/16:

Long Jan 2017 $165 call, entry $7.90, stop loss $138.25

History:
01/17/16 adjust stop loss lower from $139.45 to $138.25
01/11/16 triggered @ $145.00



TSN - Tyson Foods (CLOSED)

Company Info

Comments:

The combination of the recurrence of the bird flu and the market correction knocked Tyson back to $48.52 on Wednesday and hitting our stop loss at $49.45. We had recommended taking off half the position in December at $7.00 for a 75% gain. The stop loss on Wednesday on the second half produced a $1.20 gain.

Original Trade Description: October 25, 2015

TSN's beef business has struggled as a prolonged drought has hurt the cattle business. Yet TSN is seeing strong improvement in their chicken and prepared foods businesses.

TSN is in the consumer goods sector. According to the company, "Tyson Foods, Inc. (TSN), with headquarters in Springdale, Arkansas, is one of the world's largest food companies with leading brands such as Tyson®, Jimmy Dean®, Hillshire Farm ®, Sara Lee®, Ball Park®, Wright®, Aidells® and State Fair®. It's a recognized market leader in chicken, beef and pork as well as prepared foods, including bacon, breakfast sausage, turkey, lunchmeat, hot dogs, pizza crusts and toppings, tortillas and desserts. The company supplies retail and foodservice customers throughout the United States and approximately 130 countries.

Tyson Foods was founded in 1935 by John W. Tyson, whose family has continued to lead the business with his son, Don Tyson, guiding the company for many years and grandson, John H. Tyson, serving as the current chairman of the board of directors. The company currently has approximately 113,000 Team Members employed at more than 400 facilities and offices in the United States and around the world. Through its Core Values, Code of Conduct and Team Member Bill of Rights, Tyson Foods strives to operate with integrity and trust and is committed to creating value for its shareholders, customers and Team Members. The company also strives to be faith-friendly, provide a safe work environment and serve as stewards of the animals, land and environment entrusted to it."

After big gains in 2013 the stock ran out of steam. Shares have been consolidating sideways for more than a year and a half. That's probably because the earnings picture has been cloudy. The company has struggled to meet estimates and management has guided lower in recent quarters. That changed recently in September when TSN raised their 2016 guidance. The company should see +9% earnings growth in 2015 but earnings are expected to grow +21% in 2016.

Technically the bullish breakout in TSN this month is significant. The $44-45 zone has been major resistance for months. The current rally has generated a bullish buy signal on the point & figure chart, which is now forecasting at $63.00 target.

Tonight I am suggesting a little patience. Wait for a pullback in TSN. We are listing a buy-the-dip trigger to launch bullish positions at $45.50.

Position 10/26/15:

Closed: Long Jan 2017 $50 call, entry $4.00, exit $5.20, +$1.20 gain.

History:
12/21/15 Exited half of call position. Option bid $7.00 (+75%)
12/20/15 Plan on selling half of our call position on Monday, Dec. 21st to lock in a partial gain
12/13/15 new stop @ 49.45
12/06/15 new stop @ 45.75, readers may want to take some money off the table. Our option is already up +60%.
11/29/15 new stop loss @ 44.75
11/23/15 TSN reports earnings. The stock rallies
11/22/15 TSN could be volatile following its earnings report
10/26/15 triggered on a dip at $45.50
10/25/15 added to the watch list



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At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

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Watch

Lots of new Opportunities

by Jim Brown

Click here to email Jim Brown
The market decline pushed some great stocks to multi month lows and turned them into excellent LEAPS candidates. So many choices, so little time.

I am dropping EQR because it returned to three-month lows last week and has no discernible trend to the upside.



Stocks Dropped from Watch List:


EQR - Equity Residential - Dropped

M - Macy's Inc - Moved to active play list

GE - General Electric - Moved to active play list


New Watch List Entries:


SBUX - Starbucks

We were stopped out of the Starbucks position by a penny on the Wednesday market crash. The company reported great earnings and failed to decline. The only hiccup was a temporary decline in sales growth in Europe because of the terrorist attacks. CEO Howard Schultz said they were headed for a record quarter in Europe until the Paris attack and then everything came to a screeching halt. He also said buying and traffic patterns were returning to normal and 2016 should be a good year. They reported 9% same store sales increases in the U.S. and 6% elsewhere other than Europe. Earnings growth is expected to be 15% annually for the next five years. They are opening 500 stores a year in China for the next 5 years and Schultz expects China's revenue to exceed the U.S. in the years to come. Schultz said at the current low stock price they were "backing up the truck" to buy as many shares as possible.

I am adding Starbucks back to the Watch List on a breakout over $60.

Original Trade Description: September 20, 2015

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX continues to serve up strong earnings and revenue growth too. The fourth quarter of 2014 saw a huge jump in SBUX gift cards. One out of every seven Americans received a SBUX gift card. SBUX has been reporting very strong overseas sales growth and consistently healthy same-store sales growth globally.

Trade recommendation:

With a SBUX trade at $60.25

Buy Jan 2017 $65 LEAP Call, currently $3.80, stop loss $54.75



NFLX - Netflix

Netflix has a plan for total domination of streaming video. On December 31st they were active in 60 countries. In early January they announced they had expanded into 130 additional countries a full year ahead of schedule. The original plan was to complete the expansion by the end of 2016. This gives them a huge additional base of prospective users of more than 450 million broadband accounts. Everyone around the world knows of Netflix. Many have been waiting for them to open in their country. Netflix could gain more than 25 million new users in 2016 alone. They currently have just under 75 million. The 190 countries does not include China. They are working on getting into China but the government has put numerous censorship roadblocks in their path that need to be overcome. They expect to be in China in 2017. They added 4.04 million international subscribers in Q4 and that was just from the existing 60 countries.

Netflix said it was targeting young, outward-looking, affluent consumers with international credit cards and would spread out from that base.

Last year Netflix raised prices for new subscribers by $1 to $10 a month for unlimited high definition streaming. Existing subscribers were left at the $8 level. Now the company is saying those grandfathered under the $8 plan will see their exemption expire in May. They can continue paying $8 a month for standard definition but the rate will rise to $10 for HD shows and movies. Premium subscribers getting 4K UHD videos will be paying $12 a month. With 75 million subscribers this represents a cash windfall with the $8 rate rising 50% to the $12 level if you want UHD. Netflix said they were already seeing very fast adoption of the $12 plan by existing users. Plus, premium subscribers can stream to 4 devices simultaneously rather than just 2.

Netflix plans to stream more than 600 hours of original content in 2016 compared to 450 hours in 2015. There will be 31 new and returning original series, up from 16 in 2015. There will be two dozen original feature films and documentaries, 30 children's series and a variety of comedy specials.

Analysts believe Netflix earnings are going to soar in 2017 as the adoption of streaming in those 130 new countries begins to accelerate. That is good news because Netflix shares are highly overvalued according to normal metrics. Revenues have been rising 25% annually and streaming content obligations rose by 15% in 2015. They are paying a lot for content but they are essentially taking it off the market to prevent anyone else from competing. They can now use that content in 190 countries so they are leveraging their assets to expand future revenue. Their current PE of 346 is less than half of Amazon's 851 PE. They are operating on the same business model as Amazon. If you build it subscribers will come. When they finish their expansion phase, which is limiting earnings today, they will be highly profitable with more than 200 million subscribers by 2020. That equates to $2 billion a month in revenue. That is a month, not a year.

Buying Netflix requires a leap of faith that investors will return to it as a momentum growth stock. After the earnings report shares have been weak as traders looking for an earnings bounce move on to other stocks in hopes of repeating the process. Shares closed at $100 on Friday after a low of $97 during Wednesday's market crash.

I am suggesting we target that $97 level for a long entry. However, the LEAPS are so expensive we have to use a combination play to make it work.

One option would be to buy the stock and sell a January $110 LEAP covered call, currently $17.50. if we buy the stock at the $97 target we are protected against a decline to $80 by the premium we receive. If Netflix does not drop significantly and rebounds to more than $110 then we make roughly 20% or $20 over the next year. We cannot complain about a 20% gain in this market. If Netflix shares did decline significantly so $90 or so, the option premiums will shrink significantly and we could buy back the $110 LEAP for a profit and then buy a LEAP at a lower level for less money.

Another option would be to use a combination position where we buy the LEAP and then sell a put spread or a naked put to offset the cost of the LEAP call. One example would be to buy the $110 call for $17 and sell the $90 put for $14.25 giving you a net debit of $2.95 to be long Netflix for the next year. If shares declined under $90 you "may" be obligated to buy the stock at $90 "if" it was put to you. With the volume of puts on Netflix that potential is minimal but it does exist. If you were put I would sell a covered LEAP call to cover any losses and you still have your $110 long call for when the stock rebounds.

The option I am recommending is the combination play. If Netflix trades at $97.25 we enter the following trade. I am using the even dollar strikes in case there is another stock split in 2016.

With a NFLX trade at $97.25

Buy January 2017 $110 LEAP call, currently $17.20, stop loss $89.50
Sell short January 2017 $90 LEAP put, currently $14.25, no stop loss.
Net debit $2.95. If we are put the stock our cost will be $75.75 and a bargain.



NKE - Nike

Nike split 2:1 on December 23rd at $132 and the stock went straight down from there. When a stock is a major fund holding and it splits, there is a rush to the exits by some funds. They can sell the new shares nearly tax-free when it is classed as a stock dividend and they still have the same number of shares in the original position. Some funds have restrictions on the number of shares they can hold in any single position. A stock split doubles the number of shares and sometimes puts them over the limit and they sell the extras. These factors cause what is called "post split depression." Nike shares have now experienced that depression.

Shares declined from the $66 level the day of the split to $56 last week on fears the holiday retail selling may have been weak. Given Nike's predominant position in athletic leisure apparel they will always be the dominant seller compared to Under Armour and LuluLemon.

The reported earnings in late December of 90 cents, that rose +22% and beat estimates for 85 cents. Revenue rose +4% to $7.686 billion but missed estimates for $7.808 billion because of the strong dollar. Excluding the dollar impact revenues rose +12% and well over $8 billion.

The company guided for earnings growth in the "mid teens percentages" and said there was no weakness in China. They announced a $12 billion stock buyback program in November and raised their dividend by +14%.

Nike is targeting $50 billion in annual revenue by 2020 with online direct ecommerce sales of $7 billion, up from $1 billion in 2015. Online sales rose +51% in 2015.

Competitor Under Armour is targeting total sales of $8 billion by 2018 to put that aggressive Nike target into perspective.

Nike plans to begin selling in Mexico, Chile and Turkey in 2016. Nike began e-commerce sales to Canada, Switzerland and Norway in the last quarter.Sales in China rose +28% despite the economic downturn. North American sales rose +10% with futures orders up +14%.

Earnings are March 22nd.

I am recommending we buy the $65 LEAP with a Nike trade at $62.25 to confirm the rebound from the lows last week.

With NKE trade at $62.25

Buy January 2017 $65 LEAP Call, currently $4.80, stop loss $56.25 and under the Wednesday crash low.



Active Watch List Play Descriptions:


No plays currently on the Watch list



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