The Costco earnings drop was painful but it was just one of 16 positions. The option went from $6 ITM to $3 OTM. We closed OA for a major win and I am recommending we drop SLCA.
In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.
Original Play Recommendations (Alpha by Symbol)
AABA - Altaba Company Profile
Alibaba bought the rights to the PAC-12 college sports games in order to stream them into China. Credit Suisse resumed coverage with a buy rating and $220 price target. Wells Fargo resumed coverage with a buy rating and $225 price target.
Altaba sold its entire Snap Inc position for $69.3 million and a 177% gain. Unfortunately, SNAP had declined from $27 to $15 before AABA pulled the trigger on the exit.
Shares closed at a new high on Friday.
Original Trade Description: September 17th.
Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com.
Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments including Snap Inc. (SNAP). They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.
Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free.
We have tried to play Alibaba several times but the volatility kept knocking us out. Unless you want to buy a $30 Jan $180 call and just sit on it with no stop loss, AABA is the only way to play Alibaba.
Long Jan 2019 $70 call @ $8.20, see portfolio graphic for stop loss.
You could sell short the $90 call for $2.15 but that would limit your gain to $15. Alibaba shares are going to the moon, just like Amazon. They are growing faster than Amazon and have a bigger market with 4.5 billion consumers in Asia.
AAPL - Apple Inc Company Profile
Apple is still getting pummeled by the X phone delivery rumors and the stock traded all over the map last week. They recovered to close at a two week high.
Original Trade Description: September 24th.
Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. Company description from FinViz.com.
Earnings October 31st.
Apple shares have fallen $13 since the September 1st high and $12 since the product announcement on September 12th. The shares have fallen into a cluster of converging support levels and the post announcement decline should be "about" over. Nobody will know for sure until the rebound begins.
After the product announcement Apple reaffirmed its guidance saying we planned for the recent event surrounding the production and release of the new products when giving the prior guidance. Apple rarely misses guidance. Knowing they were having production problems and staggered release they probably low-balled the number.
They are expected to sell 85 million phones in Q4. More than 66% of iPhone users have phones older than 2 years. They will have five active models for sale in Q4. They have the 7, 7+, 8, 8+ and the X plus they still have some of the older, cheaper models they are selling overseas in places like India. The new Watch could be the model that actually turns the Watch into its own revenue category instead of being lumped into the "other" category.
I have been negative on Apple for the last three weeks and the decline is going as expected. I believe the stock has reached a level where buyers will appear. There could still be several dollars of decline but the rebound could be just as quick once it appears to have bottomed.
Because the option premiums are so large this has to be a spread position. I expect Q4/Q1 sales to be so strong that shares explode to new highs. Analysts are talking about $200 and shares closed at $152 on Friday.
Long Jan 2019 $160 call @ $12.90, see portfolio graphic for stop loss.
Short Jan 2019 $190 call @ $5.40, see portfolio graphic for stop loss.
Net debit $7.50.
ABBV - AbbVie - Company Profile
Continued good news is lifting the shares and even a negative $140 million verdict on AndroGel failed to hold the stock back. Shares closed at a new high on Friday.
Original Trade Description: June 4th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
Estimated earnings date is July 28th.
I would not normally pick a stock that has had a $5 run over the last three weeks but ABBV is about to break out to a new high and that could kick it into high gear. People love to buy stocks when they first make a new high.
Update 6/23/17: The company received a favorable opinion on MAVIRET, a once daily He-C drug, from the European Medical Agency and the CHMP. This is an 8 week cure for Hep-C that will compete with Gilead's products.
Update 7/28/17: AbbVie reported earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Update 8/5/17: AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Update 9/10/17: The company declared a quarterly dividend of 64 cents payable Nov 15th to holders on Oct 13th. They have increased their dividend for 25 consecutive years.
The company also submitted two NDAs to the FDA for approval. AbbVie also released positive results on a new drug for eczema. The drug called upadacitinib, produced stronger results than the competitor drug from Regeneron (REGN).
Update 9/17/17: AbbVie's drug Humira is expected to sell more than $18 billion in 2017 after a $16.1 billion revenue in 2016. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs.
Update 10/1/17: AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams. Shares spiked $5 on the news.
Long Jan 2019 $75 call @ $4.70, see portfolio graphic for stop loss.
Previously closed 7/28/17: Short term: Long Jan 2018 $72.50 call @ $2.81, exit $2.63, -.18 loss.
ATVI - Activision Blizzard - Company Profile
No specific news. Activision's BlizzCon event is scheduled for Nov 3rd/4th. This always gets a lot of press and analyst coverage. Activision will announce a "full pipeline of initiatives" that will get a rise out of gamers and analysts alike.
Original Trade Description: July 16th.
Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com
Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.
Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.
Earnings Nov 2nd.
Activision has been beating on earnings and given the success of their last two releases the Q2 earnings should also be a beat. The stock is poised to break out to a new high over $61. I am recommending the 2019 LEAPS ahead of earnings. For those that do not want to hold that long I am also going to list the January 2018 strikes as well.
Update 7/30/17: Blizzard announced that player signing for the professional Overwatch Gaming League will begin on August 1st. All players for the league will become members of the seven teams that have joined the league so far including, Boston, Los Angeles, Miami-Orlando, New York City, San Francisco, Seoul and Shanghai, or for teams that sign on before the player signing period closes Oct. 30. Each player is guaranteed a $50,000 salary or more, lodging and practive facilities, health insurance, a retirement savings plan and 50% of the team's winnings. Each team will have 6-12 players. The total bonuses in Season 1 will add up to $3.5 million with a minimum of $1 million to the winning team. The e-Sports craze is exploding and this will be a money maker for ATVI.
Update 8/5/17: ATVI reported earnings of 55 cents compared to estimates for 30 cents. Revenue of $1.42 billion beat estimates for $1.21 billion. They guided for earnings of 34 cents in the current quarter with full year earnings of $1.94 per share. Shares spiked to a new high close at $64 on Thursday but gave back $2 on Friday.
Update 9/24/17: Call of Duty: WWII is due out in November and retailers have already reported a huge wave of preorders after the beta testing was completed. Those that were allowed to download the beta version were very excited and the news is spreading. This takes Call of Duty back to its roots and should be a very successful game.
Long Jan 2019 $65 call @ $8.20, see portfolio graphic for stop loss.
Short Jan 2019 $85 call @ $2.61, see portfolio graphic for stop loss.
Net debit $5.59.
Long Jan 2018 $65 call @ $4.05, see portfolio graphic for stop loss.
BA - Boeing Company - Company Profile
Boeing reported a 7.4% rise in Q3 deliveries due to the high demand for the 737 jetliners. Boeing delivered 202 planes in Q3 compared to 188 in the year ago quarter. Of that total 145 were 737s, up from 120 last year. The 787 Dreamliners slipped 1 to 35 and 777s fell from 22 to 16. Boeing has delivered 554 planes in 2017 and expects to deliver 760-765 for the year. They received 127 new orders in Q3. Shares closed at a new high on Thursday.
Original Trade Description: May 14th.
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.
Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part.
The temporary dip could be a buying opportunity. Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.
Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.
Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.
All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.
Update 6/9/17: Israel's El Al airlines will take delivery of its first 787 Dreamliner in August. They have 16 on order for $1.25 billion. They expect to save 47% in fuel costs by retiring the 747-400s and 767-300s.
The company finalized the $3 billion order with Iran's Aseman Airlines for 60 planes. This will be 30 737 planes to be delivered in 2019 delivered in the first group with another 30 models yet to be determined in 2020-2021.
Update 6/23/17: Boeing received orders or commitments for 571 planes at the Paris Air Show. This was a record number of orders surpassing the 2011-2015 period where orders were booming. More than 500 of those orders were for the 737 single isle jets. On the final day Boeing announced an order of 125 737-MAX 8s to an unidentified customer. Avolon ordered 75 737 MAX 8s and Lion Air orderes 50 737 MAX 10s. Orders for the 737 MAX 10 that was formerly announced at the show totaled 361 planes.
Update 7/2/17: Boeing said it received orders for more than $40.1 billion at the Paris Air Show.
Last week Boeing announced the startup of Boeing Global Services a new division in Boeing that will focus on the needs of government, space and commercial customers worldwide. They said the services market is worth an estimated $2.6 trillion over the next ten years.
Update 7/17/17: Through July 4th, Boeing has received 381 net firm orders consisting of 438 gross orders and 57 changes or cancellations. This compares to only 276 new orders in the first six months of 2016. It is going to be a good year for Boeing. Hardly a day goes by that they do not announce a new order for a plane, fighter, helicopter, satellite or spacecraft.
Update 7/30/17: Boeing reported earnings of $2.55 that beat estimates for $2.32. Revenue of $22.74 billion missed estimates for $23.01 billion. Operating cash flow of $5 billion was more than twice expectations. They repurchased 13.6 million shares for $2.5 billion and paid out $900 million in dividends. They delivered 226 aircraft in Q2. They added $27 billion in net new orders to lift their backlog to $482 billion. They expect to buy back $10 billion in stock in 2017. They reaffirmed guidance to deliver 760-765 aircraft in 2017 with earnings of $9.80-$10.00, up from $9.20-$9.40. Shares literally exploded to gain $29 for the week and add 198 points to the Dow. Unfortunately, we have a spread position so our gain was limited.
Update 8/5/17: Boeing said they sold 2 747s previously allocated to Russia's Transaero Airlines to the U.S. government for use as the next generation Air Force One. Transaero went bankrupt and the planes were never delivered. They have been in storage since late 2015. The government said they got a really good deal but nobody would release a price. The planes will require extensive conversion work to upgrade them to Air Force One specifications. Even a new plan rolling off the line today would require the same upgrades. Congressional committees approves plans to shift $195 million in previously approved defense funds to the current year to accelerate conversion work on the planes. They will not enter service until 2024.
Update 8/13/17: Boeing said they signed a deal with Air Lease for 12 737 MAX planes. That will be five 737 MAX 7s and seven 737 MAX8s. They also received two new orders for the 787-9 Dreamliner. They also signed a memorandum of understanding with SpiceJet for fourty 737 MAX planes worth $40.7 billion. Another MOU was signed with Tibet Financial Leasing for twenty 737 MAX planes. Another MOU was signed with BOC Aviation Ltd for ten 737 MAX 10 planes worth $1.25 billion. Boeing expects to sell 29,530 single-aisle jets worth $3.2 trillion over the next 20 years. That is a 5% increase from the last guidance.
Boeing said it booked 183 net commercial orders in Q2 compared to 381 net orders in Q1.
Update 8/20/17: Boeing said they were awarded a 4-year, $7.1 billion contract for maintenance and support on the C-17 military aircraft. The company also said it received clearance to sell six additional Apache helicopters for $654.6 million.
Update 8/27/17: Boeing won a $349 million design contract to update the Minuteman III missile system. When the final contract for production is written, it will be from $65 billion to as much as $140 billion. Orbital ATK (OA) and Rocketdyne (AJRD) are expected to be subcontractors for Boeing.
Update 9/10/17: Boeing upgraded their forecast for plan demand from China. The company now predicts China will buy 7,240 planes, up from 6,810 in the prior forecast. The value of these planes will be more than $1.1 trillion. The period covered is 2016 to 2036. China is expected to be 20% of the global demand for aircraft over the next 20 years. Boeing said the rapidly growing middle class and the continued economic growth in China would fuel the growth of airline travel.
Update 9/17/17: Boeing announced on Tuesday it was increasing production on the 787 Dreamliner from 12 to 14 per month. The planed cost $306 million each so that is a big boost to revenue. Even bigger news is that Boeing is going to raise the 787 "accounting block" by 100 planes to 1,300 starting in Q3. This will change the rate of amortization for the original tooling and add 15-20 cents to earnings in Q3 and 30-40 cents in 2018.
Update 9/24/17: Boeing blew out to another new high after announcing a tentative order from Turkish Airlines for (40) 787-9 Dreamliners worth $11 billion.
Boeing raised its 20 year target on deliveries to Southeast Asia by 460 planes saying demans should exceed 4,210 new planes worth $650 billion. Boeing said Southeast Asia wasthe fastest growing market in the world and 10% of the global market.
Earnings October 26th.
Shares made a new high on Wednesday at $187 before dropping back to $182 on the temporary flight halt. Options are expensive so I am recommending a spread.
Long Jan $190 call @ $7.80, see portfolio graphic for stop loss.
Short Jan $210 call @ $2.02, see portfolio graphic for stop loss.
Net debit $5.78.
COST - Costco - Company Profile
The earnings disaster for Friday was Costco (COST). The earnings were great but the reaction was terrible. The company reported earnings of $2.08 that rose 17.5% and beat estimates for $2.02. Revenue of $42.3 billion rose 15.8% and beat estimates for $41.74 billion. That compares to $1.77 and $36.56 billion in the year ago quarter. Membership fees rose 13% to $943 million.
Same store sales were up 6.5% in the US and 5.7% globally. Analysts were expecting 5.2%. E-commerce sales rose 21%.
For the 5-week period ending Sept 30th. US same store sales were up 9.0%, Canada 9.4%, international 8.2% and total company 8.9%. E-commerce sales were up 30%. No weakness here!
Analysts and the talking heads on stock TV keep talking about the impact of Amazon dragging down Costco. Show me in the numbers above where Costco sales and earnings are dragging. In a recent survey by BMO Capital, they found that Costco consistently had lower prices and faster shipping than Amazon. They surveyed 16 categories and Costco was an average of 7% cheaper than Amazon. Shipping took an average of 4.5 days from Costco compared to 5.5 days from Amazon. Wal-Mart and Jet.com had prices that were 18% higher than Amazon and average shipping was 9.8 days.
Costco now has free 2 day shipping from 355 of its 741 stores through CostcoGrocery and faster shipping in as little as 2 hours is available with partner Instacart. Costco is not just sitting around waiting for Amazon to catch up. They are actively investing in the e-commerce platform and expanding it to their other stores. With a Costco or two in every major population center, they have an edge on Amazon because the products are already local for most people and that makes shipping faster. Amazon does have a larger number of items but that is not a negative for Costco. They have always had a variety of items based on buying opportunities and they may not have the same exact items on every visit. This allows Costco to buy cheaper and pass the savings on to the customer.
Costco also has its own private label brand in the Kirkland label. Last year Kirkland was the largest selling grocery brand on Amazon. Yes, on Amazon.
Unfortunately, for the stock, perception is reality. If enough talking heads say Amazon is killing Costco then that becomes the perceived reality and shares tank. That is what happened on Friday with COST down $10 after earnings.
If we were not in Costco, I would be recommending it. However, it may have some more weakness ahead. Goldman Sachs removed it from the conviction buy list and gave it a hold rating.
We had a $155.50 stop loss. This is a January option. I considered exiting and reloading with a 2019 LEAP. I considered lowering the stop loss.
I decided to exit the position. If the stock declines another couple of dollars, the option will decline and shares may not rebound back over $160 for weeks. I am recommending we take the minor loss and look to get back in when new life returns to the stock.
Original Trade Description: September 10th.
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online.
Company description from FinViz.com.
Costco has been battered severely by the Amazon/Whole Foods news. Shares were trading at $181 when the news broke and they crashed back to $150. We tried to buy them after the initial dip in June but we were early and the dip was not over.
After testing support at $150 twice over the last two months, I believe it is going to hold. The completion of the Whole Foods acquisition in late August knocked shares back to that level again but it was only a brief dip.
I have written multiple times that Costco and Whole Foods have nothing in common. Costco sells far more than groceries and they are far cheaper than Whole Foods. They are going to report earnings on September 28th and I expect them to be good. Guidance should also be good. Their stores have been packed out over the last couple weeks with people stocking up ahead of the hurricanes. There were lines around the block just to get in. With all the food destroyed in the Houston flooding, there will be lines with people replacing the stuff that was destroyed and that includes coffee makers, flat screen TVs and whatever other household goods that were trashed.
I firmly believe that Costco will return to its former highs because nothing has changed. Their membership model continues to add subscribers and Costco shoppers love Costco. The store loyalty is far greater than any other retail outlet.
LEAPS are too expensive so I am going with a shorter-term position. I am recommending the January calls that will get us past two earnings reports.
Long Jan $160 call @ $7.05, see portfolio graphic for stop loss.
ECA - Encana Corp - Company Profile
Encana completed 2 of 3 gas plants under construction in Canada. The plants will boost earnings from NGLs and provide takeaway capacity from the Montney field. Share declined slightly for the week as gas and oil prices declined.
Original Trade Description: May 21st.
Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.
Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.
Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.
They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.
With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.
JP Morgan initiated coverage with an overweight rating and $16 price target.
Earnings August 1st.
I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.
Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.
Encana sold its Permian Basin produced water infrastructure to H2O Midstream. No price was given. This included over 100 miles of interconnected pipeline and 80,000 bpd capacity. H2O plans to double the pipeline to 200 miles and capacity to 140,000 bpd plus adding storage for 2 million barrels of produced water. The produced water can be reused in new fracing projects and reduces the cost of new wells.
Update 7/21/17: Encana reported earnings of 18 cents that beat estimates for 4 cents. Revenue of $1.083 billion beat estimates for $773 million. Production averaged 246,500 Boepd, a 9,200 boepd rise. Condensate rose 14% to 124,900 bpd. The margin per barrel rose 25% to $12.10. Recent wells with the newest fracking technology have been coming with production 20% higher than expected. The company has more than 11,000 "premium" drilling locations and thousands of non-core locations.
Long Jan 2018 $12 call @ $1.50, see portfolio graphic for stop loss.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
Long (2) Jan 2019 $15 calls @ .50.
Adjusted 2019 position (3 contracts) @ 80 cents each.
GSAT - GlobalStar - Company Profile
GlobalStar announced a secondary offering of $125 million in shares to satisfy lender requirements for capital levels. 80% of the proceeds will be deposited with the lenders and will be interest bearing until the funds are used to pay P&I due under existing loan agreements in December 2017 and June 2018. The shares were priced at $1.65 and will close on Oct 11th. This is a 2019 LEAP. No rush.
Original Trade Description: May 28th.
Globalstar, Inc. provides mobile voice and data communications services through satellite worldwide. The company offers duplex two-way voice and data products, including mobile voice and data satellite communications services and equipment for remote business continuity, recreational, emergency response, and other applications; fixed voice and data satellite communications services and equipment in rural villages, ships, industrial and commercial sites, and residential sites; and satellite data modem services comprising asynchronous and packet data services. It also provides SPOT products, such as SPOT satellite GPS messenger for personal tracking, emergency location, and messaging solutions; SPOT Global phone; and SPOT Trace, an anti-theft and asset tracking device. In addition, the company offers commercial Simplex one-way transmission products to track cargo containers and rail cars, to monitor utility meters, to monitor oil and gas assets, and other applications. Further, it provides engineering services, such as hardware and software designs to develop specific applications; and installation of gateways and antennas. The company primarily serves recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining, and forestry; construction; utilities; and transportation markets. Globalstar, Inc. distributes its products directly, as well as through independent agents, dealers and resellers, independent gateway operators, and its sales force and e-commerce Website. As of December 31, 2016, it served approximately 689,000 subscribers. The company was founded in 2003 and is headquartered in Covington, Louisiana. Company description from FinViz.com.
This is a buy and forget position. Globalstar has a lot of thing currently in the works and is likely to be acquired over the next 18 months. With the 2019 LEAP at $1, we could be well rewarded if we just buy a few contracts and forget them.
You probably saw the bidding war over Straight Path Communications. Verizon won the war with a $3.1 billion bid. Verizon was not buying STRP for its business value. Verizon was buying bandwidth and spectrum. That is the licenses and frequencies that allow a company to transmit conversations and data through the air.
Globalstar has a lot more to offer than Straight Path. Globalstar is a satellite operator and won approval from the FCC in December to use its spectrum for terrestrial wireless. That approval means Globalstar's spectrum would be available to an acquirer for immediate use. Globalstar has spectrum that is perfect for small cell networks where population density is too thin to support a group of major cell towers.
Globalstar has targeted 100 countries in which it will see approval for wireless service. The company said, "At the end of Q1 we have filed for terrestrial authority in countries covering more than 375 million people. If you include the USA the total population covered would be about 700 million.
Analysts believe companies like Facebook, Amazon, Netflix and Google could see this capability as very valuable. The ability to communicate wirelessly with people not already reached with broadband opens up entirely new markets. Google has already tried to reach the masses with Google Fiber but the cost was too expensive and they had to scale back that initiative. Facebook is experimenting with solar powered planes and airships to beam wireless internet to millions of potential customers.
If anyone makes a run at Globalstar, it could turn into another bidding war. If nobody tries to acquire them by the end of 2017 they will have even more assets in the form of operating authority in numerous other countries. The company is an interesting lottery ticket play where we can invest very little but likely be rewarded even if an acquisition does not appear.
Earnings August 3rd but in this position we really do not care what the quarterly reports say. This is a buy and forget position. The chart over the last ten years is ugly. As a satellite company they have failed in generating any material interest. It is the recent approval to use their spectrum for wireless that holds promise for the future.
Update 10/1/17: GlobalStar and IPmotion Inc. announced the formation of GlobalStar Japan and the launch of commercial mobile satellite service at a press event today in Tokyo. Globalstar Japan will offer a suite of mobile satellite products and services with voice, data, asset monitoring, tracking and emergency S.O.S. capabilities for the consumer, enterprise and government markets.
Long Jan 2019 $2.50 call @ $1.00, see portfolio graphic for stop loss.
HD - Home Depot - Company Description
HD closed at a new high on Thursday as investors continue to buy the stock in expectation of strong earnings and guidance as a result of the hurricanes. Nate made landfall as a category 1 hurricane on Saturday night but the damage was minimal. This could cause some profit taking on HD on Monday.
Original Trade Description: August 27th.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves homeowners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico.
On August 14th, HD reported earnings of $2.25 that beat estimates for $2.21. Record revenue of $28.11 beat estimates $26.47 billion. They raised guidance for the full year for 5.3% revenue growth. They guided for an 11% rise in earnings to $7.15 in May and raised that guidance in this report to 13% and $7.29.
Despite posting record results and raising guidance, the stock was crushed for a major loss. The conference call started with analysts asking how long the good times can continue since the housing market has been strong for so long. HD reps answered the question well then immediately got hit with a bigger bomb. How can your sales continue to rise when you can now buy many of your products cheaper on Amazon. The analysts even asked how much Alexa was hurting HD's business. Every question seemed to be about why Amazon was stealing market share and why HD sales were not falling. Sentiment turned bearish and shares fell $9 over the last four days.
We were stopped out on the big drop. There is nothing wrong with the company. There is strong support at $144.50.
We entered the HD position on a dip in July and with support at in the $144-$146 range, I am recommending we try to buy another dip.
Long Jan 2019 $155 call @ $11.42, see portfolio graphic for stop loss.
Short Jan 2019 $175 call @ $4.52, see portfolio graphic for stop loss.
Net debit $6.90.
LL - Lumber Liquidators - Company Profile
No specific news. Hurricane rebuilding in progress. Support held.
Original Trade Description: September 3rd.
Lumber Liquidators Holdings, Inc., together with its subsidiaries, operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. The company offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools under the Bellawood brand and Lumber Liquidators name. It also provides in-home delivery and installation services. The company primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2016, it operated 383 stores in the United States and 8 stores in Canada. The company also offers its products through its Website, catalogs, and call center. Company description from FinViz.com.
LL is back! They reported earnings of 16 cents for Q2 that beat estimates for 8 cents. Revenue of $263.5 million beat estimates for $256.9 million. Same store sales rose 8.8% and beat estimates for 6.0%. Customer traffic increased 5.3% and the average sale rose 3.5%. Gross profits rose 38.1%. Gross margins increased from 29.7% to 37%. Cash on hand was $112 million and outstanding debt $57 million.
The company has recovered from the Chinese flooring scandal from two years ago and customers are shopping at LL once again.
LL should benefit from the hurricane recovery effort. They have 8 stores in the immediate area around Houston and 7 others a little farther away from the disaster area. The vast majority of flooded homes are going to need new flooring. Many will make the switch to wood from carpet to avoid the constant problems with mold in a humid climate. This should benefit LL for the next four quarters.
Earnings Oct 31st.
Shares spiked sharply on the earnings in early August and were experiencing some post earnings depression until the hurricane hit. The initial spike on the disaster has faded and offers us a chance to enter the position a little cheaper.
Long Jan 2019 $40 LEAP Call, currently $7.60, see portfolio graphic for stop loss.
MCD - McDonalds - Company Profile
No specific news. Shares recovered from the late September drop on the analyst warning on slower sales. Shares returned to resistance at $160.
Original Trade Description: August 27th.
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 6.6%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
Shares have topped out over the last two weeks from their constant new highs. The lethargic market has put a drag on their shares. Given their strong metrics, rapidly rising sales and refusal to sell off from their highs, it suggests they will go higher when the market begins moving up again.
Earnings Oct 24th.
Update 9/10/17: McDonalds said it was going to sell some of the McCafe beverages in supermarkets in early 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
Update 9/17/17: McDonalds shares were crushed after data tracker M Science suggested they could miss on earnings and revenue as a result of the hurricanes. McDonalds has more than 2,000 locations in Texas and Florida but obviously only a very few were impacted. They have more than 31,230 stores so the impact to 10-20 or even 50 for several days is not likely to impact revenue that significantly. I think this was a cry for attention by M Science. Shares should rebound once investors think it through.
Update 9/24/17: McDonalds raised its quarterly dividend by 7% to $1.01 payable Dec 15th to holders on Dec 1st. This is a killer dividend, now $4.04 annually. This is the 41st consecutive annual dividend increase.
Update 10/1/17: McDonalds shares rebounded after a consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Long Jan 2019 $165 call @ $7.92, see portfolio graphic for stop loss.
Short Jan 2019 $185 call @ $2.49, see portfolio graphic for stop loss.
Net debit $5.43.
MNST - Monster Beverage - Company Profile
No specific news. Shares are consolidating their recent gains.
Original Trade Description: June 4th.
Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. Its Monster Energy Drinks segment sells ready-to-drink packaged drinks and non-carbonated dairy based coffee energy drinks primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, and the military. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations; and ready-to-drink packaged energy drinks to bottlers and full service beverage distributors. It sells its products under the Monster Energy, Nalu, Monster Rehab, NOS, Monster Energy Extra Strength Nitrous Technology, Full Throttle, Java Monster, Burn, Muscle Monster, Mother, Mega Monster Energy, Ultra, Punch Monster, Play and Power Play, Juice Monster, Gladiator, Ubermonster, Relentless, Samurai, BU, and Mutant Super Soda brands. The company was formerly known as Hansen Natural Corporation and changed its name to Monster Beverage Corporation in January 2012. Company description from FinViz.com.
Monster reported earnings of 33 cents that rose 26.9% and beat estimates by a penny. Revenue of $742.1 million rose 9.1% and beat estimates for $741.4 million. These numbers beat estimates despite a -$3.7 million hit from foreign currency translation. Net sales outside the U.S. rose 28% to $190.9 million. Sales of new products were so strong there was actually a shortage of product.
Earnings August 3rd.
Monster is doing great in a weak retail sector. This proves if you sell something habit forming you will always have a market.
They have multiple initiatives underway to increase global sales and they appear to be overcoming all the daily headaches that impact a retail distribution company. Gross profits rose from 62.2% to 64.8%.
For the last couple of years Monster has been transitioning their distribution into the Coca-Cola network. Coke took a major equity stake in Monster and part of the deal was that Coke would distribute the product globally. That is working out well and giving Monster a wider presence than they could have ever done on their own. Coke has an option to buy more Monster stock, or even the entire company. Given the slowdown in carbonated sugar drinks, Coke could be looking to exercise their option soon.
I am recommending two positions. The first is a Jan-2018 call that will get us through the rest of the year and capture any short-term gains. The second is a Jan-2019 LEAP call that could capture a run to a new high and/or acquisition by Coke. You can do one position or both.
Update 8/13/17: Monster reported earnings of 39 cents that missed estimates for 40 cents. Revenue of $907.1 million beat estimates for $906.6 million.
Update 9/10/17: There was more analyst speculation last week that Coke might be getting close to acquiring the rest of Monster shares it does not own. Coke has a 16.7% stake in Monster and that is the only portion of the drink business that is growing. Coke's Q2 revenues declined 16% for the 9th consecutive quarterly decline.
Position 8/14/17: Long Jan 2019 $55 call @ $6.76, see portfolio graphic for stop loss.
I will turn the 2019 call into a spread once the stock moves higher so we can widen our potential gains.
Previously closed 8/9/17: Long Jan 2018 $55 call @ $2.65, exit $1.95, -.70 loss
Closed 8/9/17: Long Jan 2019 $55 call @ $5.60, exit $5.70, +.10 gain.
NVDA - Nvidia - Company Profile
Nvidia is still holding its gains. The company scored two big drone wins for its AI computer on a chip named Jetson. JD.com and Alibaba are using the Nvidia chip in their drones.
Original Trade Description: September 18th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Update 8/13/17: Nvidia (NVDA) reported earnings of $1.01 compared to estimates for 69 cents. Revenue of $2.23 billion also beat estimates for $1.96 billion. They guided for the current quarter for revenue of $2.35 billion and analysts were expecting $2.13 billion. Despite the blowout earnings and guidance, shares fell $9.
Think about this. Revenue rose 56%, net income rose 123%, revenue in the data center segment rose 175%. Revenue from gaming rose 52%. The company has posted total revenue growth of more than 50% in each of the last three quarters and triple digit earnings growth for five consecutive quarters. So why did Nvidia shares crash? Because the stock is up 700% over the last three years and $35 in the last six weeks. Is Nvidia still a great stock? Absolutely, because it is growing faster than any other tech stock in the market and many times faster than any industrial stock. These gains will continue because they keep announcing new chips, new equipment and most importantly new performance standards. They just announced a new chip that is 12 times faster than their current top of the line chip and the current speed leader. Yes, they are replacing the fastest chip available with one that is 12 times faster. What has Intel and AMD done lately that even remotely compares?
When Nvidia fell back to $140 after their last earnings, I was pounding the table on the buying opportunity. While I do not know where this current post earnings drop will end, it is still a new buying opportunity even at the current level. If it declines any further it will just be a better opportunity.
Update 9/3/17: Walmart chose Nvidia to provide a massive amount of GPUs to power Walmart's new server farm. Walmart is withdrawing from Amazon's cloud after the company bought Whole Foods. Walmart is going to go "full steam" into deep neural networks and AI and build a GPU farm that is about a tenth the size of Amazon's. Walmart and Target both are leaving the Amazon cloud to avoid supporting a competitor.
Update 9/17/17: Evercore ISI went all in on Nvidia and boosted their price target from $180 to $250. The company hosted some of Nvidia's senior executives and were very impressed with their outlook for the future. The analyst said Nvidia is "building the industry standard for artificial intelligence or AI." The analyst said the company had built a $10 billion moat around its GPU CUDA Core architecture that would be "nearly impossible to replicate" and will remain in place for the long-term. He said Wall Street's estimates for multiple business segments are looking very conservative. The consensus is for 9% growth in data center revenue and 6% in gaming. The analyst said AI sector is merely in its early stages and Nvidia is "creating THE AI computing industry standard." Shares exploded 6% higher to a new record close.
Update 10/1/17: Citigroup reiterated a buy rating and raised their price target to $210. Bank of America reiterated a buy and $210 price target. Citi said buy Nvidia because the AI movement is just getting started and Nvidia is the leader.
Position 9/19/16 with a NVDA trade at $63.50
Closed 6/14/17: Long Jan 2018 $70 LEAP Call @ $9.40, exit $84.50, +75.10 gain.
Closed 6/14/17: Short Jan 2018 $90 LEAP Call @ $3.73, exit 64.30, -60.57 loss.
Net gain $14.53.
New Position 3/13/17:
Long Jan $120 LEAP Call @ $6.75, see portfolio graphic for stop loss.
OA - Orbital ATK - Company Profile
We closed this position at the open on Monday.
Original Trade Description: August 13th.
Orbital ATK, Inc. develops and produces aerospace, defense, and aviation-related products to the U.S. Government, allied nations, prime contractors, and other customers in the United States and internationally. It operates through three segments: Flight Systems Group, Defense Systems Group, and Space Systems Group. The Flight Systems Group segment develops launch vehicles that are used as small-and medium-class space launch vehicles to place satellites into Earth orbit and escape trajectories; interceptor and target vehicles for missile defense systems; suborbital launch vehicles that place payloads into various high-altitude trajectories; rocket propulsion systems for human and cargo launch vehicles; strategic missiles; missile defense interceptors and target vehicles; composite structures for military and commercial aircraft and launch structures markets; and illuminating flares and aircraft countermeasures. The Defense Systems Group segment develops and produces military ammunition; small-caliber commercial ammunition; propulsion systems for tactical missiles and missile defense applications; strike weapons; precision weapons and munitions; high-performance gun systems; aircraft survivability systems; fuzes and warheads; propellant and energetic materials; special mission aircraft; airborne missile warning systems; and defense electronics. The Space Systems Group segment offers small-and medium-class satellites that are used to enable global and regional communications and broadcasting; conduct space-related scientific research; and perform other activities related to national security. This segment also provides human-rated space systems for Earth-orbit and deep-space exploration, including re-supplying the international space station; and spacecraft components and subsystems, as well as specialized engineering and operations services.
Company description from FinViz.com
Orbital is a jack of all trades. If you read the description above, there is very little in defense and aerospace that they do not do. With all the attention on the defense sector, all the defense stocks are soaring. Orbital is the only one with a cheap enough stock price that you can buy that also has a decent chart.
They reported earnings of $1.56 compared to estimates for $1.45. Revenue of $1.12 billion beat estimates for $1.11 billion. They guided for the full year for earnings of $5.95-$6.25 per share and revenue of $4.60-$4.65 billion. That was up from $5.80-$6.20 and $4.55-$4.625 billion.
Revenue and earnings were hampered by a slowdown at the Lake City ammunition plant in Apr/May after an accident that halted assembly lines. Everything is back to full speed.
Order backlogs rose 4% to $15.4 billion. On August 10th, the company approved a quarterly cash dividend of 32 cents payable Sept 21st to holders on Sept 6th.
Expected earnings Nov 2nd.
They do not have LEAPS so I am recommending a February call.
Update 9/24/17: News broke last weekend that Northrop Grumman was going to buy OA for $7.8 billion. That lifted the stock to $132.64 and the deal is for $134.50. There are some rumors making the rounds that there may be another bidder. Since our call is 100% ITM and there is no time premium, we can afford to hold it for another week or two and see if another bidder appears. Even if one is not announced the price should continue to creep higher as the arbitragers take positions. We will hold it 1-2 weeks unless something changes.
Closed 10.2.17: Long Feb $110 call @ $6.20, exit $22.90, +$16.70 gain.
PYPL - PayPal - Company Profile
MasterCard and PayPal announced the global expansion of their digital partnership. This is a big deal and PayPal shares spiked $2 on the news to close at a new high.
Original Trade Description: July 30th.
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies.
Company description from FinViz.com
PayPal has been on a roll lately. They reported earnings of 46 cents, up from 36 cents and beat estimates for 43 cents. Revenue of $3.14 billion beat estimates for $3.09 billion. Transactions processed rose 23%. They guided for the full year for revenue of $12.78-$12.88 billion with earnings of $1.80-$1.84. Analysts were expecting $12.7 billion and $1.79. Paypal added 6.5 million accounts to total 210 million customers. The company said they were on track to add 25 million new accounts in 2017.
Expected earnings Oct 25th.
The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.
Pacific Crest Securities said their market cap of $71 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.
Update 8/13/17: Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.
Update 8/21/17: Paypal said payment platform Venmo was on track with expectations. The platform processed $8 billion in payment volume, a 103% YoY increase. Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.
Update 9/24/17: Evercore ISI reiterated a buy rating and raised the price target from $68 to $81. The company has $7 billion in cash and it looking for bolt on acquisitions that will be immediately accretive to earnings and continue to expand the brand.
Update 10/1/17: Bernstein wrote a piece on potential acquisition candidates by PayPal. Square (SQ) was a potential target. Bernstein article
Long Jan 2019 $65 call @ $6.27, see portfolio graphic for stop loss.
SLCA - U.S. Silica Holdings - Company Description
I have decided to drop the SLCA position. The summer decline took the option out of range and there is only 3 months left before expiration. The stock would have to rebound about 70% to put us in the money. While that is not impossible it is highly improbable unless they were to be acquired. I am recommending we drop this position. Since the option has no value there is nothing to be gained by selling it. If Iran were to bomb the Saudi oil fields and prices spike to $75-$85 a gallon, the energy stocks would do the same. Just forget it is in your portfolio unless a headline appears.
Original Trade Description: March 19th
U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.
Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.
Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.
Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.
U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.
They were crushed again on the week of Feb 6th when oil prices fell 7% in just two days to the lows for the year.
Oil prices are down on record inventory levels. Inventories at 528.4 million barrels are the highest since record were started. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.
Revised earnings July 31st.
We know oil prices should rise when refiners come back online and the summer. We also know Saudi Arabia needs high oil prices when they try to IPO Saudi Aramco later this year. Rig activations are exploding. For the week of March 17th, there were 21 new rigs. We have almost double the number of rigs operating today than we did last May.
Update 8/6/17: Silica reported earnings of 38 cents compared to estimates for 37 cents. Revenue of $290.5 million rose 148% but missed estimates for $309.8 million. Tons sold were a record 3.638 million, up 63% YoY and 7% QoQ. Frac sand sold was a record 2.745 million tons, up 106%. Earnings were up 1,000% from Q1's 3 cents and well over the Q2-2016 loss of 19 cents. This was a very strong report but shares crashed anyway.
Update 8/20/17: SLCA announced the acquisition of Mississippi Sand LLC, a leading, low-cost frac sand mining and logistics company in St Louis for $95.4 million in cash. The transaction will be immediately accretive. The mine is state of the art with 95% of total capacity in fine grain sand. Customer contracts in place account for a majority of the 1.2 million tons of annual capacity. Basically, they took out another competitor and turned it into another revenue stream and picked up some unused capacity in the process.
Update 8/27/17: I am going to recommend we turn this into a spread. The odds are slim of our $50 calls ending in the money in January. I am recommending we sell the Jan $32 calls. We averaged down on this position in the past so sell an equal number of calls.
Sell short Jan $32 call, currently $1.50.
Update 9/24/17: Shares continued to rise as oil prices moved over $50. That is the magic number for drilling new wells. Companies can hedge future production to raise cash for development. Unfortunately, the continued rebound over $31 stopped out our short call for a $1.80 loss. If shares roll over I will look to sell a new call to reduce that loss.
Update 10/1/17: Slica announced plans to build a second state of the art sand mine in the Permian with 2.6 million tons of capacity and 30 years of reserves. They have presold 1.2 million tons for cash up front contracts. They will pay for the $150 million project with cash on hand. This site is not a habitat for the Dunes Sagebrush Lizard, which is endangering operations at other sand companies.
Long Jan $50 LEAP Call @ $6.93, no initial stop loss.
Position 5/8/17: Long Jan $50 LEAP Call @ $2.30.
Adjusted cost in the position: $4.61.
Doubled down again on 6/26/17: Long 2 contracts at $1.20.
Adjusted cost in the position = $2.33.
Closed 9/22/17: Short Jan $32 call, entry $1.50, exit $3.30, -1.80 loss.
Closed 5/8/17: Short Jan $65 LEAP Call @ $2.58, exit .80, +$1.78 gain.
VAR - Varian Medical Systems Company Profile
No specific news. Varian rebounded as we expected from the long-term uptrend support. We captured a near perfect entry point but unfortunately, the stock gapped up on Monday and we got a bad fill on the option.
Original Trade Description: October 1st.
Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.
Expected earnings October 25th.
Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.
The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.
Shares had rebounded to a new high at $107.87 on Sept 14th but ran into a bout of profit taking that knocked it back to $98. There was no news that would have been negative. It was simply time for portfolio managers to rotate into something else for the next earnigns cycle.
Varian just announced the initial treatments of cancer patients using their new Halcyon radiation system. The first patient had head and neck cancer that required delivery of the treatment to nine different locations. The entire treatment time including setup, imaging, 3 minutes of beam time and patient discharge was only 13 minutes. Typically, a treatment like this using other technology requires 10 minutes of beam time and 20 min of total treatment time, plus it is far less precise.
Varian is delivering state of the art radiation systems all over the world and they are the leading edge in this technology.
The recent decline has taken VAR back to uptrend support and I believe it is time to buy the dip.
Varian does not have LEAPS so I am using the longest dated option available for May 2018.
Long May $105 call @ $5.40, see portfolio graphic for stop loss.
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