Personally I am glad January is over. While we do not know what February will bring, hopefully it will be a better market.
Starbucks and Netflix moved from the watch list to the active play list. All of our existing positions moved higher and we will be in good shape if the market continues higher. All of our positions have good relative strength and should weather any brief downturns. I did raise the stop losses on KMB, STZ, M, GE and I lowered the stop on the NFLX call.
The market rebound may not be lasting but the severe damage from the prior week pushed many stocks to critical support before they rebounded. Any further declines could be less dramatic.
Original Play Recommendations (Alpha by Symbol)
GE - General Electric - Company Info
GE rocketed higher on Friday on the influx of cash. GE is a solid stock and not expected to decline and pays a decent dividend. This made it a logical candidate for some of that buyout cash.
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.
Long Jan 2017 $30 call, entry $1.30, initial stop loss $25.85
KMB - Kimberly Clark - Company Info
KMB dipped post earnings on Monday but immediately rebounded and is nearing an all time high at $130.
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.
Long Jan 2017 $130 Call, entry $7.50
01/31/16 new stop @ 121.65
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
Macy's closed above the $40.75 trigger price the prior Friday and the position was entered at the open on Monday. Macy's is struggling with resistance at $41.50 but still making upward progress.
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.
Long 2017 Jan $45 call @ $3.40, see portfolio graphic for stop loss.
NFLX - Netflix - Company Info
The Netflix position was entered when the stock dipped to $97.25 on Tuesday. There is no stop loss on the short put because there could be additional volatility and I seriously doubt it will finish the year under $90. If we are put we will sell some very expensive covered calls against the position.
By selling the put we were able to buy the $110 LEAP call for a net debit of 5 cents. We have a free trade on Netflix until January 2017.
If we are eventually stopped on the call we will wait for a bottom and buy a lower call strike.
Original Trade Description: September 20, 2015
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.
Position 1/26/16 when NFLX traded at $97.25
Long January 2017 $110 LEAP call @ $15.00, see portfolio graphic for stop loss
Short January 2017 $90 LEAP put @ $14.95, no stop loss.
Net debit 5 cents. If we are put the stock our cost will be $74.95 and a bargain.
SBUX - Starbucks - Company Info
The Starbucks position was entered on Friday when the stock moved over $60.25 to trigger the position. We saw the stock dip to support in the January 20th market crash and immediately rebound back into the prior range. Friday's sprint higher took it out of that congestion and if it holds, we could see a move back to the October highs.
Original Trade Description: September 20, 2015
We were stopped out of the Starbucks position by a penny on the January 20th 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.
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.
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.
Long Jan 2017 $65 LEAP Call @ $4.01, initial stop loss $54.75
STZ - Constellation Brands - Company Info
I am worried about Constellation. The rebound took shares right to uptrend resistance and I would be selling here if this was a short-term trade. In theory we should see a minimal pullback that remains above the 50-day average and then another new high in the weeks ahead.
If you are a trader you could always close the position now and buy it back again when it retests the 50-day average.
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.
Long Jan 2017 $165 call, entry $7.90, stop loss $138.25
01/17/16 adjust stop loss lower from $139.45 to $138.25
01/11/16 triggered @ $145.00
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