Editors Note:

The market decline to open February continued with the S&P setting a new two-year low. We were stopped out of the majority of our positions only to see those stocks rebound strongly after the dip. I am reloading the GE and NKE positions but the banking sector continues to be weak and I am dropping BAC and JPM. The recent earnings warnings in the retail sector suggest we should avoid Macy's as well.

Because of the market volatility, I am not putting stop losses on any new plays. This is dangerous because not all declines are bought. Some go on to become bear markets. However, these are long term positions on quality companies that have already seen significant declines. When the market weakness eventually fades the leadership companies will be the first out of the bottom. If a company dips low enough we will sell a lower LEAP against the open position to turn the position into a spread and reduce our losses.

There is no easy answer to market corrections. They occur and we must deal with them. If we simply wait on the sidelines for the all clear signal, we could miss some good entry points. If we buy the dip the dip may continue. This is all part of investing.

The key is to own quality companies that will have good relative strength and survive the correction with the least amount of losses.



Original Play Recommendations (Alpha by Symbol)


BAC - Bank of America - Company Profile

Comments:

Bank of America dropped to a three-year low with the market dip to 1,810 on the 11th. There is nothing wrong with the bank but the banking sector is fearful of negative rates, a China meltdown and the banking crisis in Europe. We were stopped out on the decline and I am dropping BAC as a position. Fortunately the option was cheap and we only lost 41 cents.

Original Trade Description: January 31st:

It has been a rough few years but finally the worst is over for this sector and stock. You cannot ignore a company that earns $15 billion a year.

Bank of America has been ignored since late December and their earnings report in early January did not generate a lot of excitement. The bank said it earned 28 cents that beat estimates for 27 cents. That equates to a profit of $3.3 billion. They ended the full year with a $15.9 billion profit. From where I am sitting that is outstanding since it was up from only $3.38 billion in 2014.

The bank did not get a bounce from earnings because the CFO said increasing revenue was difficult in this market because the bank is more heavily exposed to low interest rates because it has a large retail banking business and very little profit centers like stock and bond trading that support Goldman and JP Morgan. The earned their profits the old-fashioned way one retail customer at a time and by slashing costs wherever possible. They eliminated 10,000 of its 223,715 employees and closed 129 branches. That leaves them with 4,726 locations.

BAC has $21.3 billion in energy loans and had $75 million in energy charge-offs in the quarter. The bank had $19.53 billion in revenue for the quarter and ended the year with $1.2 trillion in deposits. Once interest rates begin to rise the profits are going to explode higher.

BAC returned $4.5 billion to shareholders in 2015, $1.3 billion in Q4, through stock buybacks and dividends.

The last nine analyst ratings changes have been upgrades. On Friday, Credit Agricole upgraded them from sell to buy and skipping the hold level in the middle. Sandler ONeil, Wells fargo, Nomura, Bernstein and Robert W Baird have all upgraded BAC to buy.

Multiple analysts published notes last week recommending Bank of America at the current three-year low. Their legal troubles are about over with the vast majority of the financial crisis problems behind them. They are well away from any level that could be worrisome in the Fed's stress test scenarios. They are making money and staying out of trouble and they are paying nearly a 2% dividend.

To summarize, I believe the worst is over for the large banks and Bank America is in the sweet spot for when interest rates do rise.

Note: This same position was recommended in the Premier Investor Newsletter as a long stock play. I thought the timing was perfect to make it a LEAP play as well.

Position 2/1/16, Stopped 2/11/16: Closed: Long 2017 $15 LEAP @ $1.22, exit .81, -.41 loss.



GE - General Electric - Company Info

Comments:

GE dipped below support at $28 last week to stop us out for a fractional gain. The rebound took it back to a two month high. The market weakness brought it back down to $29 and only $1 above our last entry.

I am recommending we reload this position. However, rather than replace it with the 2017 LEAPS I am going to recommend we spend about 70 cents more and go out to 2018. This will take us past any future volatility and past the election process. GE has so many good things in process that I believe they will be significantly higher by January 2018. Having that long a time frame takes out the worry about the short term fluctuations.

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 is a new base. We are betting it is the latter.

Position 1/20/16, stopped 2/11/16:

Closed: Long Jan 2017 $30 call, entry $1.30, exit $1.40, +.10 gain

Buy 2018 $30 LEAP call, currently $2.59, no stop loss.



JPM - JP Morgan - Company Info

Comments:

JPM gapped down to $52.50 on Thursday the 11th to stop us out of the position for a 40-cent loss. The meltdown in the European banks was the reason and although JPM shares have recovered, the sector is still weak. I am not recommending we reload this position.

Original Trade Description: January 31st

JP Morgan is the largest U.S. bank with assets in excess of $2.3 trillion. It calls itself a financial services firm that operates in four segments. Those are consumer & community banking, corporate & investment banking, commercial banking and asset management. The bank earned $22.41 billion in 2015 on revenue of $89.72 billion.

For Q4 the bank reported earnings of $1.32 that beat estimates for $1.30. Revenues were $22.89 billion. Earnings were held back because of a 21% decline in profits in commercial banking because of energy loans. The CFO said we are ready to increase loan loss reserves as needed if the energy sector remains weak for a long period.

Legal expenses declined from $1.1 billion to $606 million in Q4 as they wind down all the remaining problems left over from the financial crisis. JP Morgan would have been rock solid but they were pressured by the Fed into taking over Bear Stearns and Washington Mutual at the height of the financial crisis. Most of their legal settlements over the last five years came from loans sold by those two firms and JP Morgan inherited those problems when they agreed to acquire them.

The bank is so strong they were able to digest more than $6 billion in losses caused by a rogue trader nicknamed the London Whale. That turned out to be just a blip in their financials where it could have caused serious harm to a lesser firm. They still produced record profits in that year despite the loss.

On January 26th the bank entered into an agreement with Ambac Financial Group to pay $995 million to resolve the last of their claims from the financial crisis. With this agreement, Ambac will drop objections to the $4.5 billion agreement between Blackrock and Pimco for faulty home loans in 2008.

JP Morgan continues to confound the experts and grow despite the long list of legal problems they inherited in 2008. Now that those problems are mostly behind them the bank is free to concentrate on increasing profitability. As interest rates rise their massive loan and deposit base will make them even more profitable.

JPM has an investor day on February 23rd. Earnings are April 13th.

JPM shares found support in the January sell off around $56 although they dipped to $54 on the January 25th market crash. The influx of acquisition cash on the 29th caused a +$2.22 gain to $59. I expect that gain to fade and give us a better price on the LEAP call when we are finally triggered. I am putting an entry point over $60 just to make sure we do not get trapped in any post Friday decline. My ideal entry target would be a dip back to $58.

I am recommending a breakout trigger and a buy the dip trigger. Use the one that is hit first but not both.

Position 2/2/16 stopped 2/11/16

Closed: Long Jan $62.50 call @ $3.15, exit $2.75, -.40 loss.



KMB - Kimberly Clark - Company Info

Comments:

KMB is showing great relative strength and holding at the recent highs. The dip to $125 on the Thursday crash avoided the prior stop loss. I raised the stop to $126.65 for this week to lock in a profit if the market is volatile again.

Original Trade Description: December 6, 2015:

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

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

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

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

Position 12/16/15:

Long Jan 2017 $130 Call, entry $7.50, see portfolio graphic for stop loss.

History
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

Comments:

Macy's crashed back to $37.50 and a four week low on the Thursday market crash. We were stopped out for a 50 cents loss at $38.85. With the weakness in recent retail earnings I am not recommending we reload this position.

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.

Position 1/25/16, closed 2/11/16:

Closed: Long 2017 Jan $45 call @ $3.40, exit $2.90, -.50 loss



NFLX - Netflix - Company Info

Comments:

I am still a believer in Netflix. Shares rebounded from the drop to $80 two weeks ago and did NOT put in a lower bottom on the Thursday market drop like all the other stocks did. Netflix has rebounded from that $80 low to $89 and traded as high as $94.77 on Wednesday. I am not ready to buy a new call just yet.

The market still has the potential to decline further and I prefer to wait until NFLX either moves over $97 or retests the lows at $80.

Once it appears Netflix has stopped going down we will replace our stopped call with a new strike. We still have $9.45 in net premium received from selling the put after subtracting the $5.59 loss in the call. That will cover much of the price of a new call once a bottom is reached.

Original Trade Description: January 24th.

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

Closed 2/3/16: Long January 2017 $110 LEAP call @ $15.00, exit $9.41, -5.59 loss
The call position will be replaced once the market volatility eases.

Still 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.




NKE - Nike - Company Info

Comments:

We were stopped out of the prior position on Feb 8th when Nike shares declined to $54. The rebound was almost immediate but rocky. It appears that weakness has faded and shares closed at a two week high on Friday.

I am recommending we reload the Nike position using the same Jan $65 call, currently $3.90.

Original Trade Description: January 24th

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

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

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

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

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

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

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

Earnings are March 22nd.

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

Position 2/1/16, stopped 2/8/16

Closed: Long January 2017 $65 LEAP Call @ $5.00, exit $2.59, -2.41 loss

RELOAD
Buy January 2017 $65 LEAP Call, currently $3.90, NO STOP LOSS.



SBUX - Starbucks - Company Info

Comments:

We reloaded the Starbucks position at the open on the 8th after being stopped out the prior week. The dip to $53 on the 8th gave us a great entry point on the option. I think Starbucks will turn out to be a big winner for us. Nomura initiated coverage on Friday with a buy rating and $70 price target.

Original Trade Description: January 24th.

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.

Five-Year Plan

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

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

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

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

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

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

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

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

Position 2/8/16:

Long Jan 2017 $60 LEAP Call @ $3.05, no stop loss

Prior position stopped 2/5/16:
Long Jan 2017 $65 call, entry $4.01, exit $2.47, -1.54 loss.



WMT - Walmart - Company Profile

Comments:

The play recommendation from the prior week suggested a long entry with a trade at $67.65 and the purchase of a protective put with a drop to $64.50. Unfortunately, Walmart never rebounded to trade at the $67.65 level so the play has not been opened. I am recommending we cancel the play.

Walmart reported a 7% decline in earnings to $1.49 and the sixth straight quarterly decline. That still beat estimates for $1.46 per share. The company said the $1 increase in the minimum wage for 1.2 million employees will cost the company $2.7 billion in a two year "investment" in workers.

Walmart guided for Q1 earnings of 80-95 cents and that was less than the $1.03 in the year ago quarter.

CANCEL the recommendation.

Original Trade Description: February 7th.

Walmart has been in a downtrend since trading at a high of $91 in January 2015. Same store sales were declining, stores were not being maintained, shelves were not stocked and investors fled the shares. Something happened in November 2015.

Q3 profits came in higher than expected and the company provided upbeat guidance. That was a huge change in direction for the company.

The CEO pointed out that Walmart has $485 billion in sales but only $15 billion is online. They hired about 2,000 people to work on improving the online business and competing with Amazon. At the same time Amazon announced it was going to open some retail brick and mortar locations. That suggests that you cannot do everything online. With revenue of $115 billion, Amazon is going to spend billions opening 300-400 retail locations. Walmart already has 11,500 locations. It is a lot easier to manage adding an online shopping website than open hundreds of locations.

Walmart has figured out that they need to have a big online presence and they are moving in that direction. They already have the backend distribution and warehouse network so the task ahead is a lot easier. They have plenty of cash to throw at the effort and they will get it done.

Walmart announced a wage hike for all their employees and improved benefits. The hikes will cost more than $1 billion a year. The stock was hammered on the news until analysts did the math. With $485 billion in revenue, they can raise the price of everything by only 0.22% or roughly 22 cents per $100 in sales and the entire wage hike is paid for and you still have the lowest prices. When you have that kind of scale, the numbers are mind boggling.

Walmart sales are improving as management got control of the internal problems. They hired more people and shelves are now stocked. Walmart is also adding significant numbers of organic products from produce to their private brands. They are significantly cheaper than Whole Foods and Fresh Market.

They recently announced a restructuring program to close 154 stores. The vast majority are the smaller Walmart Express stores and the smaller Neighborhood Market stores. Those never did well for Walmart. When customers shopped there, they were frustrated by the lack of all the merchandise in a Supercenter.

At the same time they are adding Walmart gas stations to their stores. Previously some stores had stations operated by Murphy USA (MUSA). The company announced last week they were adding their own branded stations in order to create another revenue stream. This is a good idea since having cheap gasoline is yet another draw to get people to shop at Walmart. Gas stations and their attached convenience stores are very high profit businesses. Those fountain drinks, jerky, candy and chips are very high profit items.

Walmart has its own credit cards. If they can hook consumers into paying at the pump with those cards then they win again from the interest collected.

Walmart is turning itself around and the low gasoline prices are putting extra money in consumer pockets. Walmart is doing its best to get those consumers to spend it in their stores.

Shares rebounded from a four-year low at $56 and have been accelerating higher. The high last week at just over $67 was a six-month high. At $67 Walmart only has a PE of 14. That is less than Target at 16 and Costco at 28. Walmart paid total dividends of $1.96 in 2015 and it has increased its dividend annually since 1974. They recently announced a $20 billion share buyback program over the next three years starting in 2016. That is almost 10% of its stock at today's prices.

I am recommending the Jan $70 LEAP call, currently $3.85. In order to prevent being stopped out in market volatility I am recommending we add the March $62.50 put at $1.09 and not have a stop loss until Walmart shares are significantly higher and we can remain profitable. I am only adding the put position if WMT shares dip to $64.50. If Walmart shares move higher as expected the $1 spent for the put will be easily recovered.

Recommendation cancelled




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Prices Quoted in Newsletter

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

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

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.