Several of our current positions experienced some dramatic post earnings volatility. Some up, some down. We were stopped out of five positions last week as the market sank to three-week lows on Tuesday and some stocks reacted negatively to their earnings reports. REIT stocks were especially hit for losses as investors dropped REITs and moved into momentum names.
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)
ATVI - Activision Blizzard - Company Profile
Activision reported record Q2 earnings of 45 cents compared to estimates for 42 cents. Revenue rose 50% to $1.57 billion and easily beat estimated for $1.45 billion. The new Overwatch game has more than 15 million players and more than 500 million hours of play in the quarter. That is the fastest ramp of any game to the 15 million player mark. The game brought in more than $500 million in revenue. The Blizzard segment now boasts more than 33 million active players. The Activision segment had 49 million active users and the King Digital segment had 409 million users. The company guided for $1.49 billion in revenue and 6 cents in earnings, unadjusted, for Q3. Shares spiked on the news but fell back on the unadjusted earnings guidance.
Original Trade Description: May 22nd.
Activision Blizzard designs, developes and publishes online, personal computer, 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.
At the end of Q1 ATVI had 544 million monthly active users thanks to the acquisition of King Digital. King had a very diverse network of 463 million global game players. Activision said the acquisition will be accretive to 2016 revenues and earnings by 30% and significantly accretive to free cash flow per share. It also brings 463 million players into the Activision Blizzard massive multiplayer PC games like World of Warcraft that have monthly subscription fees.
Activision actually has a World of Warcraft movie premiering on June 10th. If you go to the movie you will get a copy of the PC game World of Warcraft free. The movie characters have custom weapons that will be available to players after the movie debut.
The new game "Overwatch" has been played by 9.7 million people in the open beta phase where it is released to the public in order to get the bugs out of it. It is a good bet the majority of those players will be buyers when the game launches on May 24th. The Star Wars Battlefront game had 9 million players in beta and has now sold 14 million copies.
Activision said they were working with Twitch and Instagram and would be producing a lot of content on Facebook live. They are planning on launching live streams of E-Sports programming to all of Facebook's 1.6 billion users. E-Sports provides live competition by gamers for millions of dollars in prizes as other gamers watch. Activision just launched its MLG.tv live streaming platform where gamers can watch others play in real time.
Webush believes ATVI could earn $3 per share by 2018 with $2 per share in 2016. The company reported 23 cents for Q1 on record revenue of $1.46 billion. Those numbers were up from 16 cents and $1.28 billion. Analyst estimates were for 12 cents and revenue of $823 million. The company raised guidance for Q2 and for the full year. They are guiding for earnings of 38 cents in Q2, up +192% on revenue of $1.38 billion, up +81%. For the full year they guided to earnings of $1.78, up +35% and revenue of $6.28 billion, up +36%.
Adding to earnings were continued sales of Call of Duty: Black Ops 3 and Candy Crush Jelly Saga.
In other news researchers found that 43% of Overwatch players have already made purchases inside the game to improve their experience. Getting players to put down that first $50 to purchase the game is only the beginning. Future purchases inside the game is a completely separate revenue stream. Some players make continuous purchases to improve their capabilities. This is the cash cow nobody talks about.
I am proposing we buy the 2018 LEAP to give this acquisition of King Digital time to mature. We are probably going to see some retracement of the post earnings gains but I expect that to be light. Support is $34 and shares closed at $37.50 on Friday.
Long Jan 2018 $40 LEAP call @ $6.00. No initial stop loss.
BA - Boeing Company Profile
Boeing shares declined about $1.50 for the week after a 777 crashed at the Dubai airport in an aborted landing. Pilots attempted to abort the landing for reasons unknown and 12 seconds later the plane was on the ground. Some suspect the pilots were not prepared for the thin air in 120 degree heat.
Original Trade Description: March 13th.
Boeing designs, develops, manufacturers, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems worldwide. If it flies on earth or in space Boeing probably has their hand in its design and manufacture.
Boeing has had a relative dry spell in orders in 2016. For the prior four weeks they signed no new orders for commercial aircraft but they made up for it last week when they booked the biggest order of the year. They sold one 767 to FedEx, four 777s to United Airlines and 25 new 737s to United. However, at the same time United cancelled four 787 orders. That represents a net new order total of about $2.5 billion. Earlier in the year United also committed to buy (40) 737-200 aircraft at a list price of $80.6 million each.
So far in 2016, counting the orders from last week, Boeing has new orders for:
1 Boeing 767
1 Boeing 787
88 Boeing 737s
10 Boeing 777s
Boeing also has orders from the Air Force for 179 KC-46 tankers built out of 767 airframes. That contract is worth $43 billion and they have to be delivered by August 2017. The first 18 are already in production with Boeing working on some outside their buildings in Everett Washington. They do not have enough room inside the manufacturing facility because they are backed up on 787 deliveries. Last July FedEx bought 50 of the 767s in a freighter configuration. Boeing expects to sell more than 1,000 model 737 freighters with most going to China and Asia. Boeing sees $550 billion in aircraft demand from Southeast Asia in the years ahead.
While orders may be slow so far in 2016 the backlog of business is very healthy. Boeing delivered 750 jets in 2015 and expects to easily beat that number in 2016. As of the end of January Boeing had an order backlog of (4,392) 737 planes, (20) 747, (80) 767, (524) 777 and (779) 787s. The biggest order block is the 737s and that is one of Boeing's most profitable planes. The total backlog is something like 7 years of orders. Historically the backlog has run 2-3 years of production so it is more than double that today.
Add in the satellite and missile businesses and that is one busy company. As oil prices rise in late 2016 and 2017 the demand for more energy efficient planes will boost their orders even more. Some airlines are making do today with older less efficient planes because fuel is so cheap. Once prices rise again so will the orders. China's demand for planes is rising with double-digit growth in passenger traffic. One out of every four planes built goes to China.
Boeing expects to begin delivering the 777X models in 2019. The big jets are very expensive. The 777X-8 will cost $371 million and seat 350-375 passengers. The 777X-9 will list at $400 million and seat 400-425 passengers. They will have carbon fiber wings, burn 12% less fuel and be 10% cheaper to operate than competing aircraft.
Shares of Boeing declined in January after news of an SEC probe into the company's "program accounting" that shifts R&D expenses and production costs. They are the only major company to use that method but the technique is recognized under GAAP. Basically they are allowed to calculate profits over the life of the program and assign average costs to each airplane. That allows them to recognize profits earlier in the life cycle of each model but it reduces the profits on the back end. Nothing is expected to come from the SEC probe. Boeing is a very large company and they would not do anything that would jeopardize their future.
The analyst consensus for the stock is a target of $165 with a close of $124 on Friday. Earnings are April 20th.
Update 4/11/16: Boeing had a good month in March. The company booked orders for 69 new planes. A 767-300F, (4) 747-8F, (4) 777-300ER and (60) 737s. In just the first week of April then landed 17 new orders. So far in 2016 they have sold 122 model 737s, 11 model 777s, four 747s, one 767 and one 787. They sold 140 year to date but had 18 cancellations of prior orders for a net gain of 122. The total order backlog today is 5,740 planes.
Update 5/15/16: Boeing rallied after their investor day when they told analysts they expect profit margins to rise to double digits in 2017 and possibly to the mid-teens percentages in the years to follow. The company discussed plans to modify existing models to better fit what customers want to buy in an effort to take market share from Airbus. Production of the 777 jetliner will fall from 8.3 per month to 5.5 in late 2018 and 2019 while it ramps up production of the new 777x. Boeing said it would pay back $30 billion in deferred costs from the 787 saying 70% would come from selling larger, more profitable versions at higher prices. Boeing plans to ramp up production to more than 900 total plans a year by 2020.
Position 3/14/16 with a BA trade at $125.50
Long Jan $130 LEAP Call @ $7.85, see portfolio graphic for stop loss.
Short Jan $100 LEAP Put @ $4.44, see portfolio graphic for stop loss.
Net debit $3.45.
CVX - Chevron Corp - Company Profile
Chevron (CVX) shares dipped below support as oil prices dropped to $39.19 on Wednesday. We were stopped out at $99.35. The company said it was preparing to sell $10 billion in global assets with $5 billion in Asian properties going up for sale this month. The company already has more than $2 billion in bids for its Indonesian assets and it has put a gas field in Thailand on the market.
Original Trade Description: February 21st:
Chevron Corp explores, produces and refines oil and gas on a global scale. The upstream division explores and produces oil and gas. The downstream division refines the oil, produces petrochemicals and liquefies and distributes LNG around the world. Chevron is the real deal with operations in every facet of oil and gas production and distribution.
Despite the low oil prices Chevron continues to announce the completion of multiple projects to significantly enhance ongoing production. Currently Chevron produces about 2.54 million Boepd globally. They have a global refining capacity of 1.9 mbpd where profits offset the decline in crude prices. In Q3 Chevron had net income of about $2 billion. They generated cash from operations of $5.4 billion and paid out $2 billion in dividends.
The company has announced a decrease in capital expenditures from $42 billion in 2013 to $25 billion in 2016 and as low as $20 billion in 2017 depending on the market. This was helped by most of the work being completed on their two LNG facilities in Australia at a cost of nearly $60 billion. These facilities are preparing for first LNG and will be a source of a huge production increase for Chevron over the next three years.
On January 27th Chevron announced a $1.07 dividend for Q1 and they are confident cash flow will cover dividends through 2017. The CEO said maintaining the dividend will be their top priority in a period of low oil prices. Their current yield is about 5.1%.
The company announced on January 26th, first gas at the Chuandongbei Project in Southwest China. The project covers more than 800 square kilometers and is thought to contain more than 3 trillion cubic feet of gas. The LNG project consists of three trains that can process 258 million cubic feet of gas per day. The first train is now in operation and the other two trains are under construction and nearing completion. Chevron owns 49% of the project and China National Petroleum owns 51%.
In December they announced first oil from the Moho Bilondo development offshore the Republic of Congo. The project is 50 miles offshore in 4,000 feet of water. The initial project has 11 wells that are expected to produce 40,000 bpd. In November they announced first oil from the Lianzi Development Project also offshore the Republic of Congo. This project is 65 miles offshore in 3,000 feet of water and is also expected to produce 40,000 bpd.
Chevron has such strong financials that along with Exxon they were the only two companies not included in the recent Moody's warning of ratings downgrades. The rating agency said they were going to downgrade 120 oil and gas companies and 55 mining companies. Chevron and Exxon were exempted.
In the last earnings cycle for Q3 Chevron beat estimates by 37.9% and has posted an average beat of 15.11% for the last four quarters. Their refining and chemicals businesses have offset the losses from the lower oil prices. Chevron is set to announce earnings on Friday. I would not normally recommend a long position ahead of earnings but Chevron has a lot to brag about and production increased significantly in Q4. Conservative investors may want to wait until next week to enter the position.
Chevron shares have shown relative strength to the market because of their balance sheet, high production, new projects coming online and the dividend. That means we should be somewhat insulated from a price crash. Once oil prices do begin to rise for whatever reason we should see Chevron shares outpace the sector because of their relative strength.
Chevron probably has more new production in the pipeline than any other U.S. company. Most of that production is gas with two monster projects in Australia. The Gorgon project is a multibillion dollar LNG facility with the export capability of 15.6 million tons per annum (MTPA)(2.184 Bcf/d) of LNG to Asian markets. Demand for gas to Asia is expected to double by 2025. The fields feeding this LNG plant have more than 40 Tcf of gas with new discoveries every month. The first train of the three-train project is under construction and should be operational in 2015.
The $29 billion Wheatstone project will consist of two LNG trains with a combined capacity of 8.9 MTPA (1.25 Bcf/d) with the option to expand to 25 MTPA (3.5 Bcf/d). The first LNG output will be in 2016. More than 80% of the gas supplied to Wheatstone will come from Chevron fields. Another 20% will come from an Apache find in the same region. Chevron has made 21 major discoveries of gas in the region since 2009. The initial discovery was 9 Tcf of gas but more is being added every month.
There have been some worries recently about a surplus of LNG with numerous projects getting close to commencing operations. Chevron was one of the first to sanction the major projects in Australia and they presold the vast majority of their production for the next 20 years. If LNG prices do decline, Chevron will be protected. The Australian projects are close to Asia so shipping is less of an expense making their gas more desirable. With the projected startup later this year and full production by the end of 2016 this will be a monster boost to Chevron's global production.
Gorgon is the world's largest LNG project since 2010 and Australia's largest LNG project. Chevron owns 47% and Exxon and Shell own 25% each. Chevron spent $4.5 billion in 2014 and is expected to spend $3 billion in 2015 on Gorgon. Just beginning operations turns this project from a money pit into a moneymaker with revenue net to Chevron of $2.1-$2.9 billion a year.
These are just two of the dozens of projects Chevron has in progress. In the last ten years, Chevron has added 10.2 billion barrels of oil equivalent to its reserves.
The biggest factor in Chevron's favor is the pending start of the Australian LNG operations. This will significantly increase global production, reduce capex and increase cash flow. The earnings reports in 2016 will show significant improvements.
I am recommending an optional short put to offset some of the premium for the expensive LEAP calls.
Closed 8/1/16: Long 2017 $90 LEAP Call @ $8.05, exit $11.66, +$3.61 gain.
Closed 8/1/16: Short Jan $70 LEAP Put @ $3.94, exit .57, +$3.37 gain.
Net gain $6.98
DLR - Digital Realty - Company Profile
The broader market rally pulled investors away from dividend stocks and DLR broke below the long term support of the 50-day average. We were stopped out at $100.85.
Original Trade Description: July 17th.
Digital Realty Trust engages in the acquisition, ownership, development, redevelopment and management of technology related real estate. They focus on strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise datacenter users, including information technology departments of Fortune 1000 companies and financial service companies.
DLR currently pays a $3.52 annualized dividend, which yields 3.75%.
In their recent earnings, they produced $1.42 in funds from operations and that beat estimates for $1.34. Net income was 27 cents per share. Revenue was $455.3 million. For the full year, they are projecting operating funds of $5.55 to $5.65 per share.
On July 5th the company announced it had completed the acquisition of 8 premium data centers in Europe from Equinix. The properties are located in London, Amsterdam and Frankfurt. The acquisition cost $874 million or a multiple about 13 times their anticipated 2016 EBITDA. This was a major acquisition opportunity made possible because of an acquisition by Equinix that required them to divest some properties.
When DLR signed the deal they immediately announced a secondary offering of 12.5 million shares that priced at $96. After the secondary, the stock went on to peak at $113 before declining last week.
Datacenter REITs like DLR are the big thing in the current dividend hungry investing environment. Datacenter customers rarely fail to pay the rent and the space is always in high demand. Periodic rent hikes allow the centers to expand profitability. Once a customer has their equipment installed, it is almost never moved. The expense and the complicated task prevents movement in all but the most extreme circumstances. Annual rents can be more than $1000 per square foot.
Earnings July 28th.
The REITs declined over the last week as the market rallied as investors dumped dividend stocks for momentum plays in a bull market. However, you would be hard pressed to find a better momentum stock, with a huge dividend, than DLR.
I believe the market is going to suffer some additional weakness in 2016 because of earnings, the Fed, the economy and the elections. A REIT is somewhat of a safe harbor in the coming storm.
I would like to enter this position around support at $103 before earnings. Because shares may not reach that support, I am going to cheat slightly and target $104. In the long-term scheme of things, it will not matter.
Position 7/20/16 with a DLR trade at $104
Closed 8/5/16: Long January $110 call @ $3.24. Exit $2.05, - $1.19 loss.
EMR - Emerson Electric - Company Profile
Emerson reported earnings of 80 cents that missed estimates by 4 cents. Revenue of $5.13 billion also missed estimates for $5.31 billion. They guided for the full year to earnings of $2.90-$3.00 per share. They also announced the sale of 2 segments for a total of $5.2 billion. This is a major milestone in the restructuring plans announced last fall. We were stopped out but I am going to put them back into the mix as a watch list entry.
Original Trade Description: May 8th.
Emerson Electric designs and manufactures products and provides services to industrial, commercial and consumer markets worldwide. They cater to all areas of industry with electrical measurement and control products, power generation products and automation of critical energy infrastructure.
In the recent earnings cycle they reported 66 cents compared to estimates for 63 cents. Revenue of $4.928 billion beat estimates for $4.891 billion. However, earnings declined -62% mostly because of the drop in demand from the oil and gas sector. Revenue declined -9$ for the same reason.
They guided for the current quarter to earnings of 85 cents. Full year revenue is expected to decline 2% to 5%. Full year earnings are expected to be $3.05-$3.25.
While they beat expectations, the performance was lackluster. With one of their major sectors in steep decline, it was remarkable that they beat earnings and raised guidance. When the oil and gas sector begins to rebound they are positioned for a huge bounce in earnings. The decline in oil and gas was priced into the stock at the January lows of $42. Shares rebounded with oil prices to $56 before earnings and dropped back to $52 with the weak market.
The CEO said Europe was better than it was just a few months ago and the rest of the world met expectations. The U.S. remained a trouble spot in certain segments.
The company is preparing to spin off its network power segment saw rising demand from data centers and telecom spending. He predicted the overall order book would turn positive in April/May and ramp up when capex spending returned to the energy sector.
Emerson is a solid company. They are not growing earnings significantly because of the energy sector but they are still tending to business. The spinoff of the network power division will provide a boost to the stock and allow Emerson to focus on the more profitable process management and power generation side of the business. The spinoff is expected to be completed by September 30th. The spin will provide cash to Emerson and allow them to put that cash to work in other areas and buyback stock. The CEO said, while they continue to proceed on the spinoff they are also talking to interested parties about an outright sale that would provide even more cash and flexibility. They are also in talks to sell the motors, drives and power generation business, which will further improve the company focus.
The company declared a quarterly dividend of 47.5 cents payable June 10th to holders on May 13th. They had operating free cash flows of $719 million for the quarter and expects to produce $3 billion in FCF for all of 2016.
The company is a steady performer with a lot of headline events coming over the next six months. These sales events will provide cash and improve profitability.
Shares declined from $56 to support at $52 after earnings and buyers were waiting. Options are inexpensive and the spin/sales events should power the stock higher.
Closed 8/2/16: Long JAN $55 call @ $2.70, exit $2.10, -.60 loss.
FEYE - FireEye - Company Profile
Shares were crushed for a $2 loss to stop us out at $13.93 after the company reported a loss of 33 cents on a 19% rise in revenue to $175 million. Analysts were expecting 33 cents and $181.6 million. Billings of $196.4 million also missed estimates for $209.6 million. It was not all bad news. Their newest security offering saw sales rise 65% and they added more than 300 new customers and closed 40 transactions over $1 million.
The company announced a restructuring to lower costs and a reduction in employees.
Original Trade Description: June 26th.
FireEye provides cyber security solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques.
FireEye disclosed last week that it had hired Morgan Stanley to evaluate multiple acquisition offers. One of the suitors was Symantec but they could not agree on a price. Bloomberg said the company was looking for something in the $30 range as a fair offer. Shares are currently trading at $16. The other potential acquirer was not named. All talks have ended but once for sale, always for sale. Now that other companies know the price FireEye was willing to accept it may trigger action by other potential acquirers.
FireEye is unique because they can actually track cyber attacks, tell the client what data the hackers were trying to get or did acquire and who the hackers were.
Two weeks ago they discovered a new type of malware targeting process controll systems at Siemens Industrial Systems. The malware was looking for information on how to control industrial equipment that operates utility companies and manufacturing plants. The malware was said to be similar to the Stuxnet virus that crippled Iran's nuclear project for more than a year. The malware was able to check for software defenses before launching its own code and then cleaned up behind itself to leave no tracks. It was able to evade defensive software and that is a key point. Malware is getting smarter and companies need FireEye to track, monitor and eventually eradicate this kind of threat.
There have not been any high profile attacks reported in recent months. Each time an attack is reported these cyber security companies typically rise in the market. It would be naive to believe hackers were losing interest. In fact they are even more prevalent than in the past and they are getting smarter. This requires smarter software defenses like FireEye.
Even if a new acquirer does not appear, I believe FireEye will continue to grow in importance and complexity. Eventually they will either rise on their own or become a takeout target.
Shares are cheap so LEAPs are cheap and we can reach out to January 2018 on this position. The market dip on Friday gave us a buying opportunity. Resistance is currently $17.25.
Closed 8/5/16: Long 2018 $18 call @ $3.60, exit $2.73, -.87 loss.
FFIV - F5 Networks - Company Description
F5 Networks is the gift that keeps on giving. Shares closed at a new 52-week high on Friday on no news.
No news on the evaluation of the existing acquisition offers. Goldman Sachs is reportedly still reviewing them and directing negotiations.
Original Trade Description: March 13th.
F5 Networks develops, markets and sells application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.
With the vast amount of Internet traffic now being served over mobile devices utilizing 4G speeds and now advancing towards significantly faster 5G speeds it is imperative for companies to improve the speed and security of their networks.
Just to catch everyone up on how much faster 5G (5th generation) is than 4G here is a comparison.
3.5G = 42 Mbps (megabytes per second)
4G/LTE = 100 Mbps
4G/LTE.Cat 4 = 150 Mbps
4G/LTE Adv = 1,000 Mbps
5G = 5,000 Mbps to 10,000 Mbps (estimates)
The 5G standards have not been officially defined but multiple vendors are touting speeds with existing equipment up to 7,500 Mbps. Qualcomm is currently producing Snapdragon processors for smartphones with Cat.10 modems that are capable of 450 Mbps.
To put all of this in perspective for F5 Networks. At advanced 4G/LTE speeds you could download an entire standard definition movie in under 5 seconds. A theoretical 5G speed could download an entire HD BlueRay movie in under a second.
Obviously that means the servers and networks delivering this content securely must also have this capability, otherwise those superfast mobile devices will be suffering significant lag times.
Since most datacenters and networks are still delivering content at the 3G rate there is a vast amount of untapped opportunity for those companies like F5 that are bridging the technology gap.
You hear about the Internet of Things (IoT) and how much network capacity will have to increase to add tens of billions of additional devices like lights, thermostats, refrigerators, every TV now being produced and nearly every car now being produced as an Internet hot spot.
As cloud systems garner additional customers the vast amount of storage required plus the amount of network connectivity required to access that storage is growing exponentially. This week I added a new cloud account with Amazon to use as a backup and I have been uploading 150 Gb of data continuously for the last 4 days and the job is only half done and Amazon has fast servers.
Securing all that data and network traffic and delivering it instantly is what F5 does. They provide multiple highly concurrent platforms and specifically position service providers for next generation networks.
As an illustration they offer a blade server (VIPRION B445) that can handle 1.2 billion concurrent connections and more than 20 million connections per second using only an 8 blade chassis and 100 Gbe hardware. I would explain how fast that is but it would require far more space than I have here. To say it is mind-boggling would be an understatement.
FFIV announced the availability of a carrier class firewall that will give end-to-end security across service provider networks. The standalone firewall can support up to 1.2 billion concurrent connections and over 20 million connections per second. This is a major product announcement.
In their Q4 earnings they reported earnings of $1.32 that beat estimates for $1.27. Revenue rose +5.8% to $489.5 million, which also beat estimates. Service revenues rose +14.9%. The company guided for earnings in Q2 of $1.61 to $1.64 and analysts were expecting $1.32.
Shares rallied on the earnings beat to plateau at $100 over the last week. I believe that $100 level is going to break and we will see shares retest the recent highs at $120 in the months ahead.
Position 3/18/16 with a FFIV trade at $101.50
Long Jan $105 LEAP Call @ $9.75, see portfolio graphic for stop loss.
Short Jan $85 put @ $4.85, see portfolio graphic for stop loss.
Net debit $4.90
GILD - Gilead Sciences - Company Profile
Support appeared at $79 and it has held for the last week. No specific news.
Original Trade Description: July 10th
Gilead Sciences, Inc., a research-based biopharmaceutical company, discovers, develops, and commercializes medicines in areas of unmet medical needs in North America, South America, Europe, and the Asia-Pacific. The company's products include Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread, and Hepsera products for the treatment of liver diseases. The company also has dozens of other drugs and drugs in development.
They are most known for their Hep-C drugs that sell for $90,000 for a 12-week cure. Shares declined in May on a patent ruling over their Hep-C drugs. Merck (MRK) won that round but the fight is not over and the damages even if they lose in future appeals are not that bad. They would have to pay Merck a 4% royalty on future sales plus some upfront cash.
Gilead just announced another improvement in their Hep-C portfolio and it will continue to rake in billions of dollars and protect them from generic copies for years longer.
One of their new drugs for Hep-C is Epclusa and that is expected to be very strong as distributors stocked up in Q2. That is a niche drug in the Hep-C space. Unlike the drugs from AbbVie and Merck, Epclusa only requires combination with Ribavirin in a small variety of patients while the competing drugs require Ribavirin in most applications. That is a dangerous drug, is poorly tolerated and has a long list of dangerous side effects. Epclusa is the ONLY drug approved to treat all six major forms of Hep-C. It sells for $74,650 per course of treatment.
The second quarter is normally a strong quarter for biopharmaceutical companies. Leerink's Geoffrey Porges said this could be "one of the strongest quarters for Gilead's core franchise in some time." Q2 earnings normally surprise and that leads to analyst upgrades in the coming weeks. The analyst raised revenue estimates from $7.9 billion to $8.2 billion on the Hep-C products and their strong portfolio of HIV products. He increased the earnings estimate from $3.15 to $3.32 for the same reasons. Consensus is $3.03.
Earnings are July 25th.
Any stock we add over the next couple weeks will have an earnings report that we have to confront. I would rather add a stock where the estimates are rising than one with a lot of unknowns.
GILD shares are approaching resistance at $89 and a breakout there could target $100.
Because it is a biotech company where surprises do happen I am going to recommend we add a long put for August to try and protect us against a negative event.
Long January $90 call @ $5.00, no initial stop loss.
Long August $82.50 put @ $1.61, no initial stop loss.
If GILD rallies after earnings, we will close the put and accept any loss of premium as an insurance cost.
GRUB - Grub Hub - Company Profile
GRUB shares have not shown any post earnings weakness. We have a tight stop and we will take profits if forced and look to buy back in on a dip.
Original Trade Description: June 26th
GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 44,000 local restaurants with diners in approximately 1,000 cities. It operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, iPad, Android, iWatch, and Apple TV devices; and Seamless Corporate program that helps businesses address inefficiencies in food ordering and associated billing. In addition, it provides Allmenus.com and MenuPages, which provide an aggregated database of approximately 380,000 menus from restaurants in 50 states.
GrubHub is a concept that is catching fire and the bigger they get the more restaurants want to sign on to the service. They now serve 44,000 restaurants. They do not markup prices. Whatever the restaurant charges is what you pay. Diners can customize any order to their own taste specifications and dietary needs.
Restaurants benefit because the service drives more orders. Many people cannot take 2 hours out of their day to go to the restaurant to eat. GrubHub brings the restaurant to them. Restaurants typically see about 30% more takeout orders during their first year when they sign up for the Grubhub service. Delivery fees range from free to $3.99.
GrubHub currently has more than 6.9 million diners. Ordering through the GrubHub online menu is 50% faster than ordering from the restaurant on the phone.
The company recently announced participation with national chain restaurants including Boston Market, Johnny Rocket's, California Pizza Kitchen, Veggie Grill, On the Border and Panda Express. This is a natural for fast food chains. They prepare the food fast and it gets to the diner fast.
An analyst at Moness Crespi Hardt just upgraded them to buy from neutral saying the fundamentals are rapidly improving with the addition of the chain restaurants. Secondly they completely overhauled their tech platform in 2015 and the benefits are rising quickly. They are also integrating POS features including Apple Pay. He also believes they are a potential acquisition target by companies like Amazon, Uber and Postmates. His biggest point is the addition of the chain restaurants. Adding companies with hundreds or even thousands of restaurants will catapult them to the next level.
Earnings August 2nd.
Update 8/2/16: Active diners rose 24% to 7.35 million and above consensus at 7.32 million. They added 382,000 net active dinners for the quarter and also above estimates for 350,000. GrubHub now has more than 40,000 active restaurants.
Shares have been rising and they closed at an 11-month high on Thursday. In Friday's market crash they gave back only 1.4%, which is nothing compared to the rest of the market. This strong relative strength shows that current owners do not want to sell.
Long Jan $32.50 call @ $3.30, no initial stop loss.
HCN - Welltower Company Profile
HCN reported earnings of $1.15 compared to estimates for $1.14. Revenues of $1.08 billion beat estimates for $1.04 billion. The guided for the full year to $4.50-$4.60 and estimates were $4.56. Shares fell sharply as REITs were kicked to the curb with the broader market in rally mode. We were stopped out on Wednesday.
Original Trade Description: March 6th
Welltower is an independent equity real estate investment trust. They acquire, plan, develop, manage and monetize real estate assets. The company primarily invests in senior living and health care properties, including medical office buildings, inpatient and outpatient medical centers, senior living communities and life science facilities.
With the boomer generation rapidly entering into old age and facing all the health problems associated with getting older, Welltower has positioned itself to capitalize on this trend. Welltower operated in markets with relatively high real estate values where the barriers to entry are higher than average. Entering a high priced market and building new properties would take a large amount of cash and a long time to be profitable. Welltower got an early start and is already well positioned. Welltower believes they have the best healthcare real estate portfolio in the industry.
Welltower does not hold its properties forever. Once they have peaked in terms of revenue and life cycle they liquidate and use the funds to acquire new properties in desired locations to further enhance the portfolio. They sold off their life sciences portfolio in 2015 for a tidy profit.
The company has increased scale in the most attractive real estate markets in the country including Southern California, Northeastern U.S. and in London. Real estate prices are only going higher in those locations along with rents and the cost of medical services. Welltower is not buying facilities in places like Cheyenne Wyoming where the population cannot afford healthcare and senior living communities are all supported by Medicaid payments. They are building/buying in the high-income areas where rising rents can be supported by the population. Welltower's average senior living property is 12 yrs old and located in an area with a $78,387 median income. For their competitors the average is 18 yrs old and median income is $53,996. Over the past five years, Welltower has invested approximately $1.2 billion a quarter into real estate.
Welltower has about 2.5% of the more than $1 trillion U.S. healthcare real estate market and they own some of the top properties. Over the next 45 years the U.S. population over 65 is projected to double and the number of seniors over age 85 is expected to triple. Welltower expects the healthcare real estate market to double or triple over the next 20 years. Over the period 2014 to 2014 the amount spent on healthcare is expected to rise 76% to more than $5.4 trillion or nearly 20% of GDP.
Since its IPO in 1971, the company has generated an average total return of 15.6% per year for shareholders.
In Q4 HCN reported earnings of $1.13 that beat estimates for $1.12. Revenue of $1.03 billion also beat estimates for $979.4 million. The company is projecting full year earnings of $4.50-$4.60 per share.
In early February HCP Inc, another REIT posted a major earnings miss and impairment charge related to some property sales. The entire REIT sector was crushed. HCP fell from $35 to $25 and that disaster knocked Welltower from $63 to $53 in a guilty by association sector dump.
Welltower has already rebounded back above the $63 level from that drop thanks to communication from the company saying we are not HCP and we are better positioned.
Earnings are August 2nd.
Welltower closed at $66 and has resistance at $70. The 2015 high was $85. I am recommending we buy the $70 call, currently $3.70. If readers would like to reduce that premium outlay, you can sell short the Jan $50 put at $1.65 to give you a net debit of $2.05.
Closed 8/3/16: Long Jan 2017 $70 call @ $3.70, exit $8.40, +$4.70 gain.
Closed 8/3/16: Short Jan 2017 $50 put @ $1.88, exit .70, +$1.18 gain.
Net gain $5.88.
IWM - Russell 2000 ETF ETF Profile
Big spike on Friday as the major indexes closed at new highs. If there is going to be a market correction it should happen in August.
This is a hedge against our long positions rather than an attempt to make money on a put. We need to hang on to this position as we move through the summer doldrums.
Original Trade Description: March 27th
I am picking the Russell 2000 ETF for multiple reasons. The first is that the Russell has rebounded the least of the major indexes. The high on the Russell 2000 was 1,296 in June of last year. The Russell declined to 943 at the low in February for a -27% drop. The rebound from that February low to Thursday's close at 1,079 has been 14%. However, the index has gone sideways for the last three weeks while the large cap indexes moved higher. The Russell failed to reach critical resistance at 1,120 and a 50% retracement of 10-month decline. There is significant resistance at 1,120 and again at the 61.8% retracement at 1,162.
The Russell is weak for multiple reasons. Financials make up the largest sector in the index with health care and energy also major components. Those sectors have been under extreme pressure so far in 2016. There is a rising call on the political front to break up the big banks and introduce price controls on drugs that will severely damage health care and biotech stocks. The energy sector has actually provided some lift in the last two months but the price spike to $41 in WTI is not likely to last.
I believe the rebound to 1,100 in March could be another lower high and the setup for a lower low in the months ahead. In an election year, the market is typically pressured by candidates on the campaign trail. They throw out dozens if not hundreds of things wrong with the economy and what they are going to do to fix it. Of the two major candidates, analysts believe Clinton would be less damaging to the market than a loose cannon like Trump. They have no political history for Trump and some of the things he says he will do, like tariffs on China and Mexico would cause an instant recession.
As we move out of the primary cycle in June and the leaders begin mudslinging towards each other the tone of the debate is going to become increasingly ugly. Normally that weighs on consumers and on the equity markets. There is always the potential for riots surrounding the conventions and that is market negative. If we head into October with a candidate unfavorable to the market in the lead, we could see significant declines.
Add in the potential for further ISIS attacks in Europe and the USA and that is another problem for the market to digest. Economically the economy is worsening. The Q4 GDP was revised up to 1.39%, which is barely growth at all, and the Q1 GDP is now forecast at 1.4% and declining. The Fed, despite Janet Yellen's calming words, appears desperate to hike rates in April. No less than four Fed heads made those claims last week. If the market believes the Fed is going to accelerate its rate hike cycle the market will decline. Earnings are now forecast to decline -8.7% in Q1.
There are lots of potentially negative factors to consider and very few if any positive factors. All the future market catalysts are negative. That could change at any time but that is the outlook today.
I am recommending we buy the January $100 LEAP put, currently $5.92. I would recommend launching this position at $110 and adding to it at $115 on the IWM. This will lower our overall cost in the position. Also, you could sell short a January $85 put, currently $2.31 to reduce the initial net debit in the total position.
The S&P futures are up slightly on Sunday night. I am expecting the market to rally on Mon/Tue as fund managers window dress their portfolios.
Position 3/29/16 with an IWM trade at $110
3/29 - With IWM trade at $110, Long Jan $100 put @ $4.93, no initial stop loss.
4/27 - With IWM trade at $115, Long Jan $100 put @ $3.50, no initial stop loss.
Short Jan $85 put @ $2.00, no initial stop loss.
Net initial debit $2.93.
JCI - Johnson Controls - Company Profile
No specific news. The next event on the calendar is the August 17th shareholder votes.
JCI reported the Adient spinoff had completed the issuance of debt and acquisition of a $1.5 billion credit facility ahead of the October 31st spinoff. This will enable Adient to transfer $3 billion to JCI when they break apart.
JCI moved up their expected completion of the Tyco merger to close on Sept 2nd rather than October as previously expected.
JCI and Tyco (TYC) shareholders are going to vote for the merger on August 17th. Each firm filed their respective S4 form with the SEC and they were declared effective on July 6th. The boards of both companies have unanimously recommended to accept the merger. JCI would get an immediate $150 million tax benefit because Tyco is in Ireland. Jointly they expect to see $500 million in annual synergies by the third year. Shares should rise as we get closer to the vote.
Original Trade Description: February 8th
JCI is a diversified technology and industrial company worldwide. They design, produce and market building efficiency systems including heating, air conditioning, security, controls and mechanical equipment. They also have a division that manufacturers interior products, control systems, instrument panels, seating and passenger systems for cars and trucks. Their Power Solutions division makes batteries for normal cars and trucks as well as hybrid and all electric vehicles.
What makes JCI important to us today is their recently announced merger with Tyco (TYC). Tyco manufacturers fire and security systems and is headquartered in Ireland. After the merger JCI shareholders will own 56% of the combined entity to be called Johnson Controls Plc. Once the merger is completed the company will spin off the automotive segment to be called Adient leaving Johnson controls with a pure play on the HVAC, controls, fire, security products marketplace plus the Power Solutions division that will produce batteries for electric vehicles. Current JCI shareholders will own 56% of Adient.
The Johnson Controls company will have about $32 billion in revenue and Adient around $17 billion in revenue. The synergies to the merger include $150 million in tax savings because of the Ireland domicile. Another $500 million will come from eliminating corporate redundancies and from operational synergies. There will also be additional revenue synergies which has not been quantified. Both Tyco and JCI existing customers will immediately have a new range of products available to them. This should result in a significant sales boost in the first three years.
Normally when a merger is announced one of the companies sees their stock decline. That did not happen in this case. Tyco shares spiked 10% and are continuing to move higher while JCI shares moved sideways for the last two weeks but made a four-week high on Thursday. Friday's market crash knocked some of the wind out of JCI shares but they only declined -66 cents.
The actual merger has a long way to go since it was just announced on January 25th. With Tyco shares rising and JCI shares having put in a solid base at $34 I expect JCI shares to return to growth mode in the coming weeks.
This is a good deal for both companies. It will not only create a powerhouse in the building systems market but throw off the automotive business into another entity where it can be acquired by one of the larger players.
Update 5/2/16: They reaffirmed that the JCI/TYCO merger is still on track and is set to close on Oct 1st. They also filed the initial Form 10 Registration Statement with the SEC for the Adient spinoff to shareholders after the Tyco merger is completed in October. JCI shareholders will receive 1 share of Adient for every ten shares of JCI they own. Adient will have 230 locations in 33 countries with 75,000 employees and $20 billion in revenue.
Position 2/16/16 with a JCI trade at $36.75
Long Jan $40 LEAP Call @ $2.45, see portfolio graphic for stop loss.
JUNO - Juno Therapeutics Company Profile
JUNO reported a loss of 67 cents compared to estimates for 51 cents. Revenue rose +121% to $27.6 million. Analysts are still positive about the potential benefits of the cancer drugs in testing labeled JCAR015, JCAR015 and JCAR017. Shares did not go down on the earnings miss.
Original Trade Description: July 11th.
Juno Therapeutics, Inc. is a biopharmaceutical company that engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its clinical stage CD19 product candidates include JCAR015 that is in Phase II clinical trials for adult patients with relapsed/refractory B cell acute lymphoblastic leukemia (r/r ALL); JCAR017, which is in Phase I/II trials for pediatric patients with r/r ALL; and JCAR014 that is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies. The company's additional product candidates comprise CD22, a cell surface protein expressed on B lymphocytes; CD171, a cell-surface adhesion molecule to treat neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; and WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers.
Shares of Juno Therapeutics (JUNO) were crushed on Friday for a 32% loss after a pivotal study on the chemotherapy drug JCAR015 was halted. This is a chemotherapy drug for acute lymphoblastic leukemia. The FDA put a clinical hold on the study after two patients died. The FDA wants Juno to submit a new Complete Response (CR) to the clinical hold as well as a revised patient informed consent form, a revised investigator brochure, a revised study protocol. Juno intends to present all the requested documents next week. The company said plans for its other CAR-T cell products candidates, including JCAR017 were not affected by the clinical hold.
The JCAR015 drug is one of Juno's most advanced pipeline candidates. RBC Capital, Michael Yee, said the stock would recover because the halt was temporary and the drug had passed earlier trials. He said shares were trading as though JCAR015 was dead and it is not. JP Morgan was not as optimistic and they cut Juno from overweight to neutral.
Earnings are August 8th.
Since this is a temporary halt and the trial is expected to resume in a few weeks I expect Juno shares to rebound from the 32% decline. This was a knee-jerk reaction and it will pass. I am putting an entry trigger on the position just over the afternoon high from Friday.
Position 7/13/16 with a JUNO trade at $32.32:
Long January $32.50 call @ $5.92. Initial stop loss $26.25.
Position was triggered on an $8 opening spike to fill us at the high for the day and the week.
In reality, I seriously doubt any reader actually bought the January calls based on this recommendation. Nobody should have entered this recommendation on the $8 spike. The first actual trade was at 11:35 at $5.92 with Juno at $32.32. I am going to use that as our entry point because I cannot say, "Kings-X, I was just kidding about that entry" given the massive spike. In the future, we never want to enter a new position with an opening spike of more than $2 in either direction.
LL - Lumber Liquidators - Company Profile
No specific news last week.
Original Trade Description: June 19th.
Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily 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. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.
LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.
On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.
The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.
The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.
LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.
LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.
Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.
While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.
The shares were up $2.50 on Friday and I would not normally recommend an entry on a gain like that. However, as the news becomes common knowledge the shares should continue higher. We may see a small retracement or maybe not. I am sure the Friday move was short covering. The actual investing buyers will not appear for days or weeks.
Earnings July 27th.
I am recommending a January option because any major rebound move should be over the next few months. We do not need to spend the extra money for a 2018 position. Shares were $13 before the announcement and I cannot conceive they would fall back below that preannouncement level.
Long Jan $18 call @ $1.50. No initial stop loss.
MLNX - Mellanox - Company Profile
No specific news. We bought the dip on MLNX on July 27th and it ended up being a falling knife. Shares continued to fall another $4. There is strong support at $41 and that will be our decision point.
The decline came on the earnings warning by INFN claiming networking demand was slowing. The decline has slowed but no rebound yet. This is a 2018 position so the stock could be double by then.
Original Trade Description: July 24th.
Mellanox Technologies, Ltd. is a fabless semiconductor company that designs, manufactures, and sells interconnect products and solutions. The company's products are used for computing, storage, and communications applications in the high-performance computing, storage, financial services, enterprise data center, and cloud markets. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems. The company offers 40/56/100Gb/s InfiniBand solutions, including switch and gateway integrated circuits (ICs), adapter cards, cables, modules, and software, as well as switch, gateway, and long-haul systems; 10/40/56Gb/s Ethernet solution for use in EDC, HPC, embedded environments, hyperscale Web 2.0, and cloud data centers; and 10/25/40/50/56/100Gb/s Ethernet NICs. It also provides adapters to server, storage, communications infrastructure, and embedded systems original equipment manufacturers (OEMs) as ICs or standard card form factors with PCI express interfaces; and switch ICs to server, storage, communications infrastructure, and embedded systems OEMs to create switching equipment.
Mellanox is the leader in their area. While Intel has been having trouble with a 100Gbs communications product, Mellanox is preparing to market 200gbs and 400gbs products early in 2017. With larger volumes of data being transmitted over the internet and from server to server to cloud and to backup systems, the need for ever faster communications products will only grow faster.
I added a separate cloud backup application several weeks ago to backup a backup server with 9.3 million files and 3.5 terabytes of data. I have a relatively slow 25 megabyte per second uplink speed from this particular backup server. This cloud backup has been running for 3 weeks and has 22 days to go to complete the first full backup. After that it will only take an hour of so per day to update the files that have changed. Now multiply this by the millions of other users who are doing the same thing every day. The need for superfast computer-to-computer communications in the datacenters is going to continue to grow exponentially. Mellanox is the bleeding edge technology in this sector.
For Q2 the company reported earnings of 87 cents and revenue of $214.8 million. That was growth of 16% and 23% respectively. Analysts were expecting 83 cents and $212.9 million. They guided for Q3 to revenue of $221-$227 million and analysts were expecting $225.8 million.
Shares plunged -10% because InfiniBand revenue declined -3% to $111 million but Ethernet sales rose 126% to $88.1 million as their new products gained market share in that area. InfiniBand sales were pressured by competition from Intel. The Intel product is inferior so they have to discount it compared to the Mellanox product to protect their market share. That reduces the revenue for Mellanox because they are competing on price with Intel for the older technology products.
When they debut their new 200gbs and 400gbs products early in 2017 there will be no material competition. Summit Redstone analyst Srini Nandury said the Intel threat is "overblown" and Intel faces a relentless uphill battle because of the pace of Mellanox innovation. "This is an inherent disadvantage for Intel. Intel is forced to use pricing to maintain market share." Nandury reiterated his $65 price target on MLNX.
Shares crashed from $52 to $45 on the earnings and worry about Intel discounting their competitive products. Because Mellanox has these fast products in the pipeline, I doubt the shares will remain at this level for long. I am going to put an entry trigger on the play at $46.65. If shares continue lower, I will adjust that trigger and the strike price in future newsletters. If they continue lower, it would be nice to enter a position at support at $41.
Some of our best positions come from buying headline related dips. I believe this will be one of those positions.
Position 7/27/16 with a MLNX trade at $46.65
Long Jan 2018 $50 call @ $6.70. No initial stop loss.
NVDA - Nvida - Company Profile
Nvidia announces earnings on Thursday and we could either see an upside blowout of an implosion based on the news. Shares are off the scale in overextension. I raised the stop loss again but we are not going to exit the position. With their new product announcement nearly every week and products sold out almost immediately, their guidance has got to be good.
One analyst suggested Nvidia replace Netflix in the FANG acronym for Nasdaq momentum stocks. He suggested Nvidia could be the Intel of the move to artificial intelligence and virtual reality.
Original Trade Description: June 12th.
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.
Earnings August 11th.
I know we are buying the new post earnings high but Nvidia could easily be $100 by January 2018. If shares do pull back I would consider that a buying opportunity to add to your position.
Long 2018 $50 LEAP Call @ $7.85, no initial stop loss.
Short 2018 $35 put, currently $3.58, no initial stop loss.
Net debit $4.27
RH - Restoration Hardware - Company Profile
No specific news. The CEO put his house on the market at $10.5 million after a two-year remodel with all RH components. He bought the house in 2013 for $5 million. He found a new house closer to the RH design center so this one has to go. Shares of RH are still stuck under resistance at $30.50.
Original Trade Description: July 5th.
Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, dÃ©cor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.
RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.
Earnings September 8th.
Last week the shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.
I was looking at RH as a potential play before the WSM comments appeared. Shares had sold off significantly from their $106 high back in November. When it appeared they had found a bottom at $25 I was willing to take a shot. The WSM news spiked the option premiums but it also reminded a lot of investors that RH was at an attractive level. They could easily be back at $40-$45 by January.
Long Jan $35 call @ $2.51, no initial stop loss.
SBUX - Starbucks - Company Profile
Last week was exactly the wrong week to buy Starbucks LEAPS. Shares collapsed from $58 at the open on Monday to $55.50 at the close on Thursday. This is still over support at $54 so our 2018 LEAP is in no danger. The decline came after the company recalled 2.8 million stainless steel drinking straws. Multiple children were injured when they fell while drinking a beverage using a straw.
Personally, after having 4 kids and 4 grandkids and countless nieces and nephews, I cannot understand a company offering a metal product that can turn into a spike whenever a kid falls down and they fall down all the time. I cannot imagine a parent letting a child walk around with a steel spike in their glass either. Fortunately, this recall will pass and eventually be forgotten.
Original Trade Description: July 31st.
Starbucks Corporation, incorporated on November 4, 1985, is the roaster, marketer and retailer of specialty coffee. The Company purchases and roasts coffees that it sells, along with coffee, tea and other beverages, and a range of fresh food items, through Company-operated stores. The Company also sells a range of coffee and tea products and licenses its trademarks through other channels, such as licensed stores, grocery and national foodservice accounts and online. The Company operates through four segment: Americas, which includes the United States, Canada, and Latin America; Europe, Middle East, and Africa, China/Asia Pacific, and Channel Development. In addition to its Starbucks Coffee brand, it also sells goods and services under the Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange and Ethos, Starbucks VIA, Seattle's Best Coffee, Frappuccino, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks Discoveries Iced Cafe Favorites brand names. As of March 2016, it operated 23,921 stores.
We have played Starbucks before with mixed results. The company has everything going for it but shares turned down last November and spent the last 8 months moving sideways in a consolidation pattern. After their recent earnings I am willing to give them another shot. Shares have found support at $55 and appear to be attempting a new move higher.
In their Q2 earnings, they reported 49 cents on a 7% rise in revenue to $5.33 billion and analysts were expecting exactly those numbers. They guided for full year earnings of $1.88-$1.89 with the current quarter at 54-55 cents.
The problem that tripped up the stock price was same store sales growth at +4% when analysts were expecting 5.7%. CEO Howard Schultz admitted the change to the loyalty card program was the problem. They changed from a credit for every visit/sale to credits based on your total purchases. Some customers were gaming the system by asking for their coffee and food to be rung up separately to simulate two visits. Many customers were irate at the change and sales slowed. Their normally busy Frappuccino holiday promotion fell flat because of the change in the loyalty card. However, Schultz said the change has already been forgotten and business is rising again. He also said, "In Starbucks' 24 years of public life, I can't recall a quarter quite like Q3 of 2016, when a confluence of social and political turmoil at home, weakening consumer confidence, increasing global uncertainty, and the launch of one of our most significant long-term initiatives of all-time all occurred within a single earnings period."
Starbucks has opened 730 new stores in the last 12 months. The company said it has locked in coffee prices for all of 2016 and has more than 50% of expected 2017 demand already committed.
Goldman Sachs added Starbucks to their Conviction Buy list after the earnings, saying "Starbucks is not broken."
I believe the consolidation is about over and we should take advantage of the cheap options before the stock develops any positive momentum.
Long Jan 2018 $60 calls @ $5.50, see portfolio graphic for stop loss.
Short Jan 2017 $55 put @ $2.25, see portfolio graphic for stop loss.
Net debit $3.25.
SCTY - Solar City - Company Profile
I am not a happy camper on SolarCity. Shares were trading at $27.50 the prior week. On Monday they announced an agreement with Musk/Tesla to sell the company for $25.37 or 0.11 share of Tesla for every SCTY share. Musk succeeded in orchestrating a takeunder rather than a competitive merger. The original offer was for $26.50 to $28.50 per share. What happened to that offer? The only good part of the deal is a 45-day go shop provision that expired on September 14th.
SolarCity said a special committee of "independent and disinterested" SolarCity board members evaluated the proposal and strategic alternatives. This included reviewing the capital market and fundraising environment against a broad range of strategic alternatives. It also looked at the merger "and the improved access to capital and lower capital costs that it would provide." Musk said Tesla will be able to reduce prices to future SolarCity customers and add its 190 store network to the SolarCity footprint.
While I understand there is incentive for SCTY to approve the deal in order to get an easier access to capital, a key metric in their business, I hope they are able to at least get a competing offer from somebody so Musk will have to pay more.
I tightened the stop loss in case TSLA shares decline.
Original Trade Description: May 15th.
SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; MyPower loan agreements; grid control/energy storage systems; zep solar mounting systems and proprietary software. It also sells electricity generated by solar energy systems to customers.
This has been a bad quarter for the solar stocks. Multiple companies have missed earnings and lowered guidance. Solar City was no exception. The company lost -$2.52 compared to estimates for -$2.32. However, revenue of $122.6 million easily beat estimates for $110 million. They guided for the current quarter for a loss of $2.70-$2.80 and analysts were expecting $2.13. The company cut estimates for full year installations to 1,000 to 1,100 megawatts compared to analyst estimates for 1,250 megawatts. Shares dropped -21% on the news to support at $16.50. Shares are down -65% in 2016.
The company said they were expanding into new states in the second half and that would increase sales. Also, sales are normally up in the summer months because roofs are not covered with snow.
They blamed the weak first quarter on regulatory challenges and increased prices that slowed sales. Nevada regulators said they were increasing fees to connect your solar installation to the grid and they were reducing the price the utility companies were going to pay for your power when it reaches the grid. That slowed installations in Nevada. I would think utility companies would like the extra power because they do not have to pay to generate it.
There was also some uncertainty about the extension of the investment tax credits for solar installations. The government did not extend the credits until last December.
Solar City actually installed much more wattage than expected. The company had forecasted it would install 180 megawatts in the quarter. They actually installed 214 megawatts, up 40% from year ago levels. The problem came from the bookings. They only booked 160 megawatts to add to the order backlogs. That meant their backlogs shrank for the quarter. However, the CEO said bookings were up +25% in March/April.
This play recommendation is a bet on Elon Musk as much as it is a bet that Solar City will continue to improve its sales and reduce expenses. There have been rumors that Musk was thinking about taking Solar City private for multiple reasons. Whether that happens or not is of course unknown. However, I do not expect Musk to let Solar City fail or continue to post negative results. He will direct the company and if the current CEO cannot post solid improvements, I am sure Musk can find somebody that will.
Earnings Aug 8th.
I wanted to play the 2018 LEAPS but they were too expensive. With the stock at $19 after trading at $65 just a few months ago there are high expectations. I am going to settle for a January 2017 call and we can revisit the 2018 LEAP question when we exit this position.
Shares dipped to $16.50 and have already rebounded to $19.60 in only 4 days. I expect the rebound to be steady since most of the three week decline was in sympathy to other solar earnings misses in the sector.
Long Jan $22 call @ $4.15, see portfolio graphic for stop loss.
Short Jan $10 put @ $1.95, no initial stop loss.
Net debit $2.20.
WDC - Western Digital Corp - Company Profile
WDC beat the street on earnings the prior week but continued to decline on what some analysts called weak guidance. We were stopped out at $45.65 for a minor loss.
Original Trade Description: May 29th.
Western Digital develops, manufactures and sells data storage devices that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content worldwide. They produce hard drives for consumer PCs and enterprise servers. They produce solid-state drives (SSDs) that contain flash memory and operate at many times the speed of a conventional mechanical disk drive. They produce direct attach storage solutions for private and public clouds with storage per device of up to 24 TB.
Several months ago Western Digital agreed to buy flash memory maker SanDisk for roughly $80 per share or $16 billion. SanDisk has a revolutionary new memory technology that is due to hit the market soon and is considerable faster than existing flash memory. Western will be able to incorporate this super fast flash into its products and move well ahead of competitor Seagate Technology (STX). Seagate purchased competitor Samsung and Western Digital purchased Hitachi over the last several years. That leaves Seagate and Western Digital as the only major disk storage manufacturers in the world.
The SanDisk acquisition was completed on May 12th.
When Western Digital bought Hitachi in 2012, China approved the transaction but required WDC to maintain manufacturing and sales separate from WDC manufacturing and sales for 2 years. At the end of that period, China tried to impose new restrictions and after a long battle they finally relented in December. Western will finally be able to fully integrate the Hitachi acquisition into Western's manufacturing process. That is expected to provide them with another $500 million in synergies over the next two years.
As a result of the SanDisk merger, Western Digital will have an opening to spread out in the flash storage market. SanDisk will be able to leverage Western's decades of market share in the hard drive market to expand on its flash storage into laptops, notebooks, tablets, PCs, etc. This is a win-win for both companies.
Western Digital shares crashed to $41 on May 19th after the acquisition was completed. They revised their guidance as a combined company. They now expect current quarter revenue in the range of $3.35-$3.45 billion compared to the prior forecast of $2.6-$2.7 billion. Earnings are expected to be between $.65-$.70 cents compared to the prior forecast for $1.05. The new guidance now includes interest costs of about $220 million. They incurred $30 million in debt issuance costs and $50 million in interest prior to closing on the acquisition. I believe WDC is going to rally off the recent lows and through resistance at $51. The combined companies are much stronger with a wider range of products than Seagate and sales late this year and in 2017 are going to be much stronger.
Analysts upgraded their ratings with Needham upgrading to strong buy and Citigroup to a buy. Needham has a price target of $90.
We tried to play WDC back in March but were stopped out on a decline after Seagate warned on expected revenue for 2016. WDC also suggested enterprise spending had slowed. However, after completing the acquisition and revising guidance analysts are suddenly more bullish saying the guidance was conservative. With shares $8 off the lows it appears investors are trying to buy the bottom. There is decent resistance at $51 that could provide a pause point. However, as a combined company with dozens of new products I believe they will eventually push through. I am going to recommend a 2018 LEAP with an offsetting put because WDC could take a couple quarters to really build up some new product momentum.
Closed 8/2/16: Long 2018 $50 call @ $7.75, exit $6.70, -1.05 loss.
Closed 8/2/16: Short 2018 $30 put @ $4.20, exit $3.70, +.50 gain
Net loss 55 cents.
X - US Steel - Company Profile
Shares held the post earnings highs and Jefferies upgraded the stock on Friday. It was a minimal upgrade from underperform to hold but it was still an upgrade. As campaign talk begins to focus on economic issues including major infrastructure programs, US Steel should continue to move higher. It would be a long time before any programs were implemented but expectations are a powerful motivator.
JP Morgan said the stock could rise another 44% and assigned a $37 price target. However, that is for the end of 2017. I raised the stop loss because this rocket ride has just about run its course.
Remember the 12,000 Jan $25 calls the trader bought for an average price of 90 cents? They are worth $4.40 today and ht has not closed the position. He bet about $1 million and now his position is worth over $4 million.
Original Trade Description: July 5th.
United States Steel Corporation produces and sells flat-rolled and tubular steel products in North America and Europe. It operates through three segments: Flat-Rolled Products (Flat-Rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular). The Flat-Rolled segment offers slabs, rounds, strip mill plates, sheets, and tin mill products. This segment serves customers in the automotive, consumer and the combined industrial, service center, and mining commercial markets. The USSE segment provides slabs, sheets, strip mill plates, tin mill products, and spiral welded pipes, as well as heating radiators and refractory ceramic materials. This segment serves customers in the construction, service center, conversion, container, transportation, appliance and electrical, oil, gas, and petrochemical markets. The Tubular segment offers seamless and electric resistance welded steel casing and tubing; and standard and line pipe and mechanical tubing products primarily to customers in the oil, gas, and petrochemical markets.
US Steel is not a company I would normally recommend. The steel business is cyclical and China routinely dumps low priced steel in the USA. With the global economy operating at crawl speed it is not likely that steel demand is going to surge soon.
However, something is happening at this 115-year-old steel company. Somebody may be preparing to make a play to acquire the company. The Canadian counterpart, U.S. Steel Canada, which is in bankruptcy, received several acquisition offers. U.S. Steel Canada was formerly a unit of U.S. Steel. Reportedly, bids were higher than expected. Several were from U.S. companies. Two U.S. hedge funds, Bedrock Industries and KPS Capital Partners were among the bidders.
On Friday, someone bet close to $1 million that U.S. Steel would be over $24 by January. That is an enormous bet if you did not have some inside information OR that bet was made by somebody planning on taking a run at buying the company. They bought more than 12,000 January $24 calls for prices between 75 cents and $1. The open interest was only 1,157 at the time and the stock was trading for $17.50. Buying six-month calls that are 33% out of the money is suicide unless you have inside information.
I am recommending we piggy back on their trade but in a slightly different manner. Rather than paying $1.34 for a call that is $6 OTM, I am recommending we buy the $20 call for $2.56 and sell the $14 put for $1.53 for a net debit of $1.03. We will be profitable over $21 where the mystery buyer needs X shares to move over $25 to be profitable. This way if the news does not move the stock as much as they expect we will still be in good shape.
This is purely a speculative trade based on that $1 million bet. If you cannot afford to lose $1 then do not enter this trade.
Long Jan $20 call @ $2.29, no stop loss
Short Jan $14 put, currently $1.60, no stop loss.
Net debit $.69.
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