Markets do not go straight up or down and a pause to refresh after three days of big gains is only normal.
The S&P gained more than 1% per day for three consecutive days and that has not happened since October 2011. This was a big rebound with a +120 point gain in the S&P. We gave back -9 points today and I view that as very acceptable. It could have been a lot worse.
Current Position Changes
DNKN - Dunkin Brands
The long call play was entered at the open.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.
BULLISH Play Updates
CSCO - Cisco Systems - Company Description
Cisco held its substantial gains from the last week with no material intraday dip. This is encouraging because it suggests the return of a positive market could see further gains. Target $27.25 for an exit.
Original Trade Description: February 11th.
Cisco reported after the bell yesterday and did more than please investors. The results, plus forward guidance, an increase to the dividend and an increase to the share buyback plan drove shares higher in today's session. The stock gained nearly 10%, broke above the previous resistance, moved up off the short-term moving average after gapping higher and all on 2.35X average daily volume.
Cisco Systems, Inc. supplies data networking products for the Internet. The Company's Internet Protocol-based networking solutions are installed at corporations, public institutions and telecommunication companies worldwide. The Company's solutions transport data, voice, and video within buildings, across campuses, and around the world.
Cisco reported earnings after the bell and did more than stun the market with its results. In the face of weak global growth and poor earnings results for the broader tech sector this company has been able to grow revenue, grow earnings and all on the back of increased demand.
Quarterly earnings rose to $3.1 billion or $0.62 per share, up 29.1% and 34% respectively from last year in the same period. Revenue rose 2% year over year due to a 2% increase in product revenue and a 3% increase in service revenue. All geographic segments saw growth, led by the Asia/Pacific region with an 11% increase. In terms of business segments product revenue was led by an 11% increase in security revenue, evidence of the ongoing need for business around the globe to bolster their online security. Margins are also on the rise driven by productivity improvement and a 7% decline in GAAP operating expenses.
The board of directors approved an increase to dividend, in line with the companies pledge to return 50% of free cash to investors. The new dividend is $0.26 per share, up $0.05 or 24% from the previous quarter.
The board also approved an increase to the current share repurchase program. The previously approved program totaled near $97 billion of which about $1.9 billion is left. The new addition is for another $15 billion, with no time limitation, making the total available for repurchase $16.9 billion.
The company also reaffirmed guidance for the 3rd quarter of fiscal 2016. Management is expecting earnings of $0.54 to $0.56, bracketing the consensus estimate, on revenue of $12.26 to $12.62 billion. Consensus revenue estimates are only $12.03 billion. High end estimates are closer to $13 billion, leaving plenty of room for Cisco to beat estimates yet again and if they continue to grow their customer base as they did this quarter it is sure to happen. Additionally, with the dollar falling to new lows and the strength shown in the Asia/Pacific region it is likely that current estimates are low.
There has already been one upgrade in the wake of the report and more are sure to come. Jeffries upped their rating to buy from hold. The consensus estimate if for share prices to rise to $31.61 with a high target of $37.00. Simply based on the consensus estimate there is a potential upside of 30%.
Our play, buy the April $25 call with a price trigger of $25 per share. As of today's action these options were going for $0.95 per share. Next earnings is in mid May so this position will be closed before then.
Position 2/12/16 with a CSCO trade at $25.00:
Long March $70 call @ $1.05, see portfolio graphic for stop loss.
DNKN - Dunkin Brands - Company Description
We received a gift from the market this morning when DNKN dipped below $43 at the open to give us a decent entry point on the option at $2.05. The dip was immediately bought and DNKN returned to the highs of the day.
Original Trade Description: February 17th.
Everybody knows Dunkin Donuts. Consumer consultancy, Brand Keys, named Dunkin Donuts coffee as the top brand for consumer loyalty for tenth consecutive year. I know, you would probably have said Starbucks if you were asked the question but Dunkin Donuts coffee is the most loved. Dunkin was also number one in packaged coffee loyalty for the fourth consecutive year. Starbucks sells more units because Dunkin Donuts did not sell their K-Cups in supermarkets for a long time. Up until recently, if you wanted to buy Dunkin K-Cups you have to go to a Dunkin store. Now they are available everywhere, even in Kohl's stores and Ace Hardware.
Dunkin is changing their business model. They are opening 62 "non-traditional" stores in 2016 in addition to their normal stores. Those non-traditional stores will be located in airports, transportation terminals, casinos and resorts, hospitals, stadiums, grocery stores, military bases, colleges and universities. They are also opening multibranded stores featuring both Dunkin Donuts and Baskin Robbins, their ice cream brand. That will allow for traffic from the morning donut and coffee to the after dinner ice cream treat. They are also adding other bakery goods to their donut menus including a full range of breakfast sandwhiches.
Dunkin currently has 11,700 stores under the Dunkin brand, with 750 of those now non-traditional. They also run more than 7,600 Baskin Robbins in 40 countries. They operate more than 220 stores in Europe.
Dunkin prides itself on the "blue collar" appeal compared to the sometimes snobby views of Starbucks with $10 coffees.
Their Q4 earnings were 52 cents that beat estimates by 2 cents. Revenue of $203.8 million increased 5% and also beat estimates. U.S. same store sales comps rose +1.4%.
Shares peaked just under $44 on February 5th, just before earnings. Post earnings depression and the weak market knocked them back to $40 but they have rebounded to close at $44 today and a five-month high.
No entry trigger because the June option is cheap and we have a long time before expiration. However, earnings are April 21st. We will decide on an exit strategy as we near that date.
Long June $45 call @ $2.05, see portfolio graphic for stop loss.
FL - Foot Locker - Company Description
Foot Locker also declined sharply with the market at the open but recovered to close $1 off its lows. Target $69.25 to exit.
Original Trade Description: February 3rd.
Foot Locker is a specialty athletic retailer with more than 3,400 stores in 23 countries and it a leading provider of athletic shoes. February is kickoff month for Foot Locker and they run a series of new ads on TV ahead of the March Madness.
This year the ads will feature comedian Kevin Hart in both Foot Locker and Kids Foot Locker promotions. In Q3 same store sales rose +8% and retailers for sports apparel reported a good holiday season. Foot Locker reports earnings on March 4th.
Nike and UnderArmour already reported strong earnings. UnderArmour reported a record quarter claiming accelerating sales of athletic footwear were growing market share and profitability. Nike reported earnings that increased 21.6% at 90 cents that were 5.1% above consensus. That was the 14th consecutive quarter that Nike has beaten estimates.
The country is currently undergoing a "social fitness" phenomenon with sales of sports watches and fitness training products exploding. Millennials, those born between 1980-2000, have changed the landscape of retail. They now represent 25% of the population. Millennials are far more health conscious than boomers and tend to try lots of different activities unlike boomers that stuck to 1 or 2 sports. Boomers played golf or tennis. Millennials are cyclists, runners, basketball players and any number of other active sports. They are not golfers. Each of these sports requires different shoes. This is where Foot Locker shines in providing a wide range of affordable shoes and athletic apparel.
Foot Locker should have a good quarter when they release earnings next month. With the Foot Locker commercials in February plus the Super Bowl and the build up to March Madness, investors will think of Foot Locker and shares should rise.
Position 2/10/16 with a FL trade at $64.75:
Long March $70 call @ $1.20, see portfolio graphic for stop loss.
IYT - Dow Transports ETF - ETF Description
Good relative strength with a rebound off the intraday lows. Given its recent gains the profit taking wwas minimal. Target $136.50 to exit.
Original Trade Description: February 8th
The Dow Transports typically lead the Dow industrials. The transports have been weak because of the slowdown in the manufacturing sector, competition in the airline sector and slowing rail traffic due to the weak shipments of coal and oil field equipment.
For some reason the transports quit declining about three weeks ago about the time oil prices appeared to have bottomed. Now with analysts extending their estimates for low oil prices into 2017 the transports are starting to rise again. Summer is a very busy time for airlines and with low oil prices, their profits should be much stronger even with the added competition.
The transports are very oversold. In Monday's market drop the IYT shares barely moved and ended the day down -38 cents. If we are looking at a potential rebound in the market the transports could lead because of their severely oversold position. The individual stocks have been crushed since early December. The Dow Transports declined -31% off their highs to the January lows.
This is a play on a rebound in the transportation sector. While I admit the fundamentals are still weak the IYT has refused to dip below support for three weeks and set a new high for 2016 last Thursday. This relative strength in a very negative market suggests investors are making their bets there is a rally in the future.
Position 2/9/16 with IYT trade at $125.85
Long March $130 call @ $2.55, see portfolio graphic for stop loss.
KR - Kroger - Company Description
Kroger was the big loser for the day. The nearly $2 drop at the open was bought but shares did not recover all the losses. The intraday rebound faded at the close. After a $4 rebound the prior 4 days we should expect some profit taking.
Target $41.50 for an exit ahead of the resistance at $42.
Original Trade Description: January 28th
Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.
While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.
They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.
Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.
While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.
At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.
Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.
Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.
Earnings March 3rd. We will exit before earnings.
Long April $40 call, entry $1.05. No stop loss because of the cheap option.
QQQ - Nasdaq 100 ETF - ETF Description
The Qs paused their gains because of the weak Nasdaq but declined only $1. I raised the stop loss to $97.85.
Target $105.50 for an exit.
Original Trade Description: February 8th.
This is purely a rebound play and not based on fundamentals. The major large cap stocks in the Nasdaq 100 have been crushed and the $NDX had declined -411 points at today's lows, down from 4,300 the prior Monday. This is a -9.5% drop and represents a severely oversold market.
I warned in my weekend Option Investor commentary that we we could expect some follow through on Monday as portfolio managers who missed the Friday reaction drop hit the sell button today. I also mentioned the potential for those managers that did raise cash on Friday to come back to today with a calmer mind and start bargain hunting.
The afternoon rebound suggests those bargain hunters appeared and once the smoke clears we could see a major short squeeze.
Position 2/10/16 with QQQ trade at $98.45
Long March $100 call @ $2.61, see portfolio graphic for stop loss.
THO - Thor Industries - Company Description
Sharp drop at the open but recovered to close positive for the day. Excellent relative strength. Still facing initial resistance at $53. No change in position.
Original Trade Description: January 29th, 2016:
Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.
You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.
In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.
At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.
Earnings are March 3rd.
Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.
Position 2/1/16 after a THO trade at $52.75
Long March $55 call @ $1.15, no stop loss because of the cheap option.
BEARISH Play Updates (Alpha by Symbol)
BABY - Natus Medical - Company Description
BABY shares are still lackluster and we are waiting for that big seller to appear that can force it to a lower level.
Original Trade Description: February 4th.
Shares of BABY spiked higher on the 27th when they posted a 27% increase in earnings but revenue only rose +6.4% and failed to meet their projections. They guided for $100 million and came close at $99.951 million so rounded up they did hit their target. However, investors sold the stock almost immediately and the stock has continued slowly lower.
There is nothing wrong with the company. They are transitioning away from selling devices and systems as their primary revenue and more to supplies and services as a continuing revenue source. Once you sell a hospital a bunch of devices it will be years before they buy again. By moving into the supplies area they will develop a constant revenue stream as those supplies are consumed.
One of their products is called NicView that allows families and friends to view the babies over the Internet while they are in the neonatal intensive care units. More than 80 hospitals now have that installed.
They guided for Q1 to revenue of $86.5-$97.5 million, down slightly from Q4 and earnings of 34-35 cents. Full year revenue guidance was $445-$455 million and also down from the Q4 run rate. Earnings are good but that slowing revenue is a challenge.
Earnings are April 27th.
I like Natus as a company. I wish their stock was rising so I could play it on the upside. However, shares are struggling to hold over $34. If this level breaks the next support is in the $25 to $28 level.
With the biotech sector very weak and expected to get weaker I am afraid it is going to rub off on Natus and we will see that breakdown.
Position 2/5/16 with a BABY trade at $33.50
Long April $30 put @ $1.15. No stop loss because of the cheap option.
HPQ - Hewlett Packard - Company Description
HPQ exploded higher on no news ahead of earnings next week. Volume was only slightly higher than normal but it was heavily skewed to the buy side. This could be continued short covering.
This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.
Original Trade Description: January 25th
Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.
Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.
In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.
HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.
Earnings are February 24th.
Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.
VXX - iPath S&P 500 VIX Futures ETN - ETF Description
The VXX actually declined even though the market was down. There was a slight uptick at the close as the intraday market rebound rolled over.
Original Trade Description: January 16th
At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.
The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.
No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.
Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.
Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.
Long March $23 Put @ $2.41, no stop loss
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