After two weeks of heavy event risk, Monday was a risk off day but it may be only temporary.
The French election played out as investors had hoped and Le Pen and Macron will compete in a runoff on May 7th. Le Pen is the isolationist and Macron is the establishment candidate. Macron is widely expected to win the runoff and life in France will continue normally.
The markets rejoiced with the results and the CAC 40 rose 3.3% to lead the global markets higher. The U.S. markets gapped open with the S&P adding 25 points, Dow 216 points, Nasdaq 73 points and Russell 18 points. Unfortunately, this was a monster short squeeze and the markets closed at almost the same level that they opened. There was very little, if any, follow on buying. This was a textbook short squeeze. Everyone was expecting the worse and they were leaning the wrong way at Friday's close.
Short squeezes rarely just continue higher the next day. Sometimes there is some follow on buying from those shorts that were hoping the market would sell off into the close and when it did not they will have margin calls they have to cover at the open the following day.
If the markets can continue higher in the face of the legislative event risk later this week, it would be very bullish. The government funding battle and debt ceiling hike have to be completed by midnight on Friday or there could be a government shutdown. Everyone says they do not want that to happen but they are also demanding their specific funding requests be included or excluded depending on the topic. The battle lines are drawn and this will be a critical moment for the Trump presidency. It is especially critical since his first 100 days ends on Saturday. As a new president, you would hate to celebrate your 100 days with a government shutdown. That should significantly temper his demands but you never know how politicians will react.
That sets up some serious event risk for late this week. If they pass a temporary resolution to extend the deadline a couple weeks that would remove some of the pressure but eventually there will be a battle with winners and losers and it could be ugly. The market would react negatively to any potential shutdown.
The Dow traded over prior resistance of 20,750 almost all day but there was a brief dip about 11:00 to 20,730. That is immaterial in the larger scenario. The Dow is poised to break through that mild resistance at 20,785 and make a new run at the 21,000 level. However, in order to be successful the gains from Monday have to stick. If we run into some sellers on Tuesday and the Dow drops back below 20,750 again it could poison sentiment for the rest of the week.
The S&P gapped up over prior resistance at 2,370 and held that level all day. The next resistance level is 2,390 then round number resistance at 2,400. With more than 190 S&P companies reporting earnings this week, the index is at risk of earnings misses or possibly enjoy a series of upside surprises. It is too bad that funding event risk is hanging over the market or this could be a strong week.
The Nasdaq Composite added 73 points to blow past resistance at 5,916 and close well into new high territory and very close to the 6,000 level. Given the Nasdaq gains since the election there is the possibility of round number resistance at that level that could be strong. Once we are past the big cap tech earnings this week and next there will be no further catalysts to power the index higher over the summer months.
The Russell 2000 blew through resistance at 1,388 and traded only fractionally under 1,400 intraday. If the Russell can hold these gains it would be very bullish for the broader market.
The economic calendar is full but uneventful until Friday. The GDP is expected to be barely positive and any weakness below the estimate would not be received well. An upside surprise could rekindle rate hike fears for the following week when the Fed meets.
The biggest event is the funding battle. That has the potential to either send the market higher on a resolution or significantly lower on a shutdown.
There are 12 Dow components reporting this week and 194 S&P-500 stocks. Thursday is the big day with Google, Amazon, Intel, Microsoft, western Digital and Starbucks. Those reports after the bell will add even more volatility to Friday's market.
I struggled with adding a new play this week because market performance after a major short squeeze can sometimes be rocky. We also have the hundreds of earnings this week and thousands over the next three weeks. That eliminates about 85% of the choices. I went with Netflix because they already reported and the post earnings depression phase was short and shallow. Hopefully the tech earnings on Thursday will help lift the entire market higher.
Send Jim an email
NEW DIRECTIONAL CALL PLAY
With the calendar of earnings this week the heaviest for one week in several years and the next two weeks almost as bad there are almost no companies we can play without a scheduled report. Netflix had a very minor post earnings depression phase and with a strong tech earnings calendar this week they could benefit from positive earnings from the sector.
NFLX - Netflix - Company Profile
Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves over 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com
CEO Reed Hastings tweeted out this week a picture of himself eating a steak at a Dennys to celebrate their 100 millionth subscriber. That is the same thing he did when they passed one million subscribers.
Netflix reported earnings on April 17th and while the earnings were good, the subscriber guidance was mediocre compared to analyst expectations. However, the company continues to grow rapidly. They are just not growing at the pace analysts would like to see.
The company said it expects a big rebound in subscriber growth rates for Q2 with projected growth of 3.2 million subscribers. Some analysts believe Netflix is actually low balling subscriber growth estimates. They had 98.75 million subscribers at the end of March. For Hastings to celebrate they would have had to add 1.25 million in only the first three weeks of April. With ten weeks to go, they could easily blow past their target of 3.2 million.
Netflix had only 9 million DVD subscribers at the end of 2008. Now they have progressed to streaming in 190 countries in 12 languages with 100 million subscribers. Hastings was asked how long it would take to add another 100 million and he said, "not as long" with a big grin.
Stifel Nicholas raised their price target from $155 to $170 because of the faster subscriber growth in Q2. RBC analyst Mark Mahaney raised his price target to $175.
Netflix is using the Amazon model of build it and they will come. They continue to lose money but they are rapidly approaching $1 billion a month in subscription fees. They estimate that as many as 50% of their streams go to accounts that are sharing a username/password that belongs to someone else. When Netflix gets to the point where they want to make a profit all they have to do is not allow sharing and suddenly half the people who are currently hooked on streaming will have to sign up on their own. Also, a $2 or $5 price hike on 100 million accounts is suddenly a lot of money.
Netflix offered to sell one billion euros in debt last week ($1.08 billion) to add original international content. That is a huge audience of 7 billion potential customers compared to only 300 million in the USA.
Because they recently reported earnings they do not report again until the middle of July. The July options are very expensive but we can use some June options with 55 days to go and try to capture any bullish sentiment rubbing off on Netflix from the other tech stocks reporting.
Buy June $150 call, currently $2.50, initial stop loss $138.50.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
Send Jim an email
Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
LIT - Lithium ETF
The long stock position was opened at the open on Tuesday.
FMC - FMC Corp
The long call position was entered at the open on Tuesday.
CAH - Cardinal Health
The long call position was stopped at $79.85 on Tuesday.
NTCT - NetScout
The long call position was stopped at $35.85 on Wednesday.
Original Play Recommendations (Alpha by Symbol)
ATVI - Activision Blizzard - Company Profile
Investors Business Daily (IBD) upgraded its score for ATVI from 92 to 98. That means it is expected to perform better than 98% of all stocks. For last quarter earnings grew 11% and revenue rose 49%. Shares broke out to a new high on the upgrade.
Original Trade Description: March 6th.
Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com
Activision reported Q4 earnings of 92 cents that beat estimates for 73 cents. Revenue of $2.45 billion beat estimates for $2.35 billion.
The new Overwatch game was the fastest Blizzard title to hit 25 million registered players. Monthly active users (MAU) rose 5 million at Activision to reach 51 million. Bllizzard's MAU fell 1 million to 41 million but set a record for Q4. Kind Digital users fell from 394 million to 355 million. Since King Digital is phone games the numbers tend to be volatile. Users spent 43 billion hours playing ATVI's suite of games in Q4 compared to the 45 billion hours peopls spent watching Netflix.
Shares spiked despite weak guidance. They guided for Q1 for $1.05 billion and earnings of 18 cents. The street was looking for $1.2 billion and 31 cents. For the ful lyear they guided for $6.3 billion and $1.85 in earnings. That missed street estimates for $6.68 billion and $2.03. Fortunately, ATVI normally guides low and then crushes the estimates when they report.
Earnings May 11th.
Shares spiked from $39 to $47 on the earnings. Post earnings depression appeared for four weeks and shares sank back to $45. Over the last several days the uptrend has resumed and Monday was a new high close at $47.81.
Update 4/17/17: Activision said the next Call of Duty would be back in WWII, which is the player's favorite setting. They are also working on a mobile version scheduled to be out in 2018. There will be a Call of Duty movie in 2019, which would be a real income producer since the World of Warcraft movie released last year has grossed more than $434 million.
Long May $50 call @ $1.29, see portfolio graphic for stop loss. .
CAH - Cardinal Health - Company Profile
Cardinal Health shares fell -19% on the 18th after they announced a $6.1 billion deal for certain Medtronic (MDT) assets. As part of the acquisition they revised guidance to say they expect to come in at the bottom of their earlier forecast of $5.25-$5.50. Analysts were expecting $5.42. Since the deal has been in the works for a very long time and the acquisition will add 21 cents to earnings almost immediately, I think the sell off was way overdone. This is a plus for Cardinal not a negative. We were stopped out on the position for a major loss. A 19% gap lower open is never good for option prices.
I would have reloaded the play at the lower level but the company has earnings next Monday.
Original Trade Description: February 20th
Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com
Cardinal reported earnings of $1.34 compared to estimates for $1.24. Revenue of $33.1 billion just missed estimates for $33.4 billion. Pharmaceutical revenues rose 5% to $29.7 billion. Medical segment revenues rose 8% to $3.4 billion. Pharmaceutical segment profits fell 14% to $537 million because of the loss of a major customer. They expect this to be made up in future quarters by the solid performance of Red Oak Sourcing. Medical segment profits rose 50% to $159 million thanks to a higher contribution from Cardinal Health Branded products.
They guided for full year earnings of $5.35-$5.50 and growth of about 4%.
Update 4/10/17: Cardinal is said to be close to a deal to acquire the medical supplies unit from Medtronic. The deal is expected to be worth about $6 billion. Cardinal acquired a similar business when it bought Covidien in 2014 for $43 billion.
Earnings May 9th.
Analysts believe Cardinal guided conservatively and will beat guidance because of the growth in their own branded products. Shares spiked on the earnings, faded for three days and are now surging. We are going to target resistance at $85 for an exit.
Closed 4/18/17: Long Jun $82.50 calls @ $2.85, exit .35, -2.50 loss.
CRM - Salesforce.com - Company Profile
No specific news. Shares closed back over resistance on Monday.
Original Trade Description: April 10th.
Salesforce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, gain insights through relationship intelligence, and collaborate around sales on desktop and mobile devices, as well as solutions for partner relationship management. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as connects their service agents with customers on various devices; and Marketing Cloud to plan, personalize, and optimize one-to-one customer interactions. In addition, the company offers Commerce Cloud to deliver a digital commerce experience; Community Cloud to create and manage branded digital destinations for customers, partners, and employees; Internet of Things Cloud that provides insights to companies enabling them to sell, service, and market to their customers in personalized ways, as well as engage with them in real time; and Analytics Cloud that enables employees across an organization to explore business data, uncover new insights, make decisions, and take action from various devices. Further, it provides Salesforce Quip, a next-generation productivity solution for teams with a mobile-first strategy to collaborate without email; and Salesforce Platform for building enterprise apps. Additionally, the company offers professional cloud services, such as consulting, deployment, training, user-centric design, and integration to facilitate the adoption of its solutions; and architects and innovation program teams, as well as various education services comprising introductory online courses and advanced architecture certifications. Salesforce.com, inc. offers its services through direct sales; and through consulting firms, systems integrators, and other partners. Company description from FinViz.com
Evercore ISI penned an article in Barrons last week saying they expect Salesforce to grow annual revenue to $20 billion within four years. They see +20% revenue growth over the next several years and a 20% upside in the stock price in the next 6-12 months. They have a short term price target of $100.
Last week Salesforce received a government classification of Impact Level 4 or IL 4 for short. With this certification, government agencies and employees are free to use the Government Cloud for controlled, unclassified information.
There is also a persistent rumor that Salesforce could be acquired. Google has been speculated as a potential candidate. With Oracle, Microsoft and IBM trying to compete in this market, having Google's big bucks behind Salesforce would help them compete.
Earnings May 30th.
With the stock up 21% YTD there could be some profit taking if the market decides to rest. Support is around $81.
Futures are falling overnight so I am picking a closer to the money strike in hopes we get a gap lower open on Tuesday. If the market does open lower, let the call premiums breathe for a few minutes before adding the position. It normally takes 10-15 minutes for them to settle. Obviously if the market continues to fall then wait for a bottom to appear before entering the position.
Update 4/17/17: Salesforce opened a new data center in Japan to deliver the Intelligent Customer Success Platform including Sales Cloud, Service Cloud, App Cloud, Community Cloud, Analytics Cloud and more for customers in Japan and the Asia Pacific region. Salesforce is very close to opening their new 61 floor tower in San Francisco as well. They are expecting a July completion.
Long June $85 call @ $3.55, see portfolio graphic for stop loss.
FMC - FMC Corp - Company Profile
No specific news. Shares are holding their recent gains.
Original Trade Description: April 17th.
FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com
FMC has been around forever as in 123 years. However, last month it entered a new phase of its life. DuPont is (DD) merging with Dow Chemical (DOW) and the EU is forcing them to divest DuPont's crop protection business in order to gain approval of the merger.
On March 31st, the companies announced that FMC will acquire DuPont's crop protection business and overnight become the fifth largest in the world. Secondly, FMC will sell its health and nutrition business to DuPont. This is a low margin, low growth business that FMC is glad to be selling. FMC will pay DuPont $1.2 billion in cash.
The transactions will be immediately accretive to FMC upon closing. FMC expects revenue from the acquired business of $1.5 billion in 2017 and $475 million in EBITDA. Total annual revenue will be $3.8 billion. The combination of the DuPont crop business with the R&D capabilities of FMC it will catapult FMC into an entirely new range of capabilities. The company will acquire multiple major brands of pesticide and herbicides. It will also expand the reach of FMC around the world where there was little market penetration in the past. FMC is gaining a global manufacturing network of four active ingredient manufacturing facilities and 10 regional formulation plants.
In one transaction FMC dumped its underperforming health business and gained a crop protection business equal or greater than its own and cleaned up their balance sheet at the same time.
Earnings are May 2nd. There is no way to play this without holding over that earnings report. With all the good news breaking out about the transaction, the earnings will be another podium to brag about their good fortune.
Long July $77.50 call @ $2.54, no stop loss until after earnings.
HAIN - Hain Celestial - Company Profile
No specific news. Shares are holding at the $37 level while we wait for the next headline.
Original Trade Description: March 20th
The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products in the United States, the United Kingdom, Canada, and Europe. Its grocery products include infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, granola bars, and cereal bars; canned, chilled fresh, aseptic, and instant soups; Greek-style yogurt; chilies and packaged grains; and chocolates and nut butters, as well as plant-based beverages and frozen desserts, such as soy, rice, almond, and coconut. The company's grocery products also comprise juices, hot-eating, chilled and frozen desserts, cookies, crackers, gluten-free frozen entrees and bars, frozen pastas and ethnic meals, frozen fruits and vegetables, cut fresh fruits, refrigerated and frozen soy protein meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads and jelly, honey, marmalade, and other food products. In addition, it provides snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla chips, whole grain chips, pita chips, puffs, and popcorn; specialty teas, including herbal, green, black, wellness, rooibos, and chai tea lattes; ready-to-drink beverages comprising organic kombucha and chai tea lattes; personal care products consisting of skin, hair and oral care, deodorants, baby care items, acne treatment, body washes, and sunscreens; and poultry and protein products, such as turkey and chicken products. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, and drug and convenience stores in approximately 70 countries worldwide.
Company description from FinViz.com
We played Hain before back in the fall. Basically, they have not filed their quarterly reports since last May because of a review of accounting procedures. They have suffered over the last year and have reportedly spent $20 million in the complete accounting review for years past and a review of their procedures. They are facing class action suits and SEC probes but none of these things will have a lasting impact.
They are facing a new deadline of May for their reports or they will be in default with their lenders. While they will not say when they will file the back reports, they continue to assure investors there was no wrongdoing and these types of corporate autopsies for prior years take time.
They are so undervalued compared to their peers and their historical norms, it is silly not to have a long position. Once they file the reports this will all be behind them.
I am recommending we buy the August $40 call and forget about it. At $2 it is not a lot of money and they could quickly return to the $50s once they file the reports.
Long Aug $40 call @ $1.97, see portfolio graphic for stop loss.
LIT - Lithium ETF - Company Profile
No specific news. Every day more electric cars are produced than the day before. Demand for Lithium is only going to increase.
Original Trade Description: April 17th.
The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index. The fund invests at least 80% of its total assets in the securities of the underlying index and in American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs") based on the securities in the underlying index. The underlying index is designed to measure broad-based equity market performance of global companies involved in the lithium industry. The fund is non-diversified. Company description from FinViz.com
Lithium-Ion batteries are becoming the fuel of the future. We are right on the edge of an explosion in demand for lithium. Tesla is only making 100,000 cars per year today but by the end of 2018 they expect to be making up to 500,000 cars. They are only one of the manufacturers making electric vehicles. Others are right on the verge of their own surge in manufacturing.
Tesla also makes the batteries for the Solar City energy storage units and the Tesla storage batteries for residential, commercial and industrial use. This barely even scratched the surface of lithium demand two years ago. Add to that nearly 2 billion cell phones and tablets and suddenly there is a surge in lithium demand that is not going to stop.
Tesla's Gigafactory is so big that it will double the entire planet's battery making capacity. Elon Musk is now saying he may need up to four additional Gigafactories to keep up with demand as he builds hundreds of thousands of electric cars per year plus the solar storage demand for mass scale utility companies, businesses, residential, etc.
The demand for lithium could rise by 1,000% over the next several years. Companies are racing to find new supplies of the raw material and contract it before the prices explode out of sight.
Rather than buying one company that maybe has one mine or one division to produce lithium there is now an ETF for that purpose. It has options but the prices are crazy if you can even find them listed. Most quote locations just list zero for the bid/ask.
The ETF is relatively inexpensive dollar wise given the coming surge in lithium demand and prices. This may be as close as we can get to the ground floor since the odds of it moving lower are almost zero.
This will be a long-term hold.
Long LIT shares @ $28.20. See portfolio graphic for stop loss.
NTCT - Net Scout - Company Profile
The market drop on Wednesday caused NTCT to plunge intraday and stop us out. There was no news.
Original Trade Description: February 27th
NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions in the United States, Europe, Asia, and internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks, as well as gain timely insight into services, applications, and systems. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network; network monitoring fabric switching solutions that deliver targeted network traffic access to an increasing number of monitoring systems; and a suite of test access points that enable non-disruptive access to network traffic with multiple link type and speed options. In addition, the company offers portable network analysis and troubleshooting tools, which help customers identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks. Company description from FinViz.com
Jeff Ubben at ValueAct added NetScout as a new position with 1,645,000 shares. Ken Fisher of Fisher Asset Management owned 3.6% at the end of Q4.
The company specializes in network assurance and network performance management.
They reported earnings of 60 cents compared to estimates for 55 cents. Revenue of $311.4 million also beat the street's estimate for $310 million. They guided for full year earnings in the range of $1.87-$1.90 on revenue of $1.2 billion.
Earnings May 2nd.
Shares exploded out of the earnings report and moved to a new 52-week high at $38. They paused there for the last week but closed at a new high by a few cents on Monday. I believe a breakout is about to appear.
Closed 4/19/17: Long June $40 call @ $2.45, exit .35, -2.10 loss.
SBUX - Starbucks - Company Profile
Starbucks created a major marketing gimmick with their Unicorn Frappucino drinks. The sweet multicolored pink and blue concoctions were only supposed to be on the menu for five days. This created such a demand that stores were overrun with customers and many stores ran out of the ingredients after just the first two days.
Twitter was mobbed with people asking what store still offered them and thousands of tweets complaining about not being able find them. Starbucks said it created so much congestion in the stores that people were leaving without buying anything.
As a company, the success of this gimmick showed them how to drive future sales and they are on a crash program to staff up the stores and change the traffic flow to handle the excess customers. What company would not like to have too many customers. Shares spiked for a week and are retesting 52-week highs. Earnings are Thursday.
Original Trade Description: April 3rd.
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single-serve and ready-to-drink coffee and tea products, juices, and bottled water; an assortment of fresh food and snack offerings; and various food products, such as pastries, breakfast sandwiches, and lunch items, as well as beverage-making equipment and accessories. The company also licenses its trademarks through licensed stores, and grocery and national foodservice accounts. It offers its products under the Starbucks, Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange, Ethos, Frappuccino, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks VIA brand names. As of November 3, 2016, the company operated 25,085 stores. Company description from FinViz.com
I have had trouble playing Starbucks over the last couple of years. The company always seems to have everything going for it but the stock heads in the opposite direction. There have been three major sell offs since December. Maybe this time it is different.
In mid March the company disclosed a series of changes that suggest the company has finally found the key to financial success. At the company shareholder meeting the board disclosed plans to hire 240,000 additional employees by 2021. Since they only have 330,000 workers today that is a major increase. In order to do that they would have to be planning for a significant jump in revenue and profits. Of those new jobs 68,000 would be in the USA.
They also announced plans to open 12,000 new stores of which 3,400 would be in the USA. They currently have nearly 26,000 stores globally. They are also planning on implementing a new menus with sandwiches and salads along with new varieties of premium craft teas. Manu of their stores will be adding alcohol to attract the evening crowds.
They have so many current customers it is hurting business. Ordering and paying through the mobile app has become so easy and so popular, it is jamming the stores with customers and causing long wait times for drinks. Starbucks is working on a method to streamline the process and using employees to surge mobile orders into specific stores to see if the new methods are working before implementing them system wide. They are also testing walk up windows for mobile orders so the customers do not have to come into the store.
They even implemented voice ordering through Amazon's Alexa app. A survey last year found that collectively, have more money in their Starbucks accounts than they do in some banks.
Starbucks guided for $30 billion in revenue by fiscal 2019 and that target appears easily reached with all the new initiatives.
Crowded stores are a problem for consumers but when that many people are standing in line to give the retailer money, it is a good problem to have.
Earnings April 27th.
This is going to be a short fused position since earnings are less than four weeks away. However, the May option is only 79 cents and I am planning on holding over the earnings report unless we are already strongly profitable ahead of earnings. We will make that decision the week of earnings. After several quarters of disappointments, this could be a quarter with a positive surprise.
Shares are close to a new 52-week high but that also means old high resistance at $59. A break over that level could trigger some serious short covering.
Update 4/17/17: Starbucks said it was going to distribute 100 million healthy coffee trees to farmers by 2025 to insure the future of coffee. Existing plantations have old trees that do not produce as well as they did years ago. There is also a disease called coffee rust that is attacking the older trees. Starbucks began this program in 2016 with the distribution of 10 million trees.
Long May $60 call @ 76 cents, see portfolio graphic for stop loss.
SPY - S&P-500 SPDR ETF - ETF Profile
The S&P exploded higher on Monday as a major short squeeze seized the markets after the French elections played out in the best way possible. Macron is widely expected to win the runoff on May 7th.
I would close this position today but we have major event risk of our own later this week with the government funding and debt ceiling hike. Legislators have dug in for a major battle and carved their positions in stone. While everyone says they do not want to cause a government shutdown they also do not want to give in to the other side.
Original Trade Description: March 27th.
The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.
The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy a put on the SPY only IF the SPY trades at 232.75. Before Monday's dip that would have been a new five-week low. Regardless of what happens on Tuesday we will be ready for the next leg down.
I believe if the market goes lower this week it could be the beginning of a major decline.
Position 4/13/17 with a SPY trade at $232.75
Long June $230 put @ $4.13, see portfolio graphic for stop loss.
TRIP - Trip Advisor - Company Profile
Despite being replaced in the Nasdaq 100 by Wynn Resorts, the stock rose for the week to close at a three week high. The company said it had reached half a billion reviews and opinions. The booking site now posts 290 pieces of content every minute.
Original Trade Description: March 6th.
TripAdvisor, Inc. operates as an online travel company. The company operates through two segments, Hotel and Non-Hotel. Its travel platform aggregates reviews and opinions of members about destinations, accommodations, activities and attractions, and restaurants, which enables users to research and plan their travel experiences, as well as book hotels, flights, cruises, vacation rentals, activities and attractions, and restaurant reservations. The company operates TripAdvisor-branded Websites, including tripadvisor.com in the United States; and localized versions of the Website in 48 markets and 28 languages. It also manages and operates 23 other media brands that provide travel planning resources across the travel sector, such as airfarewatchdog.com, bookingbuddy.com, citymaps.com, cruisecritic.com, familyvacationcritic.com, flipkey.com, gateguru.com, holidaylettings.co.uk, holidaywatchdog.com, housetrip.com, independenttraveler.com, jetsetter.com, thefork.com, niumba.com, onetime.com, oyster.com, seatguru.com, smartertravel.com, tingo.com, travelpod.com, tripbod.com, vacationhomerentals.com, and viator.com. The company's Websites feature 465 million reviews and opinions on 7 million places comprising 1,060,000 hotels and accommodations; 835,000 vacation rentals; 4.3 million restaurants; and 760,000 activities and attractions worldwide. Company description from FinViz.com
TRIP re;orted Q4 earnings of 16 cents that missed estimates for 30 cents. Revenue of $316 million missed estimates for $325 million. Shares fell from $52 to $40 over the three weeks since the earnings report.
TRIP missed earnings for two main reasons. They have been investing "significant" amounts of money into new processes and marketing that will pay off in the future. Secondly, they just implemented an "Instant Booking" platform that was different enough that customers became confused and they lost a lot of revenue in Q4.
However, sales on the platform improved in December and spiked higher in January as the company refined its processes and made it easier to understand. They spent money marketing the benefits of the platform and apparently business is improving significantly in Q1.
TRIP has had earnings challenged for the last three quarters as they invest heavily in developing for the future.
Earnings May 17th.
Shares appear to have bottomed at $41 having spent the last five days at that level. While we cannot be certain this is the bottom, the option is cheap enough to induce me to take the risk. Once the stock begins to bounce, it should attract some more buyers looking for a bargain. With the market starting to turn choppy, any actual decline will make stocks like this look appetizing since they have already been crushed.
Update 3/13/17: Shares spiked on Wednesday to $44 after Cowen said the chairman's comments the prior week suggested there were some takeover conversations in progress. The chairman said the "company's appeal to a potential buyer acts as a floor on the stock." He named Facebook, Amazon and Alibaba as potential buyers. That is very unusual for a board member to suggest there may be interest by other parties and then name them. Another analyst said the comments were actually negative since the board member was using the takeover appeal to "prop up the stock." Personally, I hope the chairman stimulated some interest by those companies.
Long June $45 call @ $2.10, see portfolio graphic for stop loss.
Prices Quoted in Newsletter
At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.