Events overseas are going to push our markets lower on Tuesday.
After the bell on Monday North Korea launched an ICBM over Japan. The Japanese government warned people to take cover indoors in strong buildings when the launch was detected. The missile flew over Japan and eventually broke up into three pieces and fell into the sea.
The S&P futures opened the evening session down about 19 points and are holding at -16 as I type this. The UN Security council scheduled an emergency meeting on Tuesday. The Japanese security forces scheduled an emergency meeting. South Korea warned its troop to toughen up and prepar for battle in case North Korea finally steps over the line. The US Dept of Defense said it was still assessing the launch as President Trump met with military and intelligence officials to discuss the situation. Asian stock markets opened sharply lower.
In our very low volume market a major geopolitical event could upset the delicate balance we have been maintaining for the last couple weeks. With the futures down so hard, if the cash markets follow through on Tuesday, current support levels would be broken and the markets could begin a sharp decline into September.
The markets were already at a tipping point and this event could be the trigger that pushes them over the edge. September was already expected to be volatile but nobody was rushing to sell. It was as though everyone was waiting for someone else to sell first. Nobody wanted to be the first seller only to see a sudden rally.
If we get a sharp drop at the open on Tuesday, this will be an opportunity to test the conviction of the dip buyers. If they rush into the gap and the markets rebound then we need to rethink the "volatile September" scenario. If the markets do not rebound, that could be the trigger point for the September selling to begin.
The S&P has trended flat with resistance at 2,450 since the short squeeze last Tuesday. With the futures down 16-18 points tonight that would knock the S&P back to initial support at 2,420 or close on Tuesday. That would not be a disaster. That is only about a 2.8% decline from the highs. A break below 2,420 should target 2,400. That is the critical psychological level. That will determine what our market looks like for September.
The Dow futures are down -120 points and that could just be a starting place for the open. The critical resistance points are 21,600, 21,500, 21,300. With a lot of uncaptured profits in Dow stocks, a sudden knee jerk reaction to Korea could cause several of them to decline sharply. I would not be surprised to see a 200-point decline or more. That would put the Dow right at 21,600.
The Nasdaq could be the problem index. With many of the big cap tech stocks right on critical support, any sharp decline could break those support levels and trigger some cascade selling and send investors running for the exits. Everyone knows the big caps have stretched valuations but traders have been sticking with them because of their resilience. A major break of support kills that theory and could change investor sentiment. The Nasdaq could be the key to the broader market. A collapse here could drag the other markets lower.
This is payroll week but without a major miss in either direction the numbers should not matter. The Fed has already made up its mind and they will more than likely announce QE tapering at the September meeting. How the market will react is still unknown. There has been plenty of advance warning but until it happens we will not know the reaction.
Having a major geopolitical event in a very low volume market could cause an abnormal reaction. In a normal market it would be a problem but in a 5 billion share market it could be a big problem. Most traders and portfolio managers are on vacation until after Labor Day. They can still call in position changes but normally there are already contingency plans in place.
I continue to recommend withholding new positions until later in September. The market lows for the second half of the year are normally made in September and/or the first two weeks of October. There is no reason to add a bunch of new positions just because you are bored. Take the rest of the week off. Go play golf or take your kids to the beach.
There is no rush to be in the market. The best six months of the year begin on November 1st. We will want to buy any September, early October dips in preparation of that best six months.
Enter passively, exit aggressively.
Send Jim an email
NEW DIRECTIONAL CALL PLAY
Very little risk in this position after a 50% drop.
FL - Foot Locker - Company Profile
Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of April 29, 2017, this segment operated 3,354 stores in 23 countries in North America, Europe, Australia, and New Zealand. The Direct-to-Customers segment sells athletic footwear, apparel, equipment, and team licensed merchandise for high school and other athletes through Internet and mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com. In addition, the company had 62 franchised Foot Locker stores in the Middle East and South Korea, as well as 15 franchised Runners Point stores in Germany. Company description from FinViz.com
Foot Locker shares were crushed in mid August when they announced earnings of 62 cents compared to estimates for 90 cents. Revenue fell -4.4% to $1.7 billion and missed estimates for $1.8 billion. Same store sales declined -6% compared to estimates for a 1% decline.
According to Foot Locker the miss was due to some premium sneaker brands that failed to perform. Nike was the offending provider. The CEO also said, there was "limited availability of innovative new products in the market." This goes along with Nike's pullback of some high profile offerings that were not selling. You can only have so many Steph Curry styles and adding 20 other similar models by lesser known names, did not appeal to the buying public.
Foot Locker shares were already down since May after Nike said it was going to sell directly on Amazon. That is not as big a threat as it seems since they are going to limit their sales to about 30% of their product line. I would view Amazon sales as liquidating surplus inventory.
Foot Locker fell 25% on the missed earnings. They were hammered by five downgrades by UBS, RW Baird, Canaccord Genuity, Wells Fargo and Telsey Advisory Group. However, the average target price from those analysts is still $62. Shares fell to $32 on the earnings.
Buckingham Research, Jefferies and Susquehanna reiterated buy ratings. They acknowledged the temporary weakness caused by Nike but also reminded that Adidas sales were surging. They said Foot Locker tends to stay on top of trends in athletic footwear fashion and lead the industry by adapting to consumer shifts in sports dominance. Sporting trends change. Basketball may have been hot last year but running shoes may be hit this year. The analysts reminded that FL generates a lot of free cash flow that will enable them to sustain a negative trend while they leverage new trends for the future.
Given the market conditions and the place on the calendar, I was looking for a stock that has already been crushed and has little downside while still giving us some decent upside. I would be surprised if FL dipped back below $32 without a 10% correction in the market and I do not see that happening.
Earnings Nov 17th.
Buy Nov $38 call, currently $1.90, stop loss $31.50.
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
WDC - Western Digital
The long call position was entered at the open on Monday.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
AbbVie is finally getting the respect it deserves. No specific news but shares are surging.
Original Trade Description: August 7th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11. AbbVie reported Q2 earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Next expected earnings Oct 27th.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
The company received a favorable opinion on MAVIRET, a once daily Hep-C drug, from the European Medical Agency and the CHMP. This is an 8-week cure for Hep-C that will compete with Gilead's products.
Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings drop is a buying opportunity and shares are rebounding.
Update 8/21/17: AbbVie said its all genotypic drug for Hep-C was approved in Canada. This is an 8-week treatment with a 97% cure rate. It is the only drug approved for all patients across all stages of the disease.
Options are very cheap.
Long Nov $72.50 call @ $1.90, see portfolio graphic for stop loss.
AKAM - Akamai Technologies - Company Profile
Akamai collaborated with Google, Cloudfire, Flashpoint, RiskIQ and the RBI to squash a botnet named WireX that had infected 120,000 Android phones in early August. The bot was generating 20,000 page requests a second against a set of targeted servers in a DoS attack. Unfortunately, shares did not respond to the good news.
Original Trade Description: July 31st.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com
Expected earnings Oct 24th.
Akamai beat on earnings and revenue for Q2 but analysts thought the guidance was a little light. Shares were crushed for an $8 loss. The company posted earnings of 62 cents that beat estimates for 60 cents. Revenue rose 6.4% to $608.9 million and beat estimates for $604.5 million.
The company guided for Q3 earnings of 57 to 60 cents and analysts were expecting 61 cents. Revenue guidance was $604-$616 million and expectations were $619.4 million.
Akamai is losing business from the "Big Six" including Apple, Amazon and Netflix as those companies refine their "do it in house" strategies to keep from having to pay so much to Akamai. The income from the big six fell 9% to $178.9 million. Akamai has reported on this metric for the last two years and this was the 7th quarter of decline. Akamai is still the largest content delivery service and total revenues are still rising.
Revenues in their new cyber security business rose 32% and the web performance business rose 15%. Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.
I believe the big drop in the shares was an overreaction and their new businesses are growing so rapidly that revenue will continue to expand. They are forecasting 6% growth in Q3 and 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.
If the market is going to be weak, these shares in companies that have already been punished will look like value stocks to investors looking for a safe haven after they exit the FAANG stocks.
Long Nov $50 call @ $2.28, see portfolio graphic for stop loss.
AMED - Amedisys - Company Profile
No specific news. The rebound stalled last week at $50.50 but the trend is still intact.
Original Trade Description: August 7th.
Amedisys, Inc., together with its subsidiaries, provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The Home Health segment offers a range of services in the homes of individuals for the recovery of patients from surgery, chronic disability, or terminal illness, as well as prevents avoidable hospital readmissions through its skilled nurses, physical and speech therapists, occupational therapists, and aides for its patients to complete their important personal tasks. The Hospice segment offers care that is designed to provide comfort and support for those who are dealing with a terminal illness, including heart disease, pulmonary disease, Alzheimer's, HIV/AIDS, and cancer. The Personal Care segment provides assistance for patients with the activities of daily living. As of March 1, 2017, the company owned and operated 420 care centers in 34 states. Amedisys, Inc. was founded in 1982. Company description from FinViz.com
On July 26th, the Centers for Medicare and Medicaid Services (CMS) said it may reduce reimbursements for home healthcare in 2018 by 0.6$. This was less than the 0.7% reduction in 2017 but shares imploded. On July 27th, the company reported earnings of 63 cents that beat estimates for 50 cents. Revenue of $378.8 million missed estimates for $380.6 million. The combination of the two events knocked $15 off the stock.
Amedisys has 385,000 home health, hospice and personal care patients in 34 states. In Q1, home health was responsible for $271 million of the total $370 million in revenue. Medicare paid 73.4% of the billing for those services. Obviously a -0.4% drop in reimbursements would be painful, it was less than the -0.7% decline in 2017. Amedisys understands this annual reimbursement process and they deal with it. The news was not worth a $15 drop in the stock price.
Next expected earnings October 25th.
I would normally go for the $50 strike price but since we are entering the normally weak Aug/Sep period, I am bumping the recommendation to the $55 strike and the 50% cheaper option. There is not a November option series so the December $55 gives us plenty of time for a decent rebound.
Long Dec $55 call @ $2.12, see portfolio graphic for stop loss.
WDC - Western Digital - Company Profile
Reuters is claiming a deal to acquire Toshiba's memory business will be announced on Thursday after the Toshiba board meeting. Reportedly, WDC will contribute $1.4 billion in a consortium with KKR, the Development Bank of Japan and the Innovation Network of Japan. This would be a great deal for WDC if it happens.
Separately, WDC announced the asset acquisition of UpThere, a startup cloud storage company. The company stored photos, videos, documents and music for individuals. The platform is agnostic and works with iPhone, iPad, MacOS, Windows PCs and Android operating systems. WDC and cloud storage makes a lot of sense when they have all the disk storage they could ever want at a rock bottom price.
Original Trade Description: August 21st.
Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com
WDC shares have been depressed over the last month because of the battle underway with Toshiba over the sale of the Toshiba chip business. WDC, through its acquisition of SanDisk has a 50% ownership in the chip business and reportedly has to approve any sale. WDC has blocked the sales by Toshiba to a consortium led by Bain Capital. WDC has filed for arbitration and that case will take well into 2018 to resolve. Toshiba has to complete the sale in late August or very early September in order to close the sale by March and avoid being delisted. They need the $19 billion to fill the hole caused by the Westinghouse bankruptcy and time is growing short.
WDC has made Toshiba 6 different offers over the last two months and even offered to match the offer made by Bain. We learned last the head of Toshiba, WDC, members of the Ministry of Economy, Trade and Industry will meet in the coming days to try and resolve the impasse. Since WDC has the legal hammer with 50% ownership, the partnership agreement and the binding arbitration case already in progress, analysts believe it will be resolved in favor of WDC gaining ownership of the 50% of the business they do not currently own. Since Bain has said their group will not make payment until all the legal questions have been resolved, that means the only qualified buyer is WDC because they can keep it tied up in court for a year. Worst case, WDC could agree to join the Bain consortium with a majority stake and leave WDC in charge of the business.
It appears we are headed for a successful solution and that will remove the cloud over WDC shares.
Earnings Oct 26th.
I am recommending we play WDC for the resolution of the Toshiba sale, which has to happen over the next several weeks in order to close by March and avoid Toshiba being delisted. We have the choice of October or January options. There are no Nov/Dec strikes. I am going with October because of the cost. That should be plenty of time for a resolution.
Long Oct $87.50 call @ $3.35, see portfolio graphic for stop loss.
Prices Quoted in Newsletter
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