Will this North Korean headline matter more than last weeks?
On Sunday local time North Korea tested a new thermonuclear bomb capable of being placed on one of their ICBMs and hitting the USA. Granted, they have not proven this capability but they did post pictures of the bomb, or a mockup, being placed in the nose cone of a missile.
The missile launch over Japan last week was important. Demonstrating the capability to attach a hydrogen bomb to a missile then a day later actually testing that bomb, is an entirely new level of stress. Eventually, they are going to do something that will cause a military response and it will be a major problem for millions of South Koreans.
Today, the S&P futures are only down about 10 points compared to almost 20 points from the prior missile launch. Whether that is because most traders are on vacation OR everyone realizes there are no real options, is unknown. North Korea holds all the cards with 21,000 artillery pieces pointed at Seoul South Korea and nearly 20 million people in range. If he is attacked and the attack fails to eliminate him in the first blast, there will be a counter attack on Seoul.
Since saner minds on this side of the ocean are probably not going to use the military option, Kim Jung-Un can continue playing his game until he finally does something that triggers a response.
The market realizes this and even though the events of the last couple days are bad, there is no real threat to the USA.
Depending on the response headlines over the next 48 hours, the market is likely to open down on Tuesday but just as likely to rebound as it did last Tuesday. The headlines will determine if that rebound will occur.
The S&P rebounded over the last four days back to critical resistance at 2,480. This is the prior high and it should be strong. This is especially true since we are likely to begin with a decline on Tuesday. If the S&P can overcome this level and break out, the next, even stronger level, will be 2,500. This is a massive psychological level with the vast majority of analysts predicting a 2017 year end back at the 2400-2450 level. We are only four months from year-end but the best six months of the year begin on November 1st. Anything is possible but initially that 2,500 level could be a challenge.
The Dow did not return to its highs but it did return to strong resistance at 22,000. That resistance held. The Dow has been the weakest index during the rebound with only minimal gains over the last three days. The breadth on the 30 stocks has been good with only a few decliners but the rest were only posting small gains. The 22,000 level is going to be the area to watch along with the 2,480 level on the S&P.
The Nasdaq was the strongest index with a 207 point, 3.3%, rebound from Tuesday's opening low. Current resistance is the intraday high at 6,460 from July 27th. The index did close at a record high on Friday. The big cap techs were strong midweek but faded on Friday with only 1 of the 11 stocks posting a decent gain. Seven of them were negative. That may have just been some light profit taking ahead of weekend event risk.
The Russell 2000 posted gains for 7 consecutive days and punched through two levels of resistance at 1,388 and 1,400. The index is still a long way from new high resistance at 1,452.
The Q2 earnings are over with the last 2 S&P-500 companies reporting this week. Portfolio managers typically use the September period after earnings to restructure their portfolios for the best six-month period starting November 1st. Second half lows are normally in Sept/Oct and that provides them a buying opportunity.
The economic calendar is busy but weak. The Fed Beige book and the ISM Nonmanufacturing Index are the two biggest reports on Wednesday. There is nothing on the calendar that should be market moving.
It will be interesting to see how the market reacts to the second Korean event in two weeks. The more we have the easier it will be to ignore them until Kim steps over some red line. The normal urge would be to buy an opening dip on Tuesday but we still have 48 hours for the events to play out on the world stage. Anything is possible.
I am encouraged by the rally last week in a typically bad period for the markets. It suggests investors are not as concerned about a government shutdown and there are expectations the budget, debt ceiling and hurricane relief will be packaged in the same bill and passed on a bipartisan vote. I hope we are not under the influence of some magical euphoria drug that only lets us see the world through rose colored glasses. There is still risk and we will see that risk evolve on a daily basis starting next week.
Enter passively, exit aggressively!
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NEW DIRECTIONAL CALL PLAY
CERN - Cerner Corp - Company Profile
Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. In addition, the company offers a portfolio of clinical and financial health care information technology solutions, as well as departmental, connectivity, population health, and care coordination solutions; and various complementary services, including support, hosting, managed, implementation, and strategic consulting services. Further, it provides various services, such as implementation and training, remote hosting, operational management, revenue cycle, support and maintenance, health care data analysis, clinical process optimization, transaction processing, employer health centers, employee wellness programs, and third party administrator services for employer-based health plans; and complementary hardware and devices for third parties. It serves integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments, and public health organizations.Company description from FinViz.com
Cerner reported earnings of 61 cents that met analyst expectations. Revenue of $1.29 billion missed estimates for $1.3 billion. They guided for Q3 for earnings of 61-63 cents and revenue of $1.26-$1.33 billion. Analysts were expecting $1.29 billion. For the full year, they guided for earnings of $2.46-$2.54 and revenue of $5.15-$5.25 billion. Shares declined $4 on the report. The earnings were not bad, they just were not exciting.
Expected earnings October 26th.
On August 14th, MIT Medical selected Cerner's integrated healthcare technology and shares reversed their slide. On August 30th, IBD upgraded their rating from 69 to 73 saying internal metrics were improving and to watch for a breakout over prior resistance highs.
Last week Cerner announced a partnership with HealthSouth to create the Post-Acute Innovation Center. The center is planned to develop enhanced tools to manage patients across the continuum of care. Full press release
Shares have rebounded to the old resistance highs ay $68.50 and this time I expect a breakout that could easily add $10 to the price. There was a double top in June but triple tops normally lead to breakouts.
Buy Dec $70 call, currently $2.65, initial stop loss $63.85.
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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
FL - Foot Locker
The long call position was entered at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. Shares surged with the biotech sector to close at a new high on Friday.
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
No specific news. Shares held support at $45 and rebounded nicely with the Nasdaq.
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.
Update 8/28/17: 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.
Long Nov $50 call @ $2.28, see portfolio graphic for stop loss.
AMED - Amedisys - Company Profile
Amedisys announced a definitive agreement to acquire Intercity Home Care. Intercity's entire asset base will be taken over by Associated Home Care. Amedisys will gain access to the 19,000 patients serviced by Intercity. Shares rallied to a six week high.
Original Trade Description: August 7th.
Amedisys, Inc., together with its subsidiaries, provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The Home Health segment offers a range of services in the homes of individuals for the recovery of patients from surgery, chronic disability, or terminal illness, as well as prevents avoidable hospital readmissions through its skilled nurses, physical and speech therapists, occupational therapists, and aides for its patients to complete their important personal tasks. The Hospice segment offers care that is designed to provide comfort and support for those who are dealing with a terminal illness, including heart disease, pulmonary disease, Alzheimer's, HIV/AIDS, and cancer. The Personal Care segment provides assistance for patients with the activities of daily living. As of March 1, 2017, the company owned and operated 420 care centers in 34 states. Amedisys, Inc. was founded in 1982. Company description from FinViz.com
On July 26th, the Centers for Medicare and Medicaid Services (CMS) said it may reduce reimbursements for home healthcare in 2018 by 0.6$. 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.
FL - Foot Locker - Company Profile
No specific news. We scored a decent entry last Tuesday when the market dropped at the open on the Korean missile. Shares rebounded to close at a two week high.
Original Trade Description: August 21st.
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.
Long Nov $38 call @ $1.70, see portfolio graphic for stop loss.
WDC - Western Digital - Company Profile
The battle is still on for the Toshiba memory business and the WDC CEO issued a formal apology to the Toshiba CEO on Thursday for hostility in the earlier negotiations. This could be seen as paving the way for an agreement soon. Toshiba had initially set August 31st as the date to name a buyer but missed the deadline after multiple bidders sweetened their bids. WDC still has a better than 50% chance of being on the winning side.
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.
Update 8/28/17: 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.
Long Oct $87.50 call @ $3.35, see portfolio graphic for stop loss.
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