Option Investor

Daily Newsletter, Tuesday, 3/3/2015

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap


by Jim Brown

Click here to email Jim Brown

Nobody should have been surprised with Nasdaq 5,000 triggering a sell the news event. It was a major psychological level and a good place for bulls to take profits and bears to launch new shorts. Now the battle is in progress to see which side is the eventual victor in this tug of war.

Market Statistics

The Nasdaq traded over 5,000 for about 45 minutes on Monday and closed at 5,008.10 on a closing day short squeeze. This is the equivalent of a runner breaking the tape at the end of a race. The goal was achieved and now it was time to rest. The profit taking was minor and no harm was done.

On the economic front there was nothing to depress the market. The ISM New York for February actually rose from 671.1 to 677.5 after a minor -2 point dip in January. The current conditions component soared from 44.5 to 63.1 while the six-month outlook component rose slightly from 66.9 to 71.7. However, the employment component declined from 55.4 and into contraction at 49.3. The quantity of purchase component collapsed from 69.0 to 54.8.

Analysts blamed weather for the weakness in the internals and this time I believe them. Weather in the northeast was terrible in February.

The vehicle sales data for February disappointed with a decline from 16.7 million to 16.2 million. Analysts were expecting 16.7 million. Auto sales declined from an annualized rate of 7.5 million to 7.2 million. Light truck sales declined from 9.1 to 9.0 million. The weakness was blamed on weather and I think everyone would agree with that. It is tough to sell cars in 20 degree weather and blowing snow. Sales are expected to rebound in March and April as spring weather brings out the buyers in force.

The big economic reports begin on Wednesday with the ADP Employment and Fed Beige Book. Estimates are for a minor decline in jobs from 213,000 to 210,000. I promise you if job gains decline any estimate miss will immediately be blamed on weather. That is the catch all excuse this month and I am sure we will see it used several more times this week.

We report on the economic reports every week and I am sure most readers skip the boring economic section. However, everyone should be paying attention this week. Since February 2nd there have been 42 reports where the numbers came in weaker than expected and only 7 where the numbers met or beat estimates. In any normal market this would be big news but the race to Nasdaq 5,000 and the various geopolitical events and Fed testimony seem to have attracted the most attention.

How stable can the economy be where an entire month of reports missed estimates? The Atlanta Fed is now projecting Q1 GDP will grow only +1.2% and half what the consensus is expecting at +2.4%. Also, their forecasts are still declining.

ZeroHedge List of Reports that Missed Estimates:

1. Personal Spending
2. Construction Spending
3. ISM New York
4. Factory Orders
5. Ward's Domestic Vehicle Sales
6. ADP Employment
7. Challenger Job Cuts
8. Initial Jobless Claims
9. Nonfarm Productivity
10. Trade Balance
11. Unemployment Rate
12. Labor Market Conditions Index
13. NFIB Small Business Optimism
14. Wholesale Inventories
15. Wholesale Sales
16. IBD Economic Optimism
17. Mortgage Apps
18. Retail Sales
19. Bloomberg Consumer Comfort
20. Business Inventories
21. UMich Consumer Sentiment
22. Empire Manufacturing
23. NAHB Homebuilder Confidence
24. Housing Starts
25. Building Permits
26. PPI
27. Industrial Production
28. Capacity Utilization
29. Manufacturing Production
30. Dallas Fed
31. Chicago Fed NAI
32. Existing Home Sales
33. Consumer Confidence
34. Richmond Fed
35. Personal Consumption
36. ISM Milwaukee
37. Chicago PMI
38. Pending Home Sales
39. Personal Income
40. Personal Spending
41. Construction Spending
42. ISM Manufacturing

Reports that Beat Estimates

1. Markit Services PMI
2. Nonfarm Payrolls
4. Case-Shiller Home Price
5. Q4 GDP Revision (but notably lower)
6. Markit Manufacturing PMI

In stock news Target (TGT) is planning $2 billion in cost cuts over the next two years through corporate restructuring and other improvements. The company will eliminate "several thousand" headquarters positions over the next two years. The company also plans to invest about $2.1 billion in capex including a $1 billion investment in technology and supply chain improvements. The company will reduce the focus to a handful of key product lines and bolster its online business.

The company said it would earn between $4.45 and $4.65 in 2015 and that compares to analyst estimates of $4.51. Same store sales in 2015 are expected to rise 1.5% to 2.5%. Sales in 2016 are expected to rise +10% and they are projecting $2 billion in share buybacks in 2015 and $3 billion a year every year beginning in 2016. Shares rallied $2 at the close.

Shares of Seagate (STX) declined -4.5% after Bank of America put an underperform (sell) rating on the disk drive maker. Shares of Seagate have been weak since December and they missed on earnings in late January.

Tivo (TIVO) shares rallied about 7% in afterhours after they reported earnings of 7 cents compared to estimates for 4 cents. Tivo said net subscriber additions in Q4 rose +340,000 compared to 319,000 in the year ago quarter. This was the fourth best quarter in the last seven years in terms of net subscriber additions. Also, expenses incurred in acquiring these subscribers declined -25%. Revenue rose +7.3% to $114.1 million and blew away estimates for $89.9 million.

Orexigen Therapeutics (OREX) shares rallied +32% after the company said their diet pill also had positive cardiovascular benefits. Patients on the drug Contrave had fewer major adverse cardiovascular events and fewer cardiovascular deaths than patients on a placebo. The study covered 8,910 obese patients. The drug is designed to reduce appetite and control cravings. The positive cardiovascular results were unexpected and appeared to be unrelated to weight change. The FDA has asked the company to organize another study to confirm the results.

Alibaba (BABA) shares fell again with a -3% drop on news Taiwan had told Alibaba it had six months to get out of the country because it did not confirm to the country's reporting rules. Alibaba had registered in Taiwan under an alias that was registered in Singapore. Taiwan said the company had "hidden" its status as a mainland based company by using the Singapore based alias.

There was also a Wall street Journal article claiming that some Alibaba sellers had been faking orders to make their products appear more desirable. Fake orders, called "brushing" in China, involves paying people to pretend to be customers and allowing vendors to inflate sales figures and boost their standing in the marketplace. Alibaba gives high volume sellers prominence on the website. The fake orders are basically a form of false advertising, which is prohibited in the U.S. and China.

With almost daily headlines that reflect badly on BABA and the 429 million share lockup expiration on the 18th the stock is really under pressure and it closed at a new low.

Human resource service company TriNet Group (TNET) reported earnings of 26 cents compared to estimates for 37 cents. Shares of TNET hit a new high in regular trading to close at $37.88 but that was quickly erased in afterhours with a -$6 drop to $31.75. Their earnings release was filled with accomplishments but traders were not impressed. After increasing revenues +33% in 2014 they predicted +15% growth for 2015.

Sharea of Ambarella (AMBA) rallied +$3.50 in afterhours to a new high after the company reported a +161% increase in earnings to 68 cents compared to estimates for 48 cents. Revenue of $64.7 million beat estimates for $56.6 million. Ambarella makes the video compression chips for GoPro cameras. The company is already looking past GoPro cameras for other niche markets and they are focusing on drones, wearable cameras, security cameras and automotive cameras that take HD video. Ambarella already makes video chips used in broadcasting TV programs worldwide. On Monday Chinese smartphone manufacturer Xiaomi will launch its own Yi wearable action camera using Ambarella's chips. Shares of AMBA should be bought on any decent pullback.

Lumber Liquidators (LL) tried to rebound today after a -40% drop since Wednesday. The program 60 Minutes did an story on them over the weekend claiming they were buying wood from China that did not meet California EPA rules for chemical content. Excess chemicals like formaldehyde then evaporate into the air in the home and can cause cancer and other diseases. LL claims the testing used by 60 Minutes personnel was not accurate and did not conform to California laws.

Janey Capital upgraded the retailer to buy saying the 60 Minutes claims were overblown and the sell off was overdone. Montgomery Scott also issued a buy rating for the same reasons. The Janey analyst said even if the claims were true the net benefit to LL from buying the cheaper wood was in the range of only $4-$6 million and he doubted the company would have risked the future of the company and possible jail time for the officers for that small amount of money.

Morgan Stanley removed their price target on LL saying we don't know what the company is worth today. Either the accusations are untrue and LL will survive or they are true and the 100,000+ suits that will appear will put the company out of business. There are already suits being filed demanding the flooring be torn out and alternate flooring installed. With more than 100,000 homes in California with LL flooring that would be a terminal disaster for LL.

Nearly all analysts that commented said even if the story proved to be untrue the reputation risk for LL would hamper sales for a long time.

If for no other reason readers should look at the chart as a good reason to always have a stop loss on any position.

Best Buy (BBY) raised its dividend by 21% to 23 cents and will pay a one-time special dividend of 51 cents using the proceeds from some legal settlements over LCD pricing. The payouts will be on April 24th to holders as of March 24th. The company also said it increased online sales to 9.8% from 7% of total sales. Net income rose +77% to $519 million or $1.48 per share for the quarter. Analysts expected $1.38. Revenue of $14.21 billion just missed estimates of $14.41 billion. Same store sales rose +2%. Best Buy expects to buyback $1 billion in shares over the next 3 years. Remember this was a chain facing bankruptcy just a couple years ago.

Thank you President Obama. That is probably what Smith & Wesson (SWHC) employees say to themselves as they leave work every day. The president has prompted the biggest increase in the sale of firearms of any other person. Every attempt to ban something or comment about gun control send buyers racing to the store to buy more while they still can. Smith posted earnings of 20 cents for Q4 compared to analyst estimates for 11 cents. Revenue of $130.6 million also beat estimates for $124.6 million. S&W raised guidance for the current quarter to a range of 29-31 cents. Analysts were expecting 27 cents.

On a side note President Obama has been unsuccessful in attempting to ban modern sporting rifles so now the ATF is trying to ban the ammunition for those rifles. This will not only cause every available bullet to be immediately bought off retailer shelves but also cause another round of frantic gun buying before the next executive order hits the headlines.


The markets pulled back from their record highs on Tuesday but it was a small decline. This was expected as I cautioned last week. However, the indexes finished well off their lows. The Dow nearly -150 points at its lows and rebounded to lose only -85. The S&P rebounded +9 from its lows to lose only -9 for the day and close at 2,107.

With the markets at record highs after four weeks of gains we should expect 2-3 days of profit taking and consolidation. The S&P dipped to support at 2,100 and resistance is still strong at 2,117. That gives us a narrow range of movement and I would not be surprised to see us trade down to 2,085. I believe the dip buyers are alive and well and we will see further gains over the next couple weeks. However, once option expiration arrives I do expect another dip that could be substantial. We have not had a real 10% correction on the S&P since 2011 and with the economic reports weakening and earnings expected to fall in Q1 and Q2 there are plenty of reasons for portfolio managers to tread lightly heading into summer.

The Dow rallied to a new high at 18,288 on Monday with a gain of +155 points. After giving back -85 today that means we are still up +70 for the week. We really can't complain. The big decliners today were the big winners on Monday. That is the way it is supposed to work. Most of the Dow components traded relatively flat and it would be hard to say today's sell off was broad based.

This was simply profit taking that could last a couple more days. With the payroll numbers this week, the bank stress tests and the Fed Beige Book there is plenty of uncertainty to cause cautious investors to pocket some profits.

Initial support is now 18,130 and resistance 18,260.

The Nasdaq declined but Apple did not. Apple has refused to dip below $128 for the last three days and that is positive for the Nasdaq. As long as Apple refuses to give back more of its gains the Nasdaq will have support to help fight off any further losses by other companies. Unfortunately Apple could easily stand to give back another $10 of the February gains. It just depends on how strongly the Apple faithful feel about next week's new product announcement. Historically Apple shares decline after announcements on a sell the news event.

The Nasdaq Composite has pretty decent support at 4,950 and today's low was 4,956. We know where resistance is and that is 5,000 and 5,048 the record high close. The Nasdaq could easily move sideways for a couple days before mounting another run at the record high and I doubt anyone would complain.

The Russell 2000 small caps are holding their gains and that is positive for market sentiment. The index gave back -8 points to 1,234 but still held above support at 1,230. As long as the Russell does not break down it suggests fund manager sentiment remains positive.

I continue to have a positive bias on the market as long as the S&P remains above 2,085. We were due for some profit taking and we basically gave back half of Monday's gains. I don't see that as a problem. I believe the dip buyers are alive and well until proven wrong. Any weak payroll numbers should be chalked up to severe winter weather and ignored.

I have to share this news headline because it is so unbelievable that it makes my head spin. America needs to organize a coalition that will actively pursue ISIS until they are eliminated. A mother braved almost certain death to find her son that was being held hostage by ISIS. She went to ISIS headquarters and asked to see him. Instead of just killing her outright they rolled out their "red carpet" and asked her to relax and have a meal while her son was being brought to her. They brought her cups of tea and a meal of rice, meat and soup. She thought they were being especially kind. After the meal she asked to see her son. They laughed and said, "You have just eaten him." They had butchered him on her arrival and prepared the meat for her meal. Somebody needs to kill these people and do it quickly. Link to story

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



New Option Plays

Gaining Altitude

by James Brown

Click here to email James Brown


Alaska Air Group - ALK - close: 66.16 change: +0.72

Stop Loss: 62.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.5 million
Entry on March -- at $---.--
Listed on March 03, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The collapse in the price of crude oil has been a huge windfall for the airline industry. As a result airline stocks have soared from the market's October 2014 lows. That's because air fares remain near 11-year highs while fuel prices have dropped to five-year lows, boosting profit margins. Today analysts are expecting jet fuel to average less than $2.00 a gallon in Q1 2015. According to the U.S. Transportation Department jet fuel dipped this low back in December and before that it hasn't been this low since 2009.

ALK is a regional airline. The company is more than 80 years old and currently has a fleet of more than 180 planes. According to the company, "Alaska Airlines, a subsidiary of Alaska Air Group (ALK), together with its partner regional airlines, serves more than 100 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked 'Highest in Customer Satisfaction Among Traditional Carriers' in the J.D. Power North American Airline Satisfaction Study for seven consecutive years from 2008 to 2014. Alaska Airlines' Mileage Plan also ranked highest in the J.D. Power 2014 Airline Loyalty/Rewards Program Satisfaction Report."

ALK has shown consistent earnings growth and beat Wall Street's EPS estimate the last four quarters in a row. Their most recent earnings report was January 22nd. ALK reported Q4 earnings of $0.94 a share. That's a +70% increase from a year ago thanks to a -32% drop in fuel prices. Management has also cut non-fuel expenses. Meanwhile ALK's traffic, measured in revenue passenger miles, was up +9.5%. ALK's full-year 2014 results saw passenger revenues rise +7%. They reported a record income of $571 million (+49%). They also saw a record full-year adjusted pretax margin of 17.2% versus 12.4% in 2013.

The company has decided to return a lot of that money back to shareholders and boosted their quarterly cash dividend by +60% to $0.20 a share. After such positive results several analysts raised their price target on ALK's stock (into the $71-85 range).

Crude oil prices remain a hot topic on Wall Street. Oil will likely see another drop to new lows thanks to vanishing storage in the U.S. Currently oil inventories are at 80-year highs. There is a growing chance that we could actually run out of storage. You know what happens where there is too much supply - prices normally fall.

Airline stocks got ahead of themselves back in January and most of the group experienced a pullback last month. It looks like the correction is over. Traders are back to buying the dips in ALK. Technically shares have found support at the rising 50-dma. The breakout past $65.00 this week looks bullish. A move above $67.00 would generate a new P&F buy signal. Tonight we are suggesting a trigger to buy ALK calls at $66.35.

Trigger @ $66.35

- Suggested Positions -

Buy the APR $70 CALL (ALK150417C70) current ask $1.45

Option Format: symbol-year-month-day-call-strike

Daily Chart:

In Play Updates and Reviews

No Follow Through Higher

by James Brown

Click here to email James Brown

Editor's Note:

Yesterday the financial media was abuzz over the NASDAQ's close above 5,000 for the first time in 15 years. Unfortunately stocks did not see any follow through higher. Instead traders were in the mood to take profits.

MNK hit our stop loss. We want to exit our ZMH trade tomorrow.

Current Portfolio:

CALL Play Updates

Aetna Inc. - AET - close: 99.79 change: -0.71

Stop Loss: 98.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.2 million
Entry on March -- at $---.--
Listed on March 02, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

03/03/15: AET followed the market lower but shares found support near last week's lows and its rising 10-dma. Our suggested entry point to buy calls is $101.15.

Trade Description: March 2, 2015:
Healthcare stocks have been extremely strong performers from the market's mid October 2014 lows. Investors have continued to buy the dips and that's especially true in shares of AET. This stock has been outperforming the market in 2015 and currently up +12.0% for the year.

Who is AET? According to the company, "Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 46 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products and services. Aetna's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates."

Investors have been bullish on big healthcare names because of the Affordable Care Act (a.k.a. Obamacare). Initially this industry was resistant to the deal. Obamacare did get off to a rocky start. Yet now a couple of years after its launch most of the wrinkles have been ironed out. Obamacare has generated millions of new health insurance customers for the industry.

Earnings have been strong. AET's most recent earnings report was February 3rd. The company delivered a Q4 profit of $1.22 a share. That was in-line with estimates. Revenues were up +12.5% to $14.77 billion, which was above expectations. More importantly AET raised their 2015 guidance from $6.90 a share to $7.00. That's actually below Wall Street's estimate but it's moving the right direction. Multiple analysts raised their price target on AET following the Q4 report. Meanwhile the point & figure chart is bullish and forecasting at $119 target.

The healthcare providers got another boost last week on February 23rd after the government issued new proposals to raise the rate they pay insurers for Medicare/Medicaid. Shares of AET have not seen that much profit taking from its February high and traders are already buying the dip.

We want to jump on board if this rally continues. Tonight we're suggesting a trigger to buy calls at $101.15. We'll try and limit our risk with an initial stop loss at $98.85.

Trigger @ $101.15

- Suggested Positions -

Buy the Apr $105 CALL (AET150417C105)

Option Format: symbol-year-month-day-call-strike

Cavium, Inc. - CAVM - close: 70.87 change: -0.86

Stop Loss: 64.95
Target(s): To Be Determined
Current Option Gain/Loss: +10.5%
Average Daily Volume = 737 thousand
Entry on February 27 at $68.75
Listed on February 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: CAVM found support near $70 intraday. That's not surprising since broken resistance commonly becomes new support. Readers may want to start raising their stop loss.

Earlier Comments: February 26, 2015:
Semiconductor stocks have been showing relative strength this year. The SOX semiconductor index is already up +4.3%. CAVM is outperforming its peers with a +10.6% gain.

If you're not familiar with CAVM, Investors.com described the company as "a specialty niche designer of network security processors 14 years ago" that has grown into "a mainstream player challenging the likes of Intel, Broadcom, and Freescale Semiconductor."

The company describes itself as "Cavium is a leading provider of highly integrated semiconductor products that enable intelligent processing in enterprise, data center, cloud and wired and wireless service provider applications. Cavium offers a broad portfolio of integrated, software-compatible processors ranging in performance from 100 Mbps to 100 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access and service provider equipment. Cavium's processors are supported by ecosystem partners that provide operating systems, tool support, reference designs and other services. Cavium's principal office is in San Jose, CA with design team locations in California, Massachusetts, India and China."

The last four quarterly earnings reports have been better than expected. CAVM has consistently beat analysts' estimates on both the top and bottom line. Revenue growth has slowly accelerated from +19.7% in Q1 2014, +22.2% in Q2, +23.6% in Q3, and +25% in Q4 2014.

CAVM's CEO Syed Ali is optimistic on 2015 saying, "This will be the single biggest year of new product introductions in our history."

Meanwhile analyst Christopher Rolland, with FBR Capital Markets, commented on the company, saying, "innovative design team, solid pipeline of new products and ability to increasingly tap into a fast-growing hyperscale customer base should provide a solid backdrop of growth for the next few years."

Wall Street expects CAVM revenue growth of +20% in 2015 and earnings growth of +26%. The point & figure chart is very bullish and forecasting a long-term target of $96.00. Technically shares spent the last few days consolidating sideways but today's display of relative strength is a bullish breakout. We are suggesting a trigger to buy calls at $68.75. (FYI: April and May options are not available yet so we chose June)

- Suggested Positions -

Long JUN $75 CALL (CAVM150619C75) entry $3.80

02/27/15 triggered @ $68.75
Option Format: symbol-year-month-day-call-strike

Criteo SA - CRTO - close: 44.59 change: -1.10

Stop Loss: 42.85
Target(s): To Be Determined
Current Option Gain/Loss: -26.9%
Average Daily Volume = 507 thousand
Entry on March 02 at $45.85
Listed on February 28, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: European stock markets were down across the board. Add to that the weakness in U.S. stocks today and shares of CRTO underperformed with a -2.4% decline. CRTO is testing short-term support near $44.00 and its 10-dma. I am not suggesting new positions at this time.

Earlier Comments: February 28, 2015:
Online advertising has evolved over the years. Today we see advertisements on our smartphone, tablet, social media platforms, and our desktop computers. One firm that is reporting surging sales growth in this area is CRTO.

According to the company, "Criteo delivers personalized performance marketing at an extensive scale. Measuring return on post-click sales, Criteo makes ROI transparent and easy to measure. Criteo has over 1,300 employees in 23 offices across the Americas, Europe and Asia-Pacific, serving over 7,000 advertisers worldwide with direct relationships with over 9,000 publishers."

Last year was pretty rocky for shares of CRTO. The stock saw a lot of ups and downs. At the end of the year CRTO shares ended with a +17.6% gain on the year. I'm surprised it wasn't higher.

The company has beaten Wall Street's bottom line earnings estimates three out of the last four quarters. They have reported revenues above expectations four quarters in a row. Plus, CRTO has raised their guidance four quarters in a row. Their sales in 2014 saw sales growth of more than +60%.

CRTO's most recent earnings report was February 18th. They reported Q4 earnings of €0.37 a share, which was €0.13 above expectations. Revenues, excluding traffic acquisition costs (a.k.a. ex-TAC), soared +76% to €96 million. CRTO said their sales in the Americas surged +121% from a year ago (ex-TAC). They also reported a +10% jump in clients to an all-time high of 7,190. Management raised their Q1 revenue guidance up to €96-99 million compared to analysts' estimates of €87.7 million. They also raised their 2015 revenue guidance to €433-440 million versus Wall Street's estimate at €400 million.

Following this Q4 earnings report and bullish guidance the stock has been upgraded by at least two analysts with new price targets at $54 and $65. The point & figure chart is bullish and forecasting a long-term target of $66.00.

Looking at the last several days CRTO's stock has been consolidating just below the $45.00 level. Friday's display of relative strength (+2.3%) appears to be a breakout. Tonight we are suggesting a trigger to buy calls at $45.85.

- Suggested Positions -

Long Apr $45 CALL (CRTO150417C45) entry $3.35

03/02/15 triggered @ $45.85
Option Format: symbol-year-month-day-call-strike

iShares Russell 2000 ETF - IWM - close: 122.74 change: -0.73

Stop Loss: 121.65
Target(s): To Be Determined
Current Option Gain/Loss: -14.0%
Average Daily Volume = 41 million
Entry on February 13 at $121.55
Listed on February 12, 2015
Time Frame: 10 to 12 weeks
New Positions: see below

03/03/15: The IWM gapped open lower and spent the day churning sideways. Shares of this small cap ETF kept pace with the decline in the NASDAQ composite. I'm not suggesting new positions at this time. If the $122 level breaks we could easily see IWM hit our stop.

Earlier Comments: February 12, 2015:
The IWM is the iShares exchange traded fund (ETF) on the small cap Russell 2000 index. The market rally in 2014 was mostly a large-cap affair. The S&P 500 index delivered a +11% gain and the small caps lagged behind with a +3.6% gain for 2014. That could change this year.

Small caps tend to see bigger moves, both up and down, than their larger-cap rivals. Right now the small caps are poised to breakout higher.

Many people look to the small cap index as a sentiment indicator for the broader market. The small cap Russell index has (about) 2,000 stocks. Compared to 500 in the S&P large cap index and only 30 stocks in the Dow Industrials.

Small cap companies in the Russell 2000 tend to be more U.S. focused so they're not encumbered by the strong dollar as much as the large cap global companies can be.

Right now the IWM is on the verge of breaking out past its all-time highs set in December (in the $121.40 area). Tonight we are suggesting a trigger to buy calls if the IWM can trade at $121.55.

We are not setting a target tonight but I will note that the IWM's point & figure chart is forecasting a long-term target of $154.00.

- Suggested Positions -

Long MAY $125 CALL (IWM150515C125) entry $2.50

02/26/15 new stop @ 121.65
02/17/15 new stop @ 119.65
02/13/15 triggered @ 121.55
Option Format: symbol-year-month-day-call-strike

Lear Corp. - LEA - close: 110.77 change: -0.71

Stop Loss: 107.75
Target(s): To Be Determined
Current Option Gain/Loss: -9.3%
Average Daily Volume = 771 thousand
Entry on February 24 at $110.65
Listed on February 23, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: Traders bought the dip near $110.00, which is a good sign if you're bullish. Tomorrow could be a new entry point if both LEA and the S&P 500 open positive.

Earlier Comments: February 23, 2015:
Last year was a great one for the auto industry. According to Autodata we saw 16.5 million new cars and light trucks sold in the U.S. in 2014. That's almost one million more than 2013. The momentum continues.

Vehicle sales rose +11% in December 2014. That surged to +14% in January 2015 (from a year ago). Ford said their January sales were up +15% and General Motors reported +18% increase. Globally IHS Automotive is forecasting more than 88 million vehicles sold in 2015.

That means a lot of car seats need to be manufactured. LEA is in the consumer goods sector. They make auto parts. According to the company, "Lear Corporation (LEA) is one of the world's leading suppliers of automotive seating and electrical distribution systems. Lear serves every major automaker in the world, and Lear content can be found on more than 300 vehicle nameplates. Lear's world-class products are designed, engineered and manufactured by a diverse team of approximately 132,000 employees located in 34 countries. Lear currently ranks #177 on the Fortune 500. Lear's headquarters are in Southfield, Michigan."

Last year the company consistently beat Wall Street's earnings estimates. Their most recent earnings report (2014 Q4) was announced on January 30th. Net income soared from $72.8 million to $261.8 million (+259%). LEA's adjusted earnings per share rose +47% to $2.27. That was 19 cents above expectations. Revenues rose +6.9% to $4.55 billion, which also beat estimates. The boost was driven by a +10% surge in the sale of car seats.

Currently LEA expects 17.4 million automobiles will be manufactured in North America this year. That's a gain of about +3% from 2014. LEA does a lot of business in China and they estimate 22.9 million cars will be built in China. IHS automotive is estimating 25.2 million cars will be made in China in 2015. Considering the current pace of car sales, LEA is guiding 2015 revenues in the $18.5-19.0 billion range. That compares to current Wall Street estimates in the $18.65-18.99 zone.

Another factor driving the stock higher is an activist investor that suggested LEA split up to unlock shareholder value. This story hit on February 3rd and sent shares of LEA soaring. LEA management said they're always willing to listen to shareholders. LEA responded with a reminder that "Since 2011, Lear has returned more than $2.1 billion to shareholders in the form of share repurchases and dividends. Since 2010, Lear has achieved a total shareholder return of 203%, which is approximately double the return for the S&P 500 over the same time period. In 2014, Lear's total shareholder return of 22% outperformed the S&P 500's return of 14%. Building sustainable shareholder value is a foremost priority for Lear."

Two weeks later LEA followed that up with an announcement they were bumping their stock buyback program up to $1 billion. At the end of 2014 their stock repurchase program was down to $339 million. The Board of Directors also raised their quarterly cash dividend +25% from $0.20 to $0.25 a share.

Technically shares of LEA have been consolidating sideways for almost three weeks. That changed today. The stock has broken through resistance at the $110 level. Tonight we are suggesting a trigger to buy calls at $110.65.

- Suggested Positions -

Long JUN $115 CALL (LEA150619C115) entry $3.75

02/28/15 new stop @ 107.75
02/26/15 caution: today's decline could signal a failed breakout (potential bearish reversal) pattern.
Option Format: symbol-year-month-day-call-strike

NXP Semiconductors - NXPI - close: 98.73 change: -0.83

Stop Loss: 94.85
Target(s): To Be Determined
Current Option Gain/Loss: +315.3%
Average Daily Volume = 3.7 million
Entry on February 12 at $84.15
Listed on February 11, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: NXPI rallied more than $14.00 yesterday. The fact that shares fell less than a buck is probably bullish. Of course it helped that analysts were raising their price targets on NXPI today. One firm upped their target to $115.00. I am not suggesting new positions at this time.

Earlier Comments: February 11, 2015:
According to Apple Inc. CEO Tim Cook 2015 will be the year of Apple Pay. That's good news for NXPI. Apple launched its Apple Pay mobile payment system last September. In just the last four months it has taken off. About 8% of retailers already support it and estimates suggest that 38% of retailers will support Apple Pay by year end.

Tim Cook discussed the growth of Apple Pay in his company's recent conference call. Every $3 spent using mobile payments with Visa, Mastercard, and American Express, about $2 of that is used through Apple Pay. Panera Bread said that 80% of its mobile payment usage is through Apple Pay. Whole Foods noted that customers using mobile payments surged +400% once Apple Pay started.

All of this is good news for NXPI because they make the key chips necessary for Apple Pay to work.

The company describes itself as "NXP Semiconductors N.V. (NXPI) creates solutions that enable secure connections for a smarter world. Building on its expertise in High Performance Mixed Signal electronics, NXP is driving innovation in the automotive, identification and mobile industries, and in application areas including wireless infrastructure, lighting, healthcare, industrial, consumer tech and computing. NXP has operations in more than 25 countries, and posted revenue of $4.82 billion in 2013."

Earnings have been good. NXPI managed to beat Wall Street's estimates on both the top and bottom line the last five quarters in a row. Back in July NXPI raised their guidance. Influential hedge fund manager David Tepper, who runs Appaloosa Management, launched a new position in NXPI back in the third quarter of 2014. In early December shares of NXPI were upgraded with a $100 price target by Oppenheimer.

NXPI's most recent earnings report as February 5th. Revenues surged +18.9%. Management delivered bullish earnings guidance for the first quarter. Since this report at least four analyst firms have raised their price targets on NXPI (most of them into the mid $90s).

Today NXPI just hit all-time highs. The stock had been consolidating sideways in at $75-82.50 trading range. This breakout looks like an entry point. I'm suggesting a trigger at $84.15 to buy calls.

- Suggested Positions -

Long Apr $90 CALL (NXPI150417C90) entry $2.36

03/02/15 new stop @ 94.85, NXPI soars after announcing acquisition of FSL
02/21/15 new stop @ 83.25
02/17/15 new stop @ 80.35
02/12/15 triggered @ 84.15
Option Format: symbol-year-month-day-call-strike

Starbucks Corp. - SBUX - close: 94.00 change: -0.23

Stop Loss: 92.85
Target(s): To Be Determined
Current Option Gain/Loss: +62.1%
Average Daily Volume = 5.1 million
Entry on February 10 at $90.25
Listed on February 05, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: Traders bought the dip again and SBUX pared its loss to less than 25 cents. I don't see any changes from my recent comments.

More conservative traders may want to take some money off the table here. I am not suggesting new positions at this time.

Earlier Comments: February 5, 2015:
The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. The good news is that looks the consolidation is over.

Five-Year Plan

Late last year SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX is having a pretty good 2015 so far with the stock up +8.1%, outperforming the broader market. A lot of this gain was thanks to a post-earnings pop. SBUX reported its Q1 2015 results on January 22nd. Adjusted earnings, backing out one-time charges, were $0.80 a share. That's in-line with estimates. Revenues were up +13.3% to $4.8 billion, also in-line with estimates. Investors applauded the news anyway and sent SBUX soaring to new all-time highs the next day.

SBUX said their worldwide comparable store sales rose +5% while traffic only rose +2%. It was the 20th consecutive period that same-store sales were up +5% or more. It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX's guidance was pretty lackluster but Wall Street didn't care. The company actually guided down for the Q2 2015 (current quarter) as they expect earnings in the $0.64-0.65 range. Analysts' were expecting $0.68 a share. SBUX also provided 2015 guidance of $3.09-3.13 versus Wall Street's estimate of $3.12. The company is still projecting 2015 sales growth of 16% to 18% as they see sales ramping up in the second half of 2015. They also updated their outlook on China as they plan to add 3,400 stores by 2019.

Investor sentiment on SBUX is bullish. Shares have not seen barely any profit taking following its post-earnings pop. Now, after two weeks of digesting gains, the stock is pushing higher and poised to breakout past resistance at $90.00. The point & figure chart is bullish and forecasting at $104.00 target.

Tonight we are suggesting a trigger to buy calls at $90.25 with an initial stop loss at $85.80.

- Suggested Positions -

Long Apr $95 CALL (SBUX150417C95) entry $1.03

02/26/15 new stop @ 92.85
02/21/15 new stop @ 89.40
02/12/15 new stop @ 87.85
02/10/15 triggered @ 90.25
Option Format: symbol-year-month-day-call-strike

Zimmer Holdings - ZMH - close: 119.27 change: -2.12

Stop Loss: 117.75
Target(s): To Be Determined
Current Option Gain/Loss: -15.9%
Average Daily Volume = 1.0 million
Entry on February 20 at $120.75
Listed on February 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: Uh-oh! ZMH underperformed the broader market today with a -1.7% decline. Furthermore today's weakness also produced a breakdown below short-term support at $120.00. We are suggesting an immediate exit tomorrow morning.

Earlier Comments: February 14, 2015:
A large chunk of the developed world is old and getting older. The demographics in the United States, Europe and Japan show an aging population. Even China is seeing a rise in its older citizens. This means big business for the orthopedic market, especially for products like hip and knee replacements. ZMH is poised to become the number one player in hip and knee medical devices with its current merger plans to Biomet.

ZMH is part of the healthcare sector. The company describes itself as "Founded in 1927, and headquartered in Warsaw, Indiana, Zimmer designs, develops, manufactures and markets orthopedic reconstructive, spinal and trauma devices, dental implants, and related surgical products. Zimmer has operations in more than 25 countries around the world and sells products in more than 100 countries. Zimmer's 2014 sales were approximately $4.7 billion. Zimmer is supported by the efforts of more than 9,000 employees worldwide."

Looking at last year's earnings ZMH's performance was mixed but they seemed to be improving. The company beat expectations in both the third and fourth quarter. ZMH reported its Q4 results on January 29th. Earnings per share hit $1.71, which was one cent above estimates. Revenues were down -1.4% to $1.22 billion. That missed estimates of $1.24 billion. Part of that miss was due to currency fluctuations. One the plus side ZMH did say gross margins improved 188 basis points to 74.4% in the fourth quarter.

ZMH management also raised their Q1 guidance. Wall Street was expecting 2015 Q1 earnings of $1.52 a share. ZMH just guided to $1.58-1.60 a share. Following its Q4 report and new and improved guidance several analyst firms have either upgraded or raised their outlook on ZMH. Many of the new price targets are in the $130-150 range. FYI: the point & figure chart is forecasting a long-term target of $169.00.

Right now the focus for ZMH is its merger with Biomet, a private company in the orthopedic space. Biomet was going to go public again last year but in April 2014 they agreed to a merger deal with ZMH. Shares of ZMH soared on the news. The deal is valued at $13.35 billion. It's the fifth largest medical device merger in the last ten years.

This merger is important to ZMH because competition is heating up in the $45 billion orthopedic market. The cost savings of the merger are expected to save $135 million the first year and hit $270 million by the third year. The deal is also accretive to ZMH. Biomet saw strong sales last quarter in its spine and bone-healing business.

The combined company will have about 40% of the hip replacement market and about 33% of the knee implant market. That puts them at the top of the list for these two niches. Overall the post-merger ZMH will be second in the orthopedic market behind Johnson & Johnson (JNJ).

It's important to note that this deal has not yet been approved by regulators. The European Union antitrust committee just announced they will render a decision by May 26th. ZMH believes the deal will be approved in the first quarter of 2015.

Technically shares of ZMH have a long-term bullish trend of higher lows and higher highs. The stock just had a mini-correction with a pullback from $120 to $111 in January. Shares have since recovered. Now ZMH is breaking out past short-term resistance near $118 and is headed for its all-time highs set last month in the $120.70 area. We are suggesting a trigger to buy calls at $120.75.

- Suggested Positions -

Long JUN $125 CALL (ZMH150619C125) entry $4.40

03/03/15 prepare to exit tomorrow morning
02/20/15 triggered @ 120.75
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Michael Kors - KORS - close: 68.34 change: +0.39

Stop Loss: 70.65
Target(s): To Be Determined
Current Option Gain/Loss: -16.7%
Average Daily Volume = 3.9 million
Entry on February 26 at $67.90
Listed on February 25, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: The U.S. market's major indices were down across the board. Naturally shares of KORS moved the opposite direction and rallied off its intraday lows to close up +0.5%. I'd watch for a failed rally below $70 as a new entry point for bearish positions.

Earlier Comments: February 25, 2015:
Luxury retail brand names like KORS and Coach (COH) have seen their stocks get crushed over the last several months. Shares of KORS were big performers for the bulls the first two plus years from its late 2011 IPO. Unfortunately the stock peaked in 2014. Investors worried about over exposure and slowing growth.

According to the company, "Michael Kors is a world-renowned, award-winning designer of luxury accessories and ready-to-wear. His namesake company, established in 1981, currently produces a range of products through his Michael Kors and MICHAEL Michael Kors labels, including accessories, footwear, watches, jewelry, men’s and women’s ready-to-wear and a full line of fragrance products."

Make no mistake, KORS is still growing. Last August they reported a strong earnings report that beat on both the top and bottom line. While management guided lower short-term they raised guidance for 2015. A few months later when KORS reports earnings in November 2014 they beat estimates again with revenues soaring +42% and KORS announced a $1 billion stock buyback program. However, their outlook on 2015 had tarnished a bit and they lowered comparable store sales growth from the high teens to mid teens.

KORS most recent earnings report was February 5th. Earnings per share grew +32%. Their results of $1.48 per share beat estimates by 15 cents. Revenues grew +30.9% to $1.26 billion but that actually missed Wall Street estimates thanks to foreign currency issues.

What troubles investors is the slowdown in KORS' growth. Globally their comparable store sales grew +8.6%. Most companies would probably be excited for that number. Yet analysts were expecting +12.6%. The slowdown appeared to accelerate in North America. Same-store sales plunged from +24% growth to +6.8%. KORS is also facing margin pressure with both gross margin and its operating profit sliding.

KORS management will tell you that the company is doing great and just reported its 35th quarter in a row of same-store sales growth. However, the number crunchers on Wall Street will point out that it was the first time in five years that same-store sales growth did not rise by double-digit percentages.

A big concern among analysts is that KORS could be losing its appeal because it's growing so fast. Last year they added 114 new stores and ended 2014 with 509 retail locations. They're starting to become too common. KORS is losing its cachet.

Management also lowered their guidance for Q4 (current quarter) to $0.89-0.92 a share versus estimates of $0.94. They also see revenues below expectations.

This concern over slowing growth has produced a bear market in the stock. KORS is definitely not participating in the market's rally. Tonight we are suggesting a trigger to open bearish positions at $67.90.

- Suggested Positions -

Long May $65 PUT (KORS150515P65) entry $2.10

02/26/15 triggered @ $67.90
Option Format: symbol-year-month-day-call-strike


Mallinckrodt - MNK - close: 114.85 change: -3.97

Stop Loss: 114.85
Target(s): To Be Determined
Current Option Gain/Loss: -45.7%
Average Daily Volume = 1.4 million
Entry on February 23 at $118.75
Listed on February 21, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

03/03/15: MNK delivered a bearish breakdown from its recent consolidation pattern. I didn't see any specific news behind today's relative weakness. Shares underperformed with a -3.3% decline and MNK hit our stop at $114.85.

- Suggested Positions -

APR $120 CALL (MNK150417C120) entry $4.60 exit $2.50 (-45.7%)

03/03/15 stopped out
02/28/15 new stop @ 114.85
02/23/15 triggered on gap open at $118.75, trigger was $118.15
Option Format: symbol-year-month-day-call-strike