The Dow fell -198 at the open and rebounded as high as +229 at 3:PM before closing with a +183 point gain. Thank oil prices and the dollar for the gains.
Crude prices rallied on more Russian headline spam. Russian Foreign Minister Sergei Lavrov said Russia was open to a meeting with OPEC to discuss production cuts. However, the full quote contained the qualification "if OPEC is in agreement and ready to cut production." The initial headline reversed a drop in oil prices despite OPEC delegates saying it was unlikely the group would meet with Russia anytime soon. Analysts reviewing the comments and the possibility of a meeting are also doubtful a meeting will ever take place.
You have to keep in mind that Russia is the enemy of Saudi Arabia. Saudi wants to cause Russia pain at the pump because it limits the amount of money they have to support aggression in the Middle East. With Russia saying they would agree to meet that means the Saudi plan to force oil prices lower is working and Russia is imploding.
Some OPEC countries may meet but unless Saudi Arabia attends, nothing will happen. Saudi drives the OPEC bus and without a driver it will go nowhere.
Oil prices rallied on another case of headline spam but without some real details in the coming days we should expect to see oil prices decline again. This was a monster short squeeze of 9% in one day.
The Dollar also collapsed -1.66% and the biggest decline in more than three-months. A cheaper dollar means it takes more dollars to buy a barrel of oil, ounce of gold or ton of copper. All rallied sharply today on the dollar drop.
Current Position Changes
AMBA - Ambarella
The Ambarella put was triggered today at $35.75.
AOS - AO SMith
The AO Smith call remains unopened.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
Original Call Recommendations (Alpha by Symbol)
AOS - AO Smith - Company Description
Minor gain in a volatile market. The position is still unopened.
Original Trade Description: February 1st
A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.
They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.
However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.
Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.
Very few companies are successful in selling to China but AO Smith is one of them.
The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.
They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.
Earnings are April 29th.
The stock bottomed on the January 29th market crash and have been moving steadily higher. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade over today's intraday high.
With an AOS trade at $70.45
Buy April $75 call, currently $3.30. Stop loss $64.85.
KR - Kroger - Company Description
Kroger continued to inch higher. No change in the position.
Original Trade Description: January 28th
Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.
While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.
They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.
Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.
While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.
At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.
Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.
Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.
Earnings March 3rd. We will exit before earnings.
Long April $40 call, entry $1.05. No stop loss because of the cheap option.
LULU - LuluLemon
LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description
Another great day for LULU. I am recommending we target $66.25 for an exit. That is just below resistance at $67.
Original Trade Description: January 22nd
LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.
Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.
Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.
It is amazing what a little positive guidance can do for Street ratings.
Earnings are March 9th.
Long March $60 calls @ $2.90, see portfolio graphic for stop loss.
Update 2/3/16: Target $66.25 for an exit.
STZ - Constellation Brands - Company Description
Down -$2 but still a long way from the support at the 50-day average.
Original Trade Description: January 14, 2016:
STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.
STZ is in the consumer goods sector. According to the company,
"Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."
STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.
This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance.
Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.
STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.
THO - Thor Industries - Company Description
Thor dipped to support at $50 intraday and rebounded at the close. No change in position.
Original Trade Description: January 29th, 2016:
Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.
You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.
In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.
At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.
Earnings are March 3rd.
Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.
Position 2/1/16 after a THO trade at $52.75
Long March $55 call @ $1.15, no stop loss because of the cheap option.
Original Put Recommendations (Alpha by Symbol)
AMBA - Ambarella - Company Description
The Ambarella trade was opened when the stock declined to $35.75 intraday.
Original Trade Description: January 27th
Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.
GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.
GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.
Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.
GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.
With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.
Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.
Earnings March 3rd.
Position 2/3/16 with AMBA trade at $35.75
Long March $32.50 put @ $2.17, initial stop loss $40.55
BABA - Alibaba - Company Description
Another big drop at the open but shares recovered somewhat in the afternoon. Target $58.25 for an exit.
Original Trade Description: January 29th.
This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.
Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.
Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.
It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.
Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.
The low last week was $65.34. I am recommending a put position with a trade at $64.85.
Position 2/2/16 with a BABA trade at $64.85:
Long March $65 put @ $3.90, initial stop loss $71.65.
HPQ - Hewlett Packard - Company Description
Dipped under support at the open but recovered in the afternoon. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.
Original Trade Description: January 25th
Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.
Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.
In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.
HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.
Earnings are February 24th.
Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.
JUNO - Juno Therapeutics
Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description
Minor gain for Juno thanks to the rebound in the Biotech Index ($BTK). It is not convincing and I suspect the sector will go lower.
Original Trade Description: January 22nd
Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.
Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.
Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.
Earnings are March 17th.
Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.
VXX - iPath S&P 500 VIX Futures ETN - ETF Description
The VXX closed well off its highs and back down at $25 support. Eventually the volatility will ease. It is only a matter of time.
Original Trade Description: January 16th
At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.
The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.
No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.
Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.
Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.
Long March $23 Put @ $2.41, no stop loss
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