Option Investor

Daily Newsletter, Tuesday, 7/18/2017

Table of Contents

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

Market Wrap

Earnings Volatility

by Jim Brown

Click here to email Jim Brown

The Dow suffered from an extreme case of earnings volatility with a -162 point decline intraday.

Market Statistics

The Dow decline was prompted by the $6 drop in Goldman Sachs that erased more than 40 points off the index but there was also leftover negativity from the news late Monday that the healthcare bill was dead. That drove futures and the dollar down overnight and treasuries higher today. The earnings from GS and Bank of America depressed the entire financial sector and that weighed on the Dow stocks.

The sharp decline in the Housing Market Index at 10:00 was also a negative for the Dow.

The Housing Market Index for July declined sharply from 67 to 64. However, the June number was revised down to 66. The index peaked at 71 in March and has been declining steadily. The Northeast remained under 50 for the fourth consecutive month with a reading of 48, although that was a four-month high. The Midwest component fell from 68 to 64, the South from 68 to 63 with the West the only gainer from 71 to 74. The single-family sales component for the present declined from 72 to 70 and for six months out from 75 to 73. Potential buyer traffic declined 1 point to 48 after peaking in March at 53.

This shows a decline in homebuilder confidence but there is no reason for concern. The limited number of homes on the market allow them to raise prices and inventory turns over quickly. You have to wonder if the last two years of a strong market has led them to expect problems ahead when there really are none in sight.

The economic calendar for Wednesday only has one report that is material. That is new residential construction or housing starts. After the decline in builder sentiment for July, we could see a smaller number of starts. It would have to be a material drop to move the market.

The Philly Fed Manufacturing Survey on Thursday is the biggest report for the week because it is a proxy for the national ISM later in the month.

Once we get past Wednesday, the chatter about the Fed meeting will increase even though there are no expectations for a change in rates.

The death of the Obamacare replacement bill on Monday evening and then the rapid demise of the repeal proposal called for by President Trump and Mitch McConnell last night, caused the dollar to decline sharply to 10-month lows.

The death of the healthcare bill led investors to expect the efforts to reform taxes, pass infrastructure spending and pass a budget, to die a similar death in the Senate. This caused a flight to safety and rush into treasuries. The yield on the ten-year declined from 2.4% last Tuesday to 2.26% today.

These factors could combine to depress the market even more during the normally weak August and September period. Once tax reform appears to be dead for 2017, there will no longer be the enticement to continue holding profitable positions hoping for a lower tax rate.

There were multiple earnings stories moving the market today. Netflix (NFLX) spiked 13.5% or $22 despite missing estimates by a penny. They reported 15 cents and analysts were expecting 16 cents. The rocket fuel came from the surge in subscribers. Analysts expected 3.2 million and the company reported 5.2 million. They also guided higher above analyst estimates for Q3. The company is on track to see negative cash flow for 2017 of $2.5 billion because opening in new markets is expensive and it takes a couple of years for subscribers to build to the point to overcome the initial expense. In the U.S. where the market is maturing, they produced gross margin of 40%. When they get to significant penetration in international markets, they expect similar margins.

Netflix continues to spend on existing content and original content and doing it in multiple languages. The company now has more than 52 million international subscribers and 51.9 million U.S. subscribers. The U.S. had been seen as a saturated market but they still added 1.1 million domestic subs and 4.1 million international. Analysts believe the U.S. market will top out in the 60-80 million range with slower growth to those numbers. However, there are 126 million households in the U.S. so they have more than 75 million to pull from. Internationally, they have billions of potential subscribers limited only by Internet access and bandwidth. Analysts are talking 200 million subscribers in 4 years and 300 million within 10 years. At the rate they are accelerating, it could be a lot less than 10 years.

Before the earnings, the option premiums were out of sight with the premiums suggesting a potential $12 range after the release. Nobody in their right mind would have taken that bet but it would have proven profitable with the $22 gain. Now we have to wait for a significant pullback to deflate premiums before we can buy Netflix again. Given their cash burn rate and the stock performance, I would not be surprised to see another secondary offering to raise several billion for operations. Reed Hastings needs to strike while the stock is hot to capture the opportunity. Netflix market cap rose $9.482 billion today alone.

Goldman Sachs (GS) reported earnings of $3.95 compared to estimates for $3.36. It was a major beat on the earnings front. Revenue of $7.89 billion beat estimates for $7.57 billion. The stock was hammered because of a drop in trading revenues of 17%. Fixed income, currency and commodities revenue fell -40% to $1.16 billion. Stock trading revenues rose 8% to $1.89 billion. Overall trading revenues fell to the lowest level in 11 years. Revenues from investing and lending rose 42% to $1.58 billion. Equity securities rose 88% to $1.18 billion. This represents the rising value of startups in the portfolio. Assets under supervision rose $33 billion to $1.41 trillion.

The bank said low market volatility, low client activity and "generally difficult" market making conditions contributed to the decline in trading revenues. There was no shortage of volatility or volume in GS shares today. They fell $6 on more than double average volume.

On the surface, this looks like a buy the dip opportunity. They blew away earnings estimates in a "generally difficult" market and increased revenues in areas other than trading. When volatility returns, trading revenues will also return.

Bank of America (BAC) reported earnings of 46 cents that rose 11% and beat estimates for 43 cents. Revenue of $23.07 billion easily beat estimates for $21.78 billion. This was the bank's first $2 billion profit quarter. Shares were down after the report based on weak net interest income that rose only 8.6% to $10.99 billion. Analysts were expecting more than 10% growth thanks to the Fed's rate hikes. Shares rebounded to close down 12 cents after a sharp intraday drop.

Harley-Davidson (HOG) reported earnings of $1.48 compared to estimates for $1.38. Revenue of $1.58 billion misses estimates for $1.59 billion. In the year ago quarter they reported $1.55 and $1.67 so this was a decent decline. Worldwide motorcycle sales were down 6.7% and -9.3% in the USA. This compares to industry wide global sales decline of -2.3%. The company blamed it on "weak industry conditions." They sold 81,388 units compared to the 87,266 in the year ago quarter. They revised full year guidance to ship 241,000 to 246,000 units in 2017, which is roughly 7% less than 2016. In Q3 they expect to ship 39,000 to 44,000 units, which is down about 15% from year ago levels. Wedbush pointed out that with guidance cut this significant after a minor decline in the first half, that the second half could be "dire" in their words. Shares declined sharply at the open but rebounded to erase half the losses at -$3 for the day. I would be a seller on HOG.

UnitedHealth (UNH) reported earnings of $2.46 that rose 28% compared to estimates for $2.38. Revenues of $50.1 billion were in line with estimates. That was a 7.7% rise from last year. They are profiting from exiting the Obamacare business and the losses it was causing. They added 2.5 million to its health care benefits business. They also saw major growth in the Medicare business with revenue rising $2.5 billion or 17% to $16.7 billion. Their new Optum pharmacy benefits business saw revenues rise 10% to $2 billion.

UnitedHealth is on pace to do $200 billion in revenue for the first time in 2017. They guided for full year earnings in the $9.75-$9.90 range, up from $9.65-$9.85 per share.

Johnson & Johnson (JNJ) reported earnings of $1.83 compared to estimates for $1.79. Revenue of $18.8 billion missed estimates for $18.9 billion. They raised guidance for the full year for revenue of $75.8-$76.1 billion. Analysts were expecting $75.7 billion. They guided for earnings of $7.12-$7.22 and analysts were expecting $7.11. Shares were up sharply on the guidance.

CSX Corp (CSX) reported earnings of 64 cents on revenue of $2.93 billion. Analysts were expecting 59 cents on $2.85 billion. The company added another $500 million to its buyback authorization to raise it to $1.5 billion. However, the company said it was "evaluating" its cash deployment strategy with respect to shareholder distributions and is committed to an investment grade rating. That caused investor flight and shares were down $2.50 in afterhours.

United Continental (UAL) reported adjusted earnings of $2.75 that beat estimates for $2.68. Revenue rose 6% to $10 billion and beat estimates for $9.96 billion. Shares collapsed after the report on worries that the momentum from rising prices had run its course and price competition was increasing. Shares fell -$2.50 in afterhours.

After the bell, IBM reported earnings of $2.97 that beat estimates of $2.74. Revenue of $19.29 billion, down -4.7%, missed estimates for $19.47 billion and was the 21st consecutive quarter of declining revenues. The company reaffirmed guidance for the full year of $13.80 per share. Cloud revenues rose 15% to $3.9 billion. Shares fell $3 in afterhours.

Earnings for Wednesday include Dow component American Express and tech giant Qualcomm. US Banks and Morgan Stanley will complete the bank earnings parade.

Thursday is another big day for the Dow with Microsoft, Travelers and Visa.

Shares of Vertex Pharmaceuticals (VRTX) spiked 24% in afterhours on news a new drug cocktail improved lung function in patients with cystic fibrosis.

Chipotle Mexican Grill (CMG) shares fell $17 or 4.34% on news they had closed a store in Sterling Virginia after a "small number" of illnesses had been reported by people eating at the store. Their symptoms were consistent with norovirus. The company has had multiple occurrences of this over the last several years but it had been some time since an outbreak. Norovirus can be spread by an infected person touching the food or the food coming in contact with an infected surface. This is likely a single store incident and not a chain problem. CMG has gone to great lengths to prevent these occurrences in their food transmission chain and have been largely successful.

The Maxim Group said this was a buy the dip opportunity and upgraded the stock from hold to buy with a $460 price target. Standpoint Research saw is slightly different with an upgrade from sell to underperform.


Which way do we go? With the market somewhat in shock from the -162 point intraday drop on the Dow and the negative earnings results after the bell you would think we could be looking at a negative day for Wednesday. However, even with the decline in IBM, the S&P futures are up 2 points and the Nasdaq futures are up 15 points. The Dow futures are down -7 thanks to IBM.

This would suggest traders are thinking about shaking off the earnings problems as stock specific and willing to buy the dip. Since the Dow and the Russell were the only two indexes to dip, that is not a bad assumption. We knew heading into this week there would be earnings volatility on the Dow. With nine Dow components reporting this week there was a chance for both positive and negative moves. Now that the shock of the big Dow drop is behind us, traders can be calmer about future reports.

The Netflix gain helped to power the Nasdaq to a new record high despite the sharp drop on the Dow. This is a positive reinforcement that there are some good reports in our future and there could be further gains ahead.

The Nasdaq big cap stocks were all positive except for Dow component Microsoft and a weak showing by Apple, also in the Dow. Facebook exploded higher with a $3 gain to a new high. If the big cap stocks are back in earnings ramp mode, the Nasdaq could continue to make new highs. That would eventually lift the Dow out of its slump.

The Goldman anchor kept the Dow in negative territory and the rest of the components were evenly matched. Crude stocks are down tonight because the API inventories showed a build of 1.628 million barrels compared to expectations for a decline of 3.0 million. Crude itself is only down about 17 cents in hopes Wednesday's EIA numbers will show a decline. If they also show a build, we could see the energy sector, led by Exxon and Chevron, decline on Wednesday. That would be a drag on the Dow.

Earnings from American Express will not impact the Dow on Wednesday because they report after the close.

If the Nasdaq remains positive, we could see the Dow shake off the IBM drag of about 28 points based on the afterhours decline. Resistance is 21,650 and support should be 21,525.

The S&P shook off the intraday dip to end slightly positive and at a new closing high. Coupled with the Nasdaq, a repeat performance on Wednesday would provide a strong lift to the broader market. With two failures intraday at the 2,463 level over the last three days, that is currently the resistance that has to be conquered. Support is 2,450 and the intraday low for today.

The Russell 2000 gave back 4 points because of the decline in the financial sector. That is the Russell's largest sector. However, the index avoided closing below support at 1,425 and could be poised to reclaim the new highs if the Nasdaq remains positive.

While I am optimistic about Wednesday, I am concerned the events in Washington could remain a cloud over the market. The rise in the bond market suggests investors are starting to be concerned about the future for equities with a legislative agenda dead in the water. If the housing starts tomorrow are weak, I would expect bonds to continue to rally and pressure equities. If the EIA reports a build in oil prices that would be another market cloud. There are plenty of cross currents in the earnings cycle and as we have seen this week, not all of them are positive. The expectations may have been overly optimistic. I would recommend caution in being overly long and let's see how this week plays out.

There will always be another day to trade if you have capital in your account.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


New Option Plays

Volatility Pause

by Jim Brown

Click here to email Jim Brown

Editors Note:

While there was significant volatility intraday, it faded into the close. That does not mean it will not rear its head again this week. While I am hopeful we will see a rebound, the direction is not clear. We are evenly split between calls and puts and there is no reason to add more risk in an uncertain environment.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Trading Places

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq traded places with the Dow to take a leadership role and close at new highs. The Dow was crushed by declines in Goldman Sachs and Home Depot and was down -162 points at the lows. The index rebounded significantly but could not make it back to positive territory ahead of IBM's earnings after the close.

The Nasdaq gained 30 points to close over 20 points into new high territory at 6,344. It was a good day for the portfolio with only one stock going in the opposite direction than our position. IBM declined $4 after their earnings and this could weigh on tech stocks on Wednesday.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

AMAT - Applied Materials
The long call position was entered at the open.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AAPL - Apple Inc - Company Profile


Guggenheim reiterated a buy rating and $180 price target in a note titles, "Quit Worrying" any delay in the iPhone this fall just gets added to subsequent quarter's sales. "Loyal users will wait" for the next model. He said even if unit volume do not grow significantly the higher sales price will lift Apple's revenue 10%. He said the majority of Apple's revenue increases have been from rising prices since the first phone launched at $499 in 2007.

Original Trade Description: June 28th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. Company description from FinViz.com.

This play is not going to take a lot of explanation. Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 and they have been trading at $145 for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.

Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will be out of the position before the August earnings so that will not impact us either way.

The plan is to capture the ramp into the earnings and then exit. Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.

Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.

Update 7/5/17: Nomura said iPhone 7 demand was weak but it was ok because of the pent up demand for the iPhone 8, expected out in a couple months. The analyst said the model 8 would provide sufficient upside in both volume and price to more than compensate for the current weak sales in the model 7.

Update 7/6/17: Qualcomm is seeking to ban imports of some iPhones in their long running patent dispute with Apple. The news was announced after the bell and shares of Apple declined about 10 cents. This will not impact any current phones or the iPhone 8 because the case will not even begin to be heard until spring of 2018 or later. The two companies will eventually settle out of court. This is just legal sparring.

Update 7/7/17: Canaccord Genuity said it was seeing "steady" iPhone 7 sales ahead of the company's earnings on August 1st. The analyst said the pace of sales is consistent with prior estimates for 42 million in Q2 and 47 million in Q3. They have a $180 price target. A Raymond James analyst said their survey found strong consumer interest in the watch, and Apple speakers including the Beats wireless speakers and the upcoming HomePod smart speaker. The survey found that 14% of iPhone owners plan to buy the HomePod when it goes on sale in December. They also found that 12% of consumers plan to buy the Apple Watch, the highest level since the watch was announced.

Update 7/10/17: An Apple analyst said the iPhone 8 could start at $1,200 and go higher from there. This is definitely going to put a crimp in iPhone 8 sales but Apple should still post higher revenue and profits thanks to the high price. The iPhone 8 is rumored to be available in four colors. There is a continuing rumor that Apple may drop the fingerprint sensor from the model 8 because of space considerations. There are so many features packed into the model 8 that there is no physical room for the sensor in the new screen configuration. Just a rumor but it refuses to go away.

Update 7/11/17: Susquehanna Financial warned that higher prices and stronger competition from Android models, were going to dent Apple's sales. The analyst also said talks with suppliers in Asia confirmed that Apple is trying to put too many things in the iPhone 8 and there is not enough room. The finger print sensor is looking much more likely to be dropped from the top of the line OLED iPhone 8 model. Apple only has a very few weeks to either work out a solution or drop the feature or risk production delays of 2-3 months while engineers go back to the drawing board on the internal hardware configuration.

Deutsche Bank also dumped on Apple's parade saying the expectations for the iPhone 8 are too high. DB warned that the iPhone 8 supercycle was probably only going to be a regular upgrade cycle. DB is expecting sales of 230 million phones in FY 2018. Peak sales were 231 million in FY 2015 and DB is expecting that to be a ceiling because of price, availability and competition. The bank said it was confused about where the new buyers were coming from, especially at a $1,200 price point.

Update 7/12/17: Bank of America and Keybanc both posted notes saying the iPhone 8 production could be delayed. BAC lowered iPhone sales estimates by 11 million units for Q3 and 6 million for Q4 because of the expected delivery delay of 3-4 weeks or longer. They raised the estimates for Q1 by 10 million units. The firm Fast Company said there is a "sense of panic" among iPhone team members as they rush to try and fix software bugs impacting the next release. RBC Capital, Cowen, KGI and Drexel Hamilton believe the announcement could be delayed until October or November.

Update 7/17/17: Morgan Stanley reiterated an overweight rating and raised their price target to $182.

DigiTimes, normally a reliable Apple researcher, said the production on the iPhone 8 could be delayed by up to 2 months because yields at the Foxconn assembly plant are not yet sufficient to begin volume production. Full story

Position 6/29/17:

Long August $150 call @ $3.00, see portfolio graphic for stop loss.

AMAT - Applied Materials - Company Profile


Zacks decided to highlight AMAT as their bulls stock of the day. We thank them for their support. They pointed out that last quarter's earnings beat the street on a 45% rise in revenue and a record level for AMAT.

Original Trade Description: July 17th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 Company description from FinViz.com

Estimated earnings date August 17th.

AMAT is an old chip company founded in 1967. In chip terms this company is an antique. However, they are growing by focusing on new products rather than fight it out for low margin chip products everyone else is making. One of their focus products is OLED screens. The adoption rates for OLED screens means strong demand for chips to power those screens. By 2021 more than two-thirds of smart phones could have OLED screens. AMAT is shooting for 30% to 40% of the total addressable market two years from now. They currently have 15% share. They have grown their display revenue by 20% annually for the last five years.

The company said the demand for memory, which is currently off the charts, is just getting started. The coming of big data, IoT, streaming video and massive data storage requirements has caused a surge in demand that is just the tip of the coming iceberg. AMAT grew its memory revenue to 35% of the total in the last quarter. Manufacturers are raising prices by about 15% per quarter because of the shortages and there is no end in sight.

The upgraded analyst price targets after the big semiconductor show last week is now $65 on the high side and $55 on the low end. AMAT closed at $46 today.

Position 7/18/17:

Long Aug $47 call @ $1.30, see portfolio graphic for stop loss.

ATHM - Autohome - Company Profile


No specific news. Shares continued to rise after breaking through resistance at $47.

Original Trade Description: July 12th.

Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including company generated content, include automobile-related articles and reviews, pricing trends in various local markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers' suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content. Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; and used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites. In addition, it operates Autohome Mall, an online transaction platform that facilitates direct vehicle sales and commission-based services; provides iOS- and Android-based applications to allow its users to access its content; and offers technical and consulting services. The company was formerly known as Sequel Limited and changed its name to Autohome Inc. in October 2011. The company was founded in 2008 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

Expected earnings August 9th.

The company reported revenue of 1.348 billion yuan compared to estimates for 1.3 billion. This was a 23% increase over the year ago quarter. Earnings of 2.8 yuan rose 33% and beat estimates for 2.2 yuan. Free cash flow rose 205.4% to 495.2 million yuan ($71.9 million.) Average daily users rose 23% to 10.1 million on the website and 8.2 million on mobile devices. Average time spent on the application was 18 minutes per day. The company sold 3,658 vehicles from its direct sales inventory in the quarter.

Of particular interest was the launch of the augmented reality showroom during the March auto festival. This was highly received and they increased the options and presentation for the June auto festival.

Shares have risen to $47 where they have held for the last three days. The chart pattern suggests there is an impending breakout over that level.

Position 7/13/17:

Long August $50 call @ $1.75, see portfolio graphic for stop loss.

BABA - Alibaba - Company Profile


No specific news. Chinese online sales rose 41% in June and the fastest pace since 2016, compared to 30% in May. The acceleration in online activity is definitely good for Alibaba.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Update 7/5/17: Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin.

Update 7/10/17: RBC analyst Mark Mahaney raised his price target on BABA from $140 to $160 and reiterated an outperform rating saying fundamental trends remain impressive. Alibaba said recently it is targeting $1 trillion in gross merchandise volume in 2020. Alibaba's Singles Day promotion is 40 times larger in sales than Amazon's Prime Day, which starts tonight.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.

PYPL - PayPal - Company Profile


Susquehanna reiterated a positive outlook and $55 price target. Since the stock closed at $59, they appear to be behind the curve.

Paypal said it had completed the acquisition ot TIO Networks for $238 million. The acquisition was announced in February. The company also announced a partnership with Visa to offer debit cards in Europe.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Update 7/5/17: Payment processor, Vantiv, offered $10 billion to buy London based Worldpay. That immediately boosted Paypal and Square on thoughts there may be other combinations in the future. Paypal has a market cap of $66 billion and Square $5 billion so Paypal is not likely a potential target but they could benefit from acquiring a smaller player.

Update 7/12/17: PayPal announced a partnership with Apple to use PayPal in the iTunes App Store. This will let users with Paypal accounts buy songs, movies, etc from iTunes. This is a good deal for both companies.

Update 7/13/17: Analyst at Monness, Crespi, Hardt published a note saying PayPal was his "top pick" for 2017. Shares rallied $1.35 to a new high.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.

THO - Thor Industries - Company Profile


No specific news. Shares declined again with a 90-cent drop. The rebound is still intact but it would have been nice to see it move higher with the market. Dow weakness is probably the reason. THO is reactive to the Dow's movement.

Original Trade Description: July 15th.

Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com

In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.

Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.

Estimated earnings date September 4th.

With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. In late June they rebounded to $110. During the market volatility over the last three weeks they dipped back to $102 and found support there once again. Now that the market has turned positive shares are rebounding.

I am using the September strike because of the September earnings date. We will exit well before then but that date will keep the premiums inflated.

Position 7/17/17:

Long Sept $110 call @ $3.00, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

BBBY - Bed Bath & Beyond - Company Profile


No specific news. The retail gloom is starting to settle over the sector again. The Target guidance and some random upgrades lifted the sector for a couple days but the clouds are forming again.

Original Trade Description: July 10th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

Expected earnings September 21st.

In late June, the company reported earnings of 53 cents that missed estimates for 66 cents. Revenue of $2.74 billion missed estimates for $2.79 billion. Same store sales declined -2%. It was not a pretty report.

The management said they plan to increase the pace of store closings and cost cuts but so far that has not been working. They have been increasing their emphasis on online sales but to compete with Amazon they have to offer free shipping and that lowers their margins. Store traffic is slowing because more people are shopping online. Those that shop online have many websites to choose from and BBBY gets lost in the shuffle. One analyst called this an existential crisis for the company.

Position 7/13/17:

Long Nov $27.50 put @ $1.72, see portfolio graphic for stop loss.

CPB - Campbell Soup - Company Profile


No specific news. Shares fell hard on the Amazon meal kit news. That is one more reason why consumers are going to buy less packaged foods with lots of preservatives and added salt and fillers.

Original Trade Description: July 8th.

Campbell Soup Company, together with its subsidiaries, manufactures and markets food and beverage products. It operates through three segments: Americas Simple Meals and Beverages; Global Biscuits and Snacks; and Campbell Fresh. The Americas Simple Meals and Beverages segment engages in the retail and food service of Campbell's condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell's gravies, pastas, beans, and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; and Campbell's tomato juices. The Global Biscuits and Snacks segment provides Pepperidge Farm cookies, crackers, bakery, and frozen products in the United States retail; and Arnott's biscuits in Australia and the Asia Pacific; and Kelsen cookies worldwide, as well as meals and shelf-stable beverages in Australia and the Asia Pacific. The Campbell Fresh segment provides Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages, and refrigerated salad dressings; and Garden Fresh Gourmet salsa, hummus, dips, and tortilla chips, as well as refrigerated soups. The company sells its products through retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, and dollar stores, as well as other retail, commercial, and non-commercial establishments; and independent contractor distributors. Campbell Soup Company was founded in 1869. Company description from FinViz.com.

Campbell added a fresh foods division but the business is failing. Sales fell -8% in Q2 to $260 million. The company warned that sales would decline for the rest of 2017. The CEO said, "Let's be real, I am not satisfied with our overall sales performance in the quarter. Our performance over the last year in fresh food has been disappointing." Total sales declined to $2.17 billion and missed estimates for $2.22 billion. The company has spent almost $2 billion since 2012 to build the Fresh Division and it is still declining.

The company announced on Friday it was buying Pacific Foods of Oregon, an organic foods distributor, for $700 million. Pacific only produced revenue of $218 million in 2016. This is actually a good move for Campbell but they paid too much for Pacific. Their earlier acquisition for the Fresh Division was Bolthouse, a producer of carrots, juices and salad dressings, for $1.55 billion.

Campbell's is struggling because consumers are buying less packaged foods and more fresh and organic foods. They are buying less packaged food because they are moving to healthier choices. The CEO's admission that sales would decline for the rest of 2017, will likely be followed by another one that sales will decline in 2018. It is a tough retail market and Amazon's acquisition of Whole Foods is going to make it even harder.

Earnings August 18th.

Shares have fallen below support at $52.50 and could continue significantly lower.

Position 7/10/17:

Long Aug $50 put @ 80 cents. see portfolio graphic for stop loss.

MKC - McCormick & Company - Company Profile


No specific news. Shares still not directional. Waiting on a catalyst.

Original Trade Description: July 10th.

McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates through two segments, Consumer and Industrial. The Consumer segment offers spices, herbs, and seasonings, as well as desserts. This segment markets its products under the McCormick, Lawry's, Club House, Gourmet Garden, OLD BAY brands in the Americas; Ducros, Schwartz, Kamis, and Drogheria & Alimentari, and Vahine brand names in Europe, the Middle East, and Africa; McCormick and DaQiao brands in China; and McCormick, Aeroplane, and Gourmet Garden brand names in Australia, as well as markets regional and ethnic brands, such as Zatarain's, Stubb's, Thai Kitchen, and Simply Asia. It also supplies its products under the private labels. This segment serves retailers comprising grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers directly and indirectly through distributors or wholesalers. The Industrial segment offers seasoning blends, spices and herbs, condiments, coating systems, and compound flavors to multinational food manufacturers and foodservice customers. It serves foodservice customers directly and indirectly through distributors. McCormick & Company, Incorporated was founded in 1889 and is based in Sparks, Maryland. Company description from FinViz.com.

McCormick reported earnings of 82 cents that beat estimates for 76 cents. Revenue of $1.11 billion rose 4.8% mostly due to acquisitions in 2016. Analysts were expecting $1.1 billion. They reaffirmed their full year guidance for earnings of $3.94 to $4.02 but they did lower estimates for some of the other projections.

Expected earnings September 28th.

Analysts asked them repeatedly on the conference call why they did not lower earnings guidance when everything else was declining. The CEO said it was "too early" to make that call and they would review it at the end of this quarter. For analysts that was an admission that guidance would probably be lowered at a later date. Shares declined sharply.

Shares rebounded almost immediately but are now poised to move lower after closing at a 4-month low on Monday.

Position 7/11/17:

Long Sept $90 put @ $1.05, see portfolio graphic for stop loss.

NKE - Nike Inc - Company Profile


No specific news. Shares continued to slowly decline from the short squeeze last Monday.

Original Trade Description: July 5th.

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike reported earnings last week of 60 cents that beat estimates for 50 cents. Revenue of $8.7 billion narrowly beat estimates for $8.6 billion. The earnings spike was due mostly to a lower tax rate.

The stock spiked $5 on short covering after they announced they were turning to Amazon to help them sell shoes and apparel. Some analysts believe this will lead to further discounting because Amazon is a cutthroat market. We have already seen a weak market for high dollar Nike models with sales at 50% off. Moving to Amazon will cause additional discounting in those high dollar models. They also believe it will lead to lower orders from distributors and cause them even more grief in the U.S. where sales were flat. The U.S. is Nike's biggest market where they face less competition from brands like Adidas, which is rapidly accelerating.

Futures orders were reportedly down -10% indicating weak orders from distributors. As Nike shifts more from wholesale sales to the direct to retail market, they are going to face an entirely different set of problems. They announced they were laying off 1,400 employees as part of their consumer direct offense strategy.

Expected earnings Sept 28th.

The earnings are over and the post earnings depression phase should be starting. With everyone else starting their earnings next week, traders will be leaving Nike to find a stock with positive momentum.

Position 7/6/17:

Long Aug $57.50 put @ $1.51, see portfolio graphic for stop loss.

ROST - Ross Stores - Company Profile


No specific news. TheStreet.com published an article today warning that Ross could fall into the $40s or even lower.

Original Trade Description: July 11th.

Ross Stores, Inc., together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. The company's Ross Dress for Less stores sell its products at savings of 20% to 60% off department and specialty store regular prices primarily to middle income households; and dd's DISCOUNTS stores sell its products at savings of 20% to 70% off moderate department and discount store regular prices to customers from households with moderate income. As of March 6, 2017, it operated 1,363 Ross Dress for Less stores in 37 states, the District of Columbia, and Guam; and 198 dd's DISCOUNTS stores in 15 states. Company description from FinViz.com.

Expected earnings August 17th.

They reported Q1 earnings of 82 cents compared to estimates for 79 cents. Revenue of $3.31 billion beat estimates for $4.27 billion. Same store sales rose 3%. Operating margins shrank. The company is planning on operating 90 stores in 2017.

Unfortunately, they guided for the full year for earnings of $3.07 to $3.17 and analysts were expecting $3.15 at the midpoint. The guidance from Ross also includes an extra week in 2017 over 2016 and that means it is even weaker than it seems.

They guided for same store sales of 1-2% and well below the 3% in Q1. They also guided for margins to contract again from 15.2% in Q1 to 13.9%-14.1%. A week later regulators posted criminal charges against a California man that generated $8.2 million in profits on insider trading in Ross shares. The insider was not named. Shares rolled over and are still falling. Three analysts have cut their estimates for Ross since the earnings.

With the retail sector getting hit every day by some store closure notice or analyst downgrade, Ross could continue falling until their earnings report.

Update 7/14/17: Telsey Advisory Group upgraded Ross from market perform to outperform with a $70 price target. Shares spiked $1.60 at the open to stop us out but then gave back all but 34 cents. I am recommending we reload this position using the same option/strike.

Update 7/17/17: The company said they opened 28 new stores in June/July as part of their plans to open 90 stores in 2017. The company currently has 1,384 locations and are planning on 2,500 in the years ahead. That is a lot of additional overhead in a declining retail market.

Position 7/17/17:

Long August $52.50 put @ $.80, see portfolio graphic for stop loss.

Previously closed 7/14: Long August $52.50 put @ $1.04, exit .65, -.39 loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now