Option Investor

Daily Newsletter, Monday, 11/20/2017

Table of Contents

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

Market Wrap

Resilient Market Shakes Off Politics

by Thomas Hughes

Click here to email Thomas Hughes


Global markets creep higher amid signs of change. Two new threats to the global status quo have emerged; Angela Merkel was not able to form a coalition and the Saudi succession could happen as soon as next week. While neither is likely to reverse the markets both will affect sentiment and possibly induce volatility. Add to this the already present possibility of US tax reform and there is a lot for traders to keep an eye on going into the holiday weekend.

Asian indices were mixed in today's action, holding steady near break even with a near even split between gainers and losers. The Shang Hai Composite led with a gain near 0.30%, Japan lagged with a loss of-0.60% as traders look west at possible trouble in Europe and the eventuality of tax reform in the US. In Europe markets were rattle by news Angela Merkel was not able to form a coalition leaving her grip on Germany tenuous at best. Equities were able to move higher, led by the DAX +0.50%, as traders chose to focus on economics and earnings.

Market Statistics

Futures trading was a little wobbly this morning but not too bad. Early indications had the major indices down less than -0.25%, as the morning wore on those numbers crept slowly higher until turning positive just before the opening bell. The open was a bit volatile but trading held in positive terrritory until 10AM when surprisingly good Leading Indicators helped them move firmly into the green. Trading was positive and moved higher through the day but it was not strong. The SPX was up 0.20% at 2:35 and near the high of the day. Trading remained positive for the rest of the day leaving the indices near the middle of their daily ranges at the close of the session.

Economic Calendar

The Economy

There was not a lot of economic data today but what we got was really good. Leading indicators jumped 1.2% in October on top of an upward revision to September. September had been a negative 0.2%, it is now +0.10%. Today's read is more than double the expectations and the largest gain since before the housing bubble burst. The coincident and lagging indicators both increased as well, 0.2% and 0.3% respectively. Economists at the Conference Board say the index points to continued expansion into the end of the year and next year. I say it looks like a period of increased and expanding growth could be upon us.

Moody's Survey of Business Confidence jumped 2.2% in the last week and is now at a 2 month high. Mr. Zandi says that business confidence has firmed in the last week but still low compared to the post election high. Sentiment if strongest in the US, followed by Asia, Europe and South American where political unrest is still stifling economics.

With 95% of the S&P 500 reporting the blended rate of earnings growth has crept up a tenth to 6.2%. This week there is another 3% expected to report. Of those who have reported 74% have beaten EPS and 64% have beaten revenue expectations, both figures above average. In terms of sector there are 7 showing growth versus an expected 6 at the beginning of the cycle. Growth is led by the energy sector which is expected to lead growth into the next few quarters.

Looking forward growth is expected to remain in the forecast and that growth is strong. This week the estimates held steady on a quarterly basis while full year 2017 ticked higher by a tenth. Fourth quarter 2017 is expected to grow earnings 10.0%. First quarter 2018 is expected to grow earnings 10.5%. Second quarter 2018 is expected to grow earnings 10.1%. Second half 2018 is expected to see growth expand above 12%. Full year 2018 is expected to come in around 11.1%. If trends hold up estimates for each of the forward quarters is likely to fall as we approach the onset of each reporting cycle.

The Dollar Index

The Dollar Index got a nice little boost from today's data. The leading indicators helped reinforce current economic outlook and FOMC expectations which supported the dollar if not strengthened it. Offsetting this is increased geopolitical risk but it appears to be the lesser force at this time. The DXY gained more than 0.50% in a move confirming the $93.50 support line and setting a new 1 week high. It also takes the index back above the short term moving average and puts it in position to move higher. Next resistance is just above today's close, near $94.15, a break of which would be bullish. The FOMC meeting could strengthen the dollar significantly, if the other world central banks do not do anything to offset that strength. There isn't much expectation of that happening but the data has been a bit better than expected lately, especially in the EU, and could lead to a firmer outlook for the EUR.

The Gold Index

Spot gold prices took a dive today, falling more than -1.5% from Friday's high. The comes on a firming dollar and an apparent lack of concern over the myriad geopolitical concerns facing the market today. Spot gold has now confirmed resistance above $1,290 and near $1,300, settling below $1,280 with today's action. This may lead to further downside with targets near $1,260 although range bound trading is likely to prevail until the next FOMC meeting.

The Gold Miners ETF GDX fell a full percent in today's action and is now back at the $22.50 support line. The ETF is winding up between the support line and the moving averages with a likely focus on the FOMC meeting. In the near term world headlines will drive day to day moves, longer term FOMC interest rates and strong dollar could push gold prices lower and take the mining complex down with it. A break below $22.50 would be bearish with targets near $22 and $21. A bounce would be bullish with targets near $23 and $24.

The Oil Index

Oil prices fell today on caution ahead of the OPEC meeting in Vienna later this month. The cartel is expected to extend its production cap and, hopefully, help to tighten the oil markets. This hope is offset by signs of currently high production and ample supply. The Saudi succession news, that Prince Mohamad Bin Salman would take control of the country next week, did not seem to affect oil prices. WTI shed -0.80% to trade near $56.25.

The Oil Index shed a half percent in today's action but is relatively steady for the past 4 days. The index is sitting on support at 1230 on last week's retreat in oil prices and looks like it may continue to consolidate at this level. The indicators are both bearish and suggest a further test of support but neither indicate reversal at this time. Support is also consistent with the 30 day moving average so may be strong. A bounce from this level would be bullish and trend following, a break below it would be bearish. Considering the high price of oil and forward earnings outlook I remain bullish on the sector.

In The News, Story Stocks and Earnings

ATT and Time Warner were moving on rumors the DOJ was going to announce an anti-trust decision about their proposed merger/takeover. The DOJ is apparently set to sue ATT to prevent such a merger and that was confirmed in the after hours. Both ATT and TWX came out in opposition to the move claiming it's not different than other mergers within the sector. ATT moved up on the news but only slightly and remains within recent ranges. Time Warner fell more than -1% and looks perilously close to falling down to long term lows. Support is near $86, a break below could take TWX down to $80 or $75 in the next few weeks.

Urban Outfitters reported after the bell and beat on the top and bottom lines. The hip retailer of urban survival gear reported revenue grew 3.5% YOY with EPS roughly 25% better than expected. The gains are driven by a 1% increase in comp store sales and an 8.7% increase in wholesale revenue. Ex-hurricane impact net comparable sales are up 2% and a company record. Shares of the stock gained more than 5% in after hours trading.

The VIX is falling fast after spiking in the last week. This spike came in tandem with a test of support during OPEX week that was driven by earnings cycle rotation, economic data and geopolitical issues. The index is now retreating from that peak and has fallen below both moving averages. The indicators have rolled over in line with the prevailing trend and are consistent with lower fear levels. Based on all this it looks like the minor dip to support we saw in the SPX may be all we get for now.

The Indices

The indices tried to push lower in the premarket but the bulls wouldn't have it. They kept prices hovering at break even and to the positive side of break even all day through the open session. Price action was not strong but it is consistent with ongoing consolidation efforts within the market. The day's leader is the Dow Jones Transportation Average with a gain of 0.40%. The transports created a small green bodied candle to the side of Friday's candle and sitting on the long term moving average. Today's action also close above support at a previous all time high and a long term up trend line. The indicators remain weak but are rolling over and consistent with support at this level. A bounce from here would be bullish and confirm the long term trend.

The Dow Jones Industrial Average made the second largest gain in today's session, 0.30%. The blue chips created a small green bodied candle to the side of Friday's candle and well within the near term consolidation range. The indicators remain weak but are showing signs of support at this level, a move up from which would be bullish and trend following. Resistance is at the current all time high, a move above there could go to 24,000.

The S&P 500 comes in third with a gain of 0.11%. The broad market created a small bodied green candle to the side of Friday's candle and within the near term consolidation range. The indicators remain weak but do show signs of support at this level and are consistent with consolidation within this range. A continued move higher would be bullish but face resistance at the current all time high. A break above there would be bullish with target at 2,660 in the near term.

The NASDAQ Composite brings up the rear with a gain of 0.11%. The tech heavy index created a small doji like spinning top candle just below the current all time high and to the side of Friday's candle. Price action is at the top of a near term consolidation range and looks bullish. The indicators are still a bit weak but showing signs of support at this level, consistent with last week's bounce from the short term moving average. The current bounce is trend following and bullish but faces resistance at the all time high. A break to new all time highs would confirm upward continuation with a near term target at 7,000.

This week is going to be a full one with Thanksgiving in the mix. This means a holiday shortened week on top of all the market has to contend with. The good news is that price action in the broad market remains bullish and the VIX suggests whatever correction was due to come has come and gone. That being said there is still reason to be careful, it's a long time until the next earnings cycle. Between then and now is Black Friday, Cyber Monday, the entire holiday season, a round of central bank meetings, myriad data points and a lot of politics. I remain bullish for the near and long term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Internet Provider

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are companies that provide internet access besides AT&T, Verizon and Comcast. Cogent is one of those companies.


CCOI - Cogent Communications - Company Profile

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access and Internet protocol communications services primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations in North America, Europe, and Asia. The company offers on-net Internet access services to bandwidth-intensive users, such as universities, other Internet service providers, telephone companies, cable television companies, Web hosting companies, content delivery network companies, and commercial content and application service providers; and to corporate customers located in multi-tenant office buildings, including law firms, financial services firms, advertising and marketing firms, and other professional services businesses. It also provides its on-net services in carrier-neutral data centers, Cogent controlled data centers, and single-tenant office buildings. In addition, the company offers off-net services to businesses that are connected to its network primarily by means of 'last mile' access service lines obtained from other carriers primarily in the form of metropolitan Ethernet circuits. Further, it provides Internet connectivity to customers that are not located in buildings directly connected to the company's network, as well as offers voice services. The company operates 52 data centers. Company description from FinViz.com.

Cogent missed on earnings in early November and shares fell 20% in the days that followed. They reported earnings of 8 cents and analysts expected 14 cents. Revenue of $122 million also missed estimates for $123.6 million. Revenue was up 8% over the year ago quarter and 2.7% over Q2. Cash flow from operations rose 26.1% to $28.8 million. Total customer connections rose 16.2% to 69,417.

Expected earnings Feb 1st.

One of their biggest plusses is the number of buildings where they offer internet service to all tenants. This is stable income and the ongoing costs are minimal. Once the building is wired all the material costs are over. Their connected buildings rose 34% for the quarter.

The increased their dividend by 2 cents to 48 cents payable Dec 4th to holders on the 17th. We are past the ex-dividend date.

Shares traded sideways for two weeks after the post earnings drop. They started to tick up on Thr/Fri and surged $1.55 today. The post earnings depression appears to be over.

Buy Apr $50 call, currently $3.10, initial stop loss $43.85.


No New Bearish Plays

In Play Updates and Reviews

Resistance Holding

by Jim Brown

Click here to email Jim Brown

Editors Note:

The first day of Thanksgiving week posted a gain but resistance held. Thanksgiving week is normally bullish and Monday is now in the books with a gain. However, Dow resistance at 23,450 held almost to the penny and S&P resistance at 2583-2584 was a dead stop for that index as well. The Nasdaq regained 8 of the 10 points lost on Friday and finished only 4 points from a new high. The big cap techs were evenly mixed between advancers and decliners.

I am leaving most of the stop losses wider than normal in hopes we will not be stopped if the market really does take a dive.

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

FL - Foot Locker
The long put 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

COST - Costco - Company Profile


No specific news. New 5-month closing high.

Original Trade Description: October 14th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Update 10/20: Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member.

Update 11/2: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.

FB - Facebook - Company Profile


No specific news. No material movement.

Original Trade Description: November 13th

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. As of December 31, 2016, it had approximately 1.23 billion daily active users. Facebook, Inc. was founded in 2004 and is headquartered in Menlo Park, California. Company description from FinViz.com.

Everyone should know this story. There is no need to go into lengthy detail on this tech giant. They posted blow out earnings and spiked from $170 to $183. Shares have traded sideways to down for the last two weeks but they have quit declining with three consecutive days at $178.

Analysts are targeting well over $200 because Facebook is printing money. Their growth is outstanding and they still have numerous web properties they have not yet monetized. They are launching Facebook TV, original content, the list of new opportunities is endless.

RBC Capital raised their price target from $190 to $230 to match Mizuho. Monnes Crespi Hardt is $210, Aegis Capital $215, Needham $215, etc. There is plenty of upside from here. Facebook is the largest earnings grower in the space.

They have eradicated Snapchat. Apple reported that Snapchat is no longer in the top 10 downloads from the Apple store.

I believe FB is about to break out of its post earnings depression phase and begin a new move higher. The option premiums are very high so I am recommending a February spread to capture inflated option premiums ahead of earnings.

Update 11/17/17: Facebook launched Facebook Creator, a video service to offer social media influencers a means to foster communities around their content. The new Creator app provides video creators exclusive tools such as a Live Creative Kit for adding intros and outros to broadcasts, a unified inbox of Facebook and Instagram comments and Messenger chats, cross-posting to Twitter and expansive analytics.

Position 11/14/17:

Long Feb $185 call @ $6.33, see portfolio graphic for stop loss.
Short Feb $200 call @ $2.30, see portfolio graphic for stop loss.
Net debit $4.03.

GILD - Gilead Sciences - Company Profile


No specific news. Shares holding over prior support.

Original Trade Description: November 7th

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Update 11/8/17: Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.

MCK - McKesson - Company Profile


Shares fell sharply after Morgan Stanley said McKesson and Cardinal Health had the most to lose if Amazon entered the drug market.

Original Trade Description: November 15th

McKesson Corporation provides pharmaceuticals and medical supplies in the United States and internationally. The company operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes branded and generic pharmaceutical drugs, and other healthcare-related products; and provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers; and medical-surgical supply distribution, logistics, and other services to healthcare providers. In addition, this segment operates retail pharmacy chains in Europe and Canada, as well as supports independent pharmacy networks in North America and Europe; and supplies integrated pharmacy management systems, automated dispensing systems, and related services to retail, outpatient, central fill, specialty, and mail order pharmacies. This segment serves retail national accounts, including national and regional chains, food/drug combinations, mail order pharmacies, and mass merchandisers; and institutional healthcare providers, such as hospitals, health systems, integrated delivery networks, and long-term care providers, as well as offers its services to pharmaceutical manufacturers. The McKesson Technology Solutions segment provides clinical, financial, and supply chain management solutions to healthcare organizations. McKesson Corporation was founded in 1833 and is headquartered in San Francisco, California. Company description from FinViz.com.

Earnings Jan 25th.

McKesson reported earnings of $3.28 that beat estimates for $2.80. Revenue of $52.06 billion beat estimates for $51.73 billion. So far, so good. However, they lowered 2018 guidance from $7.10-$9.00 to $4.80-$6.90. There were multiple reasons for the lowered guidance and none of them were sales related.

Amortization of acquisition related intangibles of $2.40-$2.70. Acquisition related expenses and adjustments of $.90-$1.10. Inventory related charges for LIFO adjustments of up to 20 cents. Restructuring charges of $1.10 to $1.40. "Other" adjustments of $1.40-$1.60. Given all those charges it is amazing they had any earnings left.

However, the line everyone overlooked was the guidance for "adjusted" earnings without those charges and that was $11.80-$12.50 for 2018. If you put a market PE of 18 on earnings of $12, you get a $216 share price. MCK shares were $138 today.

Shares have been holding over support at $135 for three weeks and suddenly rebounded $2.69 today in a very weak market. This relative strength should protect us against a further market decline.

Options are expensive so you can use the optional short call to make it a spread.

Position 11/16:

Long Feb $145 call @ $4.90, see portfolio graphic for stop loss.
OPTIONAL: Short Feb $160 call @ $1.59, see portfolio graphic for stop loss.

MDCO - Medicines Co - Company Profile


No specific news. No material movement.

Original Trade Description: November 8th

The Medicines Company, a biopharmaceutical company, provides medicines for patients in acute and intensive care hospitals worldwide. The company markets Angiomax, an intravenous direct thrombin inhibitor used as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, and for patients undergoing percutaneous coronary intervention; Ionsys, a fentanyl iontophoretic transdermal system for the short term management of acute postoperative pain for adults requiring opioid analgesia in the hospital. It also markets Minocin IV, an intravenous formulation of a tetracycline-class antibiotic used for the treatment of infections due to susceptible strains of designated gram-negative bacteria; and Orbactiv, an intravenous antibiotic used for the treatment of adult patients with acute bacterial skin and skin structure infections, or caused or suspected to be caused by susceptible isolates of designated gram-positive microorganisms. The company's approved products include Adenosine, Amiodarone, Esmolol, and Milrinone for acute cardiovascular; Azithromycin and Clindamycin for serious infectious disease; and Haloperidol, Midazolam, Ondansetron, and Rocuronium for surgery and perioperative treatment. Its research and development stage products comprise Carbavance, an antibiotic agent that has completed Phase III development stage for the treatment of hospitalized patients with serious gram-negative bacterial infections; Inclisiran, a synthesis inhibitor for the potential treatment of hypercholesterolemia; and MDCO-700, an intravenous anesthetic agent developed for moderate or deep sedation and general anesthesia in patients undergoing diagnostic or therapeutic procedures. The Medicines Company has a collaboration agreement with Alnylam Pharmaceuticals, Inc.; SciClone Pharmaceuticals; and Symbio Pharmaceuticals Limited. Company description from FinViz.com.

Earnings January 25th.

MDCO reported a loss of $1.19 that beat estimates for a loss of $1.23. However, revenue of $16.9 million missed estimates for $22.9 million.

The company announced the layoff of 85% of its workforce from 410 workers to only 60. As part of the restructuring the company is divesting its infectious disease business by the end of 2017. The revenue from the divestiture should allow the company to "aggressively" move its drug candidate through late stage clinical development. The drug, inclisiran is part of a new class of cholesterol lowering therapies called PCSK9 inhibitors. The phase three trial started the first week of November. MDCO is partnering with Alnylam (ALNY) on the trial. There are 1,500 in the trial at 100 clinical sites in eight countries. This is only one of four concurrent trials covering nearly 3,500 patients. The initial trials were very positive.

The stock declined to $28 on the dramatic layoffs and traded sideways for two weeks. A rebound has begun and options are cheap.

Update 11/9: Cardiologist Milton Packer is already pounding the table on MDCO's PCSK9 drug and it is still a couple years away from sales. He said it has the potential to be better than Amgen's Repatha and only needs to be dosed twice a year rather than twice monthly. He said it will also be significantly cheaper than the $14,000 a year for Repatha.

Position 11/9/17:

Long Jan $32 call @ $2.00, see portfolio graphic for stop loss.

MU - Micron Technology - Company Profile


No specific news. Earnings date announced as Dec 19th. Nice $1.48 gain.

Original Trade Description: November 11th

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Some analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q3, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, they guided for earnings of $2.09-$2.23 on revenue of $6.10-$6.50 billion. Analysts were expecting $2.14 in earnings.

Despite the strong earnings and forecasts, the company trades at a PE of 9.5 when the S&P is trading at 18.2. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. On Oct 31st, they spiked again to $45 after Toshiba said DRAM and NAND memory would remain in high demand and tight supply through 2018.

On October 10th, they announced a $1 billion secondary offering and shares dipped for several days while the offering was priced and completed. This added 25 million shares to the float with 1.14 billion shares outstanding.

This was a great deal. They are using the proceeds to help fund the retirement of $2.25 billion in debt priced at 7.5% and 5.5% interest. This will reduce their costs and eliminate those debt service payments. They raised about $1.2 billion after the offering was upsized and the rest of the funds for debt retirement will come out of cash on hand.

Summit Redstone said buy because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Credit Suisse reiterated an outperform rating and $50 target. Susquehanna has a $50 target and Evercore ISI has a $50 target. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Stifel has a $60 target. Needham's, Rajvinda Gill has a price target of $76.

UBS analyst Stephen Chin says he expects Micron's profits to rise 50% in 2018 to $7.50 per share. If you put any kind of market multiple on those earnings, the stock should double.

Shares drifted lower from the Halloween spike but rebounded on Friday back to the highs. There are no sellers in Micron.

Update 11/13: Micron announced a new 32gb NVDIMM memory that is twice as large as current chips on the market. This is non volatile DIMM that retains data in memory next to the processor to speed up processing of large datasets. Shares closed at a new high.

Position 11/13:

Long Jan $46 call @ $2.95, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Shares gave back another $.37 after the $4.27 gain on Thursday.

Original Trade Description: October 25th.

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.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

PayPal just launched domestic payment services in India with 1.324 billion people.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Update 11/16/17: Paypal signed a deal to sell $5.8 billion in its credit card portfolio to Synchrony Financial. The company said that would free up cash for acquisitions and expansion. The company raised its revenue forecast to $3.64-$3.70 billion for the current quarter. They raised earnings guidance from 37-39 cents to 52-59 cents.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss

STX - Seagate Technology - Company Profile


No specific news. New 5-month high close.

Original Trade Description: November 6th

Seagate Technology plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company manufactures and distributes hard disk drives, solid state drives and their related controllers, solid state hybrid drives, and storage subsystems. Its products are used in enterprise servers and storage systems applications; client compute applications, primarily for desktop and mobile computing; and client non-compute applications, including various end user devices, such as portable external storage systems, surveillance systems, network-attached storage, digital video recorders, and gaming consoles. The company offers external backup storage solutions under the Backup Plus and Expansion product lines, as well as under the Maxtor and LaCie brand names available in capacities up to 120 terabytes. It sells its products primarily to original equipment manufacturers, distributors, and retailers. Company description from FinViz.com.

Earnings January 22nd.

Seagate posted earnings of 96 cents that beat estimates for 86 cents. Revenue of $2.63 billion beat estimates for $2.53 billion despite a 6% decline. The declared a quarterly dividend of 63 cents payable January 3rd to holders on Dec 20th. During the quarter they returned $350 million to shareholders through dividends and stock repurchases. Cash on hand was $2.3 billion.

The company said demand was increasing as the move to cloud storage was creating the need for massive amounts of data bandwidth, storage, manipulation and retrieval. The average storage per drive shipped was 1.7 terabytes with the average selling price $64 per drive. Hard drive storage is a commodity business where existing technology is competing on a byte per dollar basis and new technology is the only way to expand ASPs. Seagate is progressing in that battle with larger and larger drives that operate at faster speeds and last longer between failures. With many businesses moving to SSD storage, Western Digital has the lead there because of its partnership with Toshiba. However, Seagate just signed on to the consortium that is buying the other half of the Toshiba memory business that WDC does not own. This will enable Seagate to acquire memory for the lowest prices possible and compete with WDC in the SSD arena.

Seagate just announced AI powered hard drives for video monitoring.

Seagate shares spiked from $35 to $40 on the earnings. They declined back to $36 where they found support and it appears a rebound has begun. Shares were already trending higher before the earnings and this could be an extension of that trend.

Position 11/7/17:

Long Jan $39 call @ $1.14, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


Minor rebound but faded in the afternoon. No conviction in either direction.

Original Trade Description: November 16th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Short March $210 put @ $1.71, see portfolio graphic for stop loss.
Net debit $3.45.

FL - Foot Locker - Company Profile


No specific news. Shares spiked at the open to stop right at resistance. There was probably some left over short covering from Friday. Shares ended with a minor decline.

Original Trade Description: November 18th.

Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of April 29, 2017, this segment operated 3,354 stores in 23 countries in North America, Europe, Australia, and New Zealand. The Direct-to-Customers segment sells athletic footwear, apparel, equipment, and team licensed merchandise for high school and other athletes through Internet and mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com. In addition, the company had 62 franchised Foot Locker stores in the Middle East and South Korea, as well as 15 franchised Runners Point stores in Germany. Foot Locker, Inc. was founded in 1879 and is headquartered in New York, New York. Company description from FinViz.com.

On Friday, Foot Locker (FL) reported earnings of 87 cents that beat estimates for 80 cents. Revenue of $1.87 billion beat estimates for $1.84 billion. Same store sales fell -3.7%, up from the -4% to -5% expected. Shares rose only slightly until the company said they were expanding their marketing relationship with Nike (NKE) to include a pop-up store called Sneakeasy NYC that will open on Nov 22nd. The store will only be open one week and will feature Nike and Jordan products. Foot Locker said they were now taking reservations on the Special Air Force-1 priced at $160.

Foot Locker said it was hiring new employees with Nike training who will serve as full-time "Nike Pro Athletes" and "Nike Pro Leads." They are going all out to bring awareness to the Nike brand and try to move some of those high priced shoes. For Q4 Foot Locker is expecting same store sales to decline 2% to 4% and slightly better than prior guidance of -3% to -4%. Earnings are expected to decline 15% to 25% to $1.03-$1.16 and below analyst estimates for $1.18.

Shares exploded higher on the less bad results and the new Nike marketing program. I am surprised the Nike news overpowered the negative same store sales and 15% to 25% drop in earnings guidance.

Post earnings spikes rarely continue higher and in the cash of Foot Locker when the fundamentals are so bad, you have to believe that 28% short squeeze on Friday is going to fail. Seriously, a 28% gain on guidance for earnings to decline 15% to 25% for Q4? That is ridiculous.

Position 11/20/17:

Long Feb $38 put @ $2.05, see portfolio graphic for stop loss.

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