Option Investor

Daily Newsletter, Tuesday, 12/5/2017

Table of Contents

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

Market Wrap

Tax Drag

by Jim Brown

Click here to email Jim Brown

As more details appear on the tax bill, there are more things for the market to dislike.

Market Statistics

The tax bill is growing warts at a rapid pace. We knew about the hidden capital gains tax called FIFO or first in, first out. At the last minute, the Senate added an alternative minimum tax for corporations that will be difficult to calculate and a drag on the real tax cut. There is also the new minimum holding period of three years on investments or the gains will be considered regular income. There are some more glitches but these are bad enough.

If you have 1,000 shares of Apple that you bought half at $75 in 2014 and half at $165 in 2017 and you want to sell half to raise some cash for some other stock. Your sale for tax purposes will be considered the oldest shares. First in, first out. That means you are going to pay taxes on 500 shares at roughly $100 profit per share instead of paying taxes on $10 for the second block of $500 shares. What this does is penalize you for trading. The mutual fund industry pitched a fit and got an exemption from this bill but individuals are going to be stuck with it.

Here is how it could impact the market over the next few weeks. Investors with the problem described above may decide to sell their highest basis shares before year-end even if they do not want to sell them. The tax ramifications for holding them over December 31st are extreme. If the tax bill is passed as written, we could see a surge in selling in the last week of December.

Secondly, extending the minimum holding period for favorable tax treatment to three years is another penalty for trading. This will hit hedge funds and institutional investors as well. They will look at their holdings and determine the tax disadvantages for holding over December 31st and they could dump a lot of stock in late December in order to be taxed under the old rules.

The AMT added by the senate is even worse than the current AMT. It removes deductions for R&D tax credits and adds several onerous new rules.

The major indexes seem to be steadily bleeding points as these facts become known. The prior excitement over getting a tax bill passed is turning into frustration.

The economic reports were neutral. The ISM Nonmanufacturing Index fell from 60.1 to 57.4 for November. The ISM nonmanufacturing has only reached the 60 range four times since the financial crisis. New orders declined from 62.8 to 58.7. Employment slipped from 57.5 to 55.3. Backorders declined from 53.5 to 51.5. Business activity was only slightly lower at 61.4, down from 62.2.

Despite the decline in the headline number, this still represents economic expansion in the services sector, which accounts for 88% of nominal GDP growth. Any number over 50 represents expansion. Of the 16 industries surveyed, 14 reported increased business activity and 2 reported declines. Eleven industries were still hiring, down from 13 in October.

The international trade deficit widened from -$43.5 billion in September to $48.7 billion in October. Exports were $195.9 billion and imports totaled $244.6 billion. Petroleum imports declined $-3.2 billion. This report was ignored.

The Atlanta Fed real time GDPNow forecast for Q4 declined from 3.5% to 3.2% on the drop in the vehicle sales for November as it relates to consumer spending. That lowered the forecast for consumer spending growth from 3.1% to 2.8%.

The API oil inventories for last week saw a drop in crude of -5.481 million barrels. Analysts were expecting a decline of -3.507 million. The decline is related to two factors. The Keystone pipeline was offline for several days to repair a leak. Oil coming from Canada on the Keystone was halted. Secondly, refiners are working as fast as possible to reduce crude inventories before December 31st when they will have to pay property taxes on that oil. This is a seasonal event. Inventories will surge again in January as imports from tankers waiting in the Gulf of Mexico will begin to appear. Late December the tankers go into a parking orbit waiting for January 1st.

Gasoline inventories surged 9.196 million barrels compared to estimates for 1.145 million barrel rise. Distillates rose 4.259 million barrels compared to estimates for a 548,000 barrel build. These numbers confirm the pace at which refiners are operating. Oil prices declined about 25 cents in afterhours. The EIA report on Wednesday is the market mover if the numbers are similar.

The calendar for Wednesday is headlined by the ADP Employment report. Consensus as of Friday was for a gain of 215,000 jobs. Whisper numbers Tuesday evening for a gain of 187,000 jobs. Unless the actual number misses significantly, the report will be ignored.

The government funding deadline for Friday is going to be extended. The House introduced a bill to kick the can down the road until after the vote on tax reform. The two-week funding extension is a clean bill and has no riders. It is expected to be passed by the Senate by Friday. However, the extension is only until December 22nd and the deadline pressure comes right back again. I would strongly expect another extension into January and I am surprised they picked December 22nd since neither the House or Senate will be in session. There is something going on behind the scenes that we are missing.

Stock news was minimal as will be the case for most of December. Autozone (AZO) reported earnings of $9.96 and analysts were expecting $9.78. Revenue of $2.5 billion beat estimates for $2.54 billion. Same store sales rose 2.3%. The company said hurricane impact boosted sales by 50-60 basis points but damage reduced earnings by 7 cents. They repurchased $353 million in stock during the quarter. The store count rose slightly to 6,049. The problem with AZO is the debt and payables. They ended the quarter with payables of $4.326 billion and debt of $4.982 billion. Cash on hand was only $257 million and they had spent $353 million on stock. With nearly $10 billion in debt and only a couple hundred million in cash, they would have been better off to use that $353 million on their payables. Their stockholders equity and working capital are both negative. While the CEO bragged about their good quarter, investors were not that excited and the early gains in the stock were erased to close $50 off its intraday highs.

Homebuilder Toll Brothers (TOL) reported earnings of $1.17 that missed estimates for $1.19. Revenue of $2.03 billion missed estimates for $2.08 billion. They guided for the full year for revenue in the range of $6.24-$7.48 billion. New orders rose 14.5% to 1,979 in Q4 but that was the slowest pace in six quarters. The company guided for lower gross margin because of lower than expected home prices. What?? With prices up 7% nationwide, why are they whining about lower prices? The answer is that the high dollar homebuilder, normally building homes close to $1 million, decided to start a new line of cheaper homes tailored for millennials. This reduced their average gross margin. The average selling price still rose to $836,600 but that was below their own guidance. The number of homes sold rose 9% to 2,424. Shares fell -$3.73 on the report.

Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company is going to restart its dollar menu in January and there will be $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3. Shares rose $2.34 on the upgrade.

President Trump's favorite fast food meal on the campaign trail was two Big Macs, two Fillet-O-Fish and a chocolate shake, which costs about $22 depending on the location. With the White House chefs on call, he still orders McDonalds when he can.

Restoration Hardware Holdings (RH) reported earnings of $1.04 that matched estimates. Revenue of $592.5 million missed estimates for $599 million. They guided for the current quarter for revenue of $655-$680 million. Analysts were expecting $676.9 million. For the full year, they guided for revenue of $2.58-$2.62 billion.

The earnings were up 420% from the year ago quarter. RH said the hurricanes had a 5-cent negative impact on earnings. The company completed its prior share repurchase authorization and bought back 49.5% of the outstanding shares. In 2017, they converted to a membership model and now have approximately 380,000 members and fee income rose 37% YTD. They said the membership model has eliminated the extreme promotional environment and even reduced product returns. Shares fell $8 in afterhours but recovered to close the session flat.

Unmanned aircraft maker AeroVironment (AVAV) reported earnings of 29 cents that beat estimates for 7 cents. Revenue of $73.8 million beat estimates for $62.9 million. They guided for full year earnings of 45-65 cents with revenue of $280-$300 million. Shares spiked $10 in afterhours.

Dave and Busters (PLAY) reported earnings of 29 cents that beat estimates for 23 cents. Revenue of $250 million missed estimates for $255.4 million. The company guided for full year revenue of $1.15 to $1.16 billion. Same store sales declined -1.3%. They plan to open 14 new stores in the current fiscal year. Shares rallied $4.60 in afterhours.

The big earnings on tap for Wednesday are Broadcom (AVGO). Four retailers report including LULU, TLRD, FRED and AEO. None of these should be market movers.

Disney (DIS) and Twenty-First Century Fox (FOXA) are apparently close to a deal that could be announced next week. The number being floated is now $60 billion and would include the studio and television production assets. Fox would sell the National Geographic channel, Star, regional sports networks, movie studios and stakes in Sky and Hulu along with other assets. Fox would retain the news and business news divisions, the broadcast network and Fox sports. Current shareholders would get one share of the new Fox company and shares of Disney in a currently unspecified ratio. The formal deal could be announced as early as next week. Disney shares declined $3 after Monday's $5 gain. Fox shares were flat.

Cascend downgraded Tesla to a sell rating with a $250 price target. The analyst said recent measurement of customer demand had begun to slow. Customers who have not already preordered cannot get deliveries until 2019. This allows the buying urge to fade and customers begin to look at other alternatives.

With Tesla expected to burn through $4.1 billion in cash this year and in serious need of another capital raise, there is trouble ahead. Unless Tesla can begin producing cars significantly faster, customers are going to be cancelling orders. With GM planning on producing 25 models of electric cars by 2020 and Ford announcing 15 models, the market is going to become very competitive very quickly. Tesla has had a free ride for several years and that road is about to become very bumpy.

Another analyst said Tesla is in danger of failing once the competition begins to eat into their sales and profit margins. Consumers are used to buying Ford and Chevrolet cars and once those models hit the showrooms it will become a price war. We know in advance that those companies can make enough cars to meet demand, something Tesla has never been able to accomplish. There is even talk of Tesla and Space X merging to give Tesla added cash and a technology infusion. While I doubt that will happen, it is being discussed.



Don't forget to reward yourself with our 2017 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day


Analysts are starting to release their S&P numbers for the end of 2018 and the outlook is not good. Goldman Sachs is predicting 2,850, BMO Capital 2,950, Wells Fargo 2,700, Citigroup 2,650 and Bank of America 2,800. With the S&P at 2,650 on Monday, that suggests only minor gains in 2018. Most analysts are actually expecting a major decline in 2018 with a rebound to those numbers above.

The growing challenge is the amount of gains pulled forward into 2017 by the impending tax reform. Analysts expect an $8-$10 increase in S&P earnings and 220-270 point increase in the S&P. However, the S&P has gained 200 points over just the last three months and analysts are beginning to wonder how much of that was pulled forward from 2018.

I believe there is a significant risk of a larger than normal decline over the next 60 days. It has been 521 days since a 5% decline and we normally get those twice a year. I heard one analyst say this was the longest period ever but I cannot confirm that.

While the fundamentals remain strong with double-digit earnings, low unemployment and strong economic growth, boats can still sink in a calm sea. We never know in advance what event or headline will cause a market correction and we also know the market does not need any excuse to take profits. The rotation out of the Nasdaq stocks is a prime example. If enough portfolio managers decide to sell stocks on any given day, it can trigger a market event that convinces other managers to sell and a correction is born.

I am worried about the unintended implications of the tax bill and how that will impact the normal December rally.

The S&P peaked at 2,665 at Monday's open and has been declining ever since. Two days is not a big sell off but coming after what could be termed a blow off top, the move is worrisome.

Initial support is around 2,620 and again at 2,600.

The Dow remains very unsupported after an 800 point gain over the last two weeks and 2,200 point gain since late September. The Dow leaders are starting to lose traction and once the momentum fades, the sellers appear.

We could be in just a temporary bout of profit taking but the excitement over the tax reform has faded. The Dow is the most at risk index and the steady decline over the last two days could be the start of a larger pattern.

Resistance remains 24,500 with an ultimate target of 25,000. At this point, a sudden surge to that level over the next couple of weeks would be a very tempting sell the news target.

The Nasdaq tried to fight off the sellers today and was positive most of the day. The index has fallen back to its 30-day average which has been support since August. The break of uptrend support is negative but a break below the 30-day would be worse. The 50-day is 6,673 but that has not been a recent support point.

I had hoped the rotation out of Nasdaq big cap stocks was over but nearly all had only minimal moves today suggesting they were just barely able to hold the flat line.

The Russell 2000 fell just over 1% and was the biggest loser. The index is setting up a support test at 1,512 and a break there targets 1,500. The small caps should be leading us higher in December but it appears they have lost their way.

Bitcoin set a new high this evening at $12,111. The trend is up and there is nothing to stop it. The CME will begin trading bitcoin futures next week and the first week is likely to be a wild ride. There will be volatility!

I am worried about the market. There are cracks appearing everywhere and without another miraculous short squeeze soon, the negative trend could attract additional sellers. The S&P futures were up 3 points earlier and have fallen to -3 on news that President Trump has decided to move the Israeli embassy to Jerusalem. Multiple Arab nations have warned him not to do it and there will be repercussions. This is one more problem the market does not need at the present time.

I would recommend holding off on entering new long positions until the market finds a bottom and we have more input on what the tax bill will look like after the conference committee performs its merge of the two bills. It may look entire different when they are done.

There is always another day to trade if you have money 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

Looking for Trouble

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is unstable and the nonstop trend higher hit a bump in the road. The major indexes are showing signs of investor indecision and increasing volatility. The tax euphoria has turned into tax dread. Futures are negative again and there is no reason to jump into new positions without a positive market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Cracks Appearing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq and Russell posted lower closes and the Dow closed at a 3 day low. There are cracks forming in the market as new concerns are voiced over the tax bill. This could turn into an actual decline.

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

TRN - Trinity Industries
The long call position was entered at the open.

FB - Facebook
The long call position was stopped 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

DXCM - Dexcom Inc - Company Profile


No specific news. Holding the gains.

DXCM will present an update on the company to be presented at 11:AM ET on Dec 14th at the BMO healthcare conference.

Original Trade Description: November 25th

DexCom, Inc., a medical device company, together with its subsidiaries, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company offers its systems for ambulatory use by people with diabetes; and for use by healthcare providers in the hospital for the treatment of patients with and without diabetes. Its products include DexCom G4 PLATINUM system for continuous use by adults with diabetes; DexCom G4 PLATINUM with Share, a remote monitoring system; and DexCom G5 Mobile, a CGM system that directly communicates to a patient's mobile and its data can be integrated with DexCom CLARITY, which is a next generation cloud-based reporting software for personalized, easy-to-understand analysis of trends to improve diabetes management. The company also offers sensor augmented insulin pumps. It has a collaboration and license agreement with Verily Life Sciences LLC to develop a series of next-generation CGM products. The company markets its products directly to endocrinologists, physicians, and diabetes educators. Company description from FinViz.com.

DSCM was slammed for a $22 loss at the open on Sept 28th on news that Abbott Labs had made a glucose monitoring system that did not require the daily pinprick to draw a drop of blood. Shares fell from $67.50 to $44.50 and stayed there for a month. Investors feared diabetics would drop the DexCom monitoring products in a heartbeat and move to Abbott's system.

On November 1st, the company posted better than expected earnings and revenue and the stock began to rise again.

Expected earnings January 31st.

The DexCom CEO gave an interview on CNBC last week and he said the Abbott system will not have a dramatic impact to DexCom sales. He pointed out that they had been competing against the Abbott Libre system in Europe for three years and growth has continued to rise. It wa sup 80% in Q3 alone.

The CEO said the DexCom system does much more than the Abbott system. "Our system connects to phones. We share data with people who watch patients. We offer performance and accuracy that others do not. He said DexCom could release its own blood-free glucose monitoring device by the end of 2018. DexCom is also in a venture with Apple to monitor glucose through the Apple Watch. The data will go straight to the cloud for monitoring and there will be no need to communicate through a daily phone call. The watch will become your monitoring device.

The $20 drop was serious overkill and the stock is rebounding now that investors understand there is no immediate impact and there are new devices on the horizon.

We have to reach out to the March strikes because the February series has not yet been added. With earnings January 31st we need to hold an option dated after the earnings to avoid the rapid decline in premium in pre-dated options.

Position 11/27/17:

Long Mar $60 call @ $3.30, see portfolio graphic for stop loss.

FB - Facebook - Company Profile


Facebook crashed at the open with the Nasdaq to $169.01 and stopped us out at $169.25.

Original Trade Description: November 29th

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.

Facebook fell $8 intraday and came to rest right on uptrend support and the support of the 60-day moving average.

Facebook has been showing good relative strength in the past several weeks and analysts continue to raise the price targets. This is a buying opportunity ahead of window dressing in late December. What fund manager does not want to have FB in his year end portfolio?

The original FB position was stopped out in the Nasdaq crash on Nov 29th and we rentered this new position on Nov 30th.

Update 11/30: MKM Partners boosted their price target from $200 to $240 and the highest on the street. Shares rebounded $2. The analyst said consensus expectations for revenue decline were overstated.

Update 12/2: JPM said FB and Netflix were the two best ideas in tech for 2018. They have a $225 target on FB and $242 on Netflix. Facebook Messenger should get a boost in two weeks as AOL Instant Messenger (AIM) will shut down on Dec 15th.

Update 12/4: Facebook launched a parent controlled messaging app for kids under 13 that looks a lot like Snapchat. Kids cannot add their own friends or delete messages. Only parents can perform those functions. This will allow kids to interact socially yet under adult supervision. It is also a way to addict kids to the Facebook system so they will be daily users in the years ahead.

Position 11/30/17:

Closed 12/5: Long Feb $180 call @ $8.00, exit $5.50, -2.50 loss.
Closed 12/5: Short Feb $195 call @ $2.55, exit $1.75, +.70 gain.
Net loss $1.80.

GILD - Gilead Sciences - Company Profile


No specific news. Gilead should benefit from the passage of the tax bill. They have $32 billion in cash trapped offshore and the lower repatriation tax would allow them to bring it back and put it to work.

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.

Update 11/30/17: Maxim Group upgraded Gilead from hold to buy with a $94 price target. Gilead closed at $75 giving it plenty of room to run.

Position 11/8/17:

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

MCK - McKesson - Company Profile


No specific news. Shares retraced $2 of the nearly $7 gain on Monday.

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.

PYPL - PayPal - Company Profile


No specific news. Shares holding at support at $70.

Original Trade Description: November 29th

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.

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.

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.

Paypal closed exactly on horizontal support and the 30-day average, which has been support since February. The company is more of a bank than a tech stocks and should benefit from any further rotation into banks.

The original PYPL position was stopped out in the Nasdaq crash on Nov 29th and we rentered this new position on Nov 30th.

Update 12/2: Keybanc believes the Venmo payment app is going to be a breakout hit in 2018 and raised his price target for Paypal from $85 to $90. In a recent survey of 500 consumers, Venmo was the preferred payment option for 76% of respondents. Paypal is forecasting $75 billion in Venmo payments in 2018 and they get an estimated 4 cent EPS boost for every $10 billion.

Position 11/30/17:

Long Feb $75 call @ $3.75, see portfolio graphic for stop loss.

SMH - Semiconductor ETF - ETF Profile


Nasdaq gave up the early gains but the chip sector was flat. That is an improvement.

Original Trade Description: December 2nd.

VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. The index seeks to track the most liquid companies in the industry based on market capitalization and trading volume. Industry Leaders: Index methodology favors the largest companies in the industry. Global Scope: Portfolio may include both domestic and U.S. listed foreign companies allowing for enhanced industry representation.

The semiconductor sector leads the Nasdaq because chips affect every tech product and service. The semiconductor sector was down -8% at the low on Friday in only four days. The decline stopped at the 50-day average, which has been support several times over the last year.

If the Nasdaq is going to move higher the chip sector will lead it.

Position 12/4/17:

Long Feb $100 call @ $3.50, see portfolio graphic for stop loss.
Short Feb $105 call @ $1.30, see portfolio graphic for stop loss.
Net debit $2.20.

TRN - Trinity Industries - Company Profile


No specific news. Minor gain and another new 52-week high in a weak market.

Original Trade Description: December 4th.

Trinity Industries, Inc. provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and tank cars, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2016, this segment had a fleet of 85,110 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.

More than 11,500 January $35 calls traded on Monday against an open interest of only 325. The excitement was generated by activist shareholder ValueAct Holdings, which has acquired 1.3 million shares since October and now owns 18.595 million and more than 12% of the company. Their last purchase was 43,000 shares on November 16th.

In October, the courts reversed a $663 million judgment against Trinity. The claim was for fraud after the company changed its formula for the steel in highway guardrails in 2005 and did not tell the Federal highway system. Billions of dollars of these rails have been installed around the country and after extensive testing the government found nothing wrong but complained anyway. A Texas court in 2015 awarded the judgment and Trinity appealed. The appeals court wrote a 42-page opinion tossing the case and reversing the judgment.

Earnings estimates for Trinity for Q4 have risen 31 cents to 42 cents per share over the last two months. That is a 300% rise. For the full year estimates have risen from $1.25 to $1.44.

Earnings January 24th.

Shares closed at a new 52-week high on Monday and appear destined to make higher highs. That massive amount of option volume at the money at $1.25-$1.50 per share represents $1.6 million in premium at an average of $1.40 per share. I am recommending we follow this trade only buy a higher strike.

Position 12/5/17:

Long Jan $37 call @ $1.20, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The Dow changed its trend and actually had a down day. With new headlines about negative tax consequences, this could be the start of a decline.

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.

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