Option Investor

Daily Newsletter, Tuesday, 12/19/2017

Table of Contents

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

Market Wrap

Volume Slowdown Begins

by Jim Brown

Click here to email Jim Brown

Volume declined to 6.53 billion shares and the least in the last five days ahead of the holiday weekend.

Market Statistics

Volume will continue to slow as the week progresses and traders pack up their desks and head home for the holidays. With the indexes at record highs and well above established norms, there is no buying opportunity at these levels. Traders are probably hoping for a continued decline so they can establish positions for the Q1 earnings cycle.

The Dow is 4,835 points or 20% above its 100-week average. It has not been that distance away since the dot.com bubble in 2000. I get hate mail whenever I say the market is overbought but I doubt anyone can look at the Dow chart below and come to any other conclusion. The Dow has gained 6,904 points (38.6%) in the 14 months since the election. That is hardly a normal market.

On the economic front, the housing sector continues to surprise. New residential construction for November rose to 1.297 million units on an annualized basis, up from 1.256 million in October. The unseasonably warm weather was credited with the increased activity. Single-family starts rose from 883,000 to 930,000. Multifamily starts declined from 373,000 to 367,000. Single-family permits rose from 850,000 to 862,000 and multifamily declined from 466,000 to 436,000. Starts in the Western region led with a 19% increase. The South rose 11.1% with the Midwest falling -12.9% and the Northeast losing -39.6%.

The current account deficit declined from -$124.4 billion to -$100.6 billion and a 12-quarter low. The goods deficit improved from -$141.7 billion to -$134.4 billion. The investment income balance improved from $40.5 billion to $57.0 billion. The dollar has depreciated making our exports more attractive. That makes goods from American manufacturers more competitive with those from other economies. With the global economy improving, consumers in other nations are buying more from the USA.

After the bell, the API inventories showed a crude oil decline of 5.222 million barrels, to extend the large losing streak to three weeks. Analysts were expecting a decline of -3.5 million barrels. Gasoline inventories rose 2.0 million barrels and roughly in line with estimates. Distillate inventories declined -2.85 million barrels compared to estimates for a -1.33 million barrel decline. Prices rose 20 cents after the report.

The decline in crude inventories should continue for the next two weeks as refiners try to reduce inventories ahead of the property tax deadline on December 31st. Inventories will rise again in January once we are past the tax date.

Wednesday we have existing home sales but they will probably be ignored. The bigger reports are the Philly Fed Survey on Thursday and the final revision of the Q3 GDP. The reports on Friday will definitely be ignored because there will be nobody around to see them.

The earnings for tomorrow include BlackBerry and Best Buy. Thursday has Dow component Nike, Carmax, Finish Line and Accenture.

Toys-R-Us is considering closing a minimum of 100 stores because of weak holiday sales. They could close as many as 200. They operated 879 stores earlier this year. The company is in bankruptcy and closing those stores will be another hit to Mattel (MAT) and Hasbro (HAS). I reported last month that the toy manufacturers are struggling because children are not playing with normal toys as much as before. They are playing video games at earlier ages and phones and tablets can keep them occupied for hours. The toymakers have warned of falling sales and the impact of the bankruptcy. UBS said today that closing the Toys-R-Us stores was likely to benefit Target but would not even move the needle for Walmart.

Darden Restaurants (DRI) reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $1.88 billion rose 14.6% and beat estimates for $1.85 billion. They guided for the full year for earnings of $4.45-$4.53, up from $4.38-$4.50. Analysts were expecting $4.44. Same store sales rose 3.1% and beat estimates for 1.56%. Olive Garden sales rose 3.8% and beat estimates for 2.3%. During the quarter, Darden added 153 Cheddar's Scratch Kitchen restaurants and 28 other net new stores. Darden bought Cheddar's for $780 million. Cheddar's stores each average $4.4 million in revenue and only slightly less than the $4.5 million from Olive Garden. Darden believes they can expand the southern chain nationwide to provide a major boost to overall revenue. They expect Cheddar's to become the number 2 brand in their portfolio. Cheddar's is known for their ribs, onion ring stacks, Spasagna, a lasagna-like brick of spaghetti and their chocolate cake. Shares exploded higher with a $6 gain.

Navistar (NAV) reported earnings of $1.43 that blew away estimates for 65 cents. Revenue of $2.6 billion easily beat estimates for $2.32 billion. They guided for the full year for revenue of $9.0-$9.5 billion compared to $8.7 billion in FY-2017. The company has reduced its inventory of used trucks by half to $200 million. They have worked down the liability from a technology mistake in 2013 to $600 million and half of the original amount. In 2013, Navistar spent a fortune on a new technology to reduce emissions and the technology failed, leaving the company with liabilities and no revenue from that technology. Shares spiked 7% on the earnings.

FactSet Research Systems (FDS) a provider of corporate financial data, reported earnings of $2.04 that beat estimates for $1.98. However, revenue of $329.1 million missed estimates for $331.2 million. They guided for full year 2018 earnings in the range of $8.25-$8.45 with revenue of $1.34-$1.36 billion. Analysts were expecting $1.36 billion and $8.16. FactSet added 65 clients to bring their total to 4,809. Client retention averaged 95%. However, the actual user count declined -250 to 88,600. Shares fell -$17.27 on the news.

After the bell, FedEx (FDX) reported earnings of $3.18 compared to estimates for $2.73. Revenue of $16.3 billion beat estimates for $15.7 billion. The company raised guidance for the full year to $12.70-$13.30 compared to analyst estimates for $12.47. FDX prior guidance was "no more than $12.80" so it appears conditions improved. The company said the tax reform could add $4.40 to $5.50 in earnings in 2018 due primarily from a revaluation of net deferred tax liabilities. They only expect a gain of $.85-$1.00 from a lower tax rate. They plan to use the money to fund pensions, increase their dividend and buyback stock. Shares gained $3 in afterhours.

Micron Technology (MU) reported earnings of $2.45 that beat estimates for $2.20. Revenue of $6.8 billion rose 71.4% and beat estimates for $6.38 billion. Gross margins rose from 50.7% to 55.1%. The company said demand for DRAM and NAND remained strong and they enjoyed a favorable product mix. They guided for Q4 for earnings of $2.51-$2.65 and analysts were expecting $2.04. Revenue guidance was $7.0 billion compared to estimates for $6.08 billion. This was an outstanding quarter and outstanding guidance but shares gained only slightly more than $2 in afterhours. I would expect them to rally further on Wednesday.

Stich Fix (SFIX) reported its first post IPO earnings and the result was not pretty. They reported earnings of 4 cents compared to estimates for 3 cents. Revenue of $295.6 million barely beat estimates for $295 million. They guided for the current quarter for revenue of $287-$294 million, which beat estimates for $287 million. The company said they expect profits to decline as they move into new categories. They said margins were already suffering from higher orders in men's and plus size clothes, due to rising shipping costs and a shortage of available inventory.

The company has 2.4 million customers that pay $20 to receive a box with 5 items. They can ship back anything they do not like and they are charged for what they keep, minus the $20 deposit. They had a 750,000 order waiting list for boxes for plus size women when they IPOed in November. Shares fell about 12% in afterhours.

Red hat (RHT) reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. The company guided for earnings of 81 cents for Q4 with revenue of $758-$763 million. Analysts expected $754.7 million. They also guided for full year earnings of $2.88 and revenue of $2.91 billion. Revenue from application development related and emerging technology subscription revenue rose 44%. Overall subscription revenue rose more than 20%. The CEO said the number of deals over $1 million rose by 30% thanks to strong cross selling. Shares fell $5 in afterhours to $123.51.

Apple (AAPL) was downgraded by Nomura from buy to neutral saying the iPhone X as well as other positives are already baked into the stock price. The analyst said the iPhone x was already into late innings with the rise in average selling price already discounted by analysts. He also felt the boost from services would not be enough to offset the Q1 drag from slowing X sales. Even the expected repatriation is already priced in. The last time Apple received a down was twice in June.

Last week a Cowen analyst said more customers could be opting for cheaper versions of the iPhone rather than putting down more than $1,000 for an X. Cowen said that could be a hit to the average selling price. Several analysts were quick to rebut the Nomura downgrade saying Apple's guidance was strong and the holiday shopping season would be good for sales.

Apple is expected to announce three new phones in September including its biggest screen ever along with an X phone with a regular LCD screen instead of the OLED.

Moffet Nathanson Research warned that the bear case on Facebook was becoming clearer. They said the lack of monetization on the Messenger platform was evidence the ad load was shrinking. They do not believe Facebook can continue to grow by 50% a year. Other analysts said the lack of monetization was a plus because that was a growth opportunity. Facebook has no debt and $38 billion in cash. That gives them a lot of options and they have a lot of new features and projects on the drawing boards. Facebook guided low for the current quarter because of extra expenses they were incurring in fixing some of the existing problems and adding additional levels of security.

Citigroup upgraded Dicks Sporting Goods from neutral to buy saying they were a retail survivor. The analyst raised the price target from $28 to $35. Citi said Dick's had survived drought and desolation in the sector, which has produced multiple bankruptcies and hundreds of store closings. As a survivor, they should benefit from the lack of sporting goods retailers and attract more customers. The analyst called Dick's the Best Buy of the sector. Dick's cancelled guidance in Q3 saying earnings could decline -20%. Citi expects that guidance to be beaten. Also, the recent cold weather across the Midwest and Northeast would be a benefit because winter clothing and winter sports products have higher margins. Shares posted a minor decline after opening higher on the upgrade.



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The S&P gave back 9 points after spiking through uptrend resistance on Monday. There is no reason to believe this is the start of a bigger decline. There is no incentive to selling stocks in 2017 when taxes will be cheaper in 2018. This "should" convince investors to hold what they have currently and plan to restructure their portfolios in January.

This is where the risk comes in. Most investors will want to be invested in companies with high tax rates that will benefit from the tax reform. That is industrials, financials, consumer stocks, etc. Technology stocks have an average tax rate of 24% so their windfall should be significantly less than say a Home Depot at 34%.

If they wait until January to close existing positions they may even be able to buy their new stocks at a discount to today's prices. One investor's trash could be another investor's treasure. If we were to get a downdraft in January, I would expect it to be minor even with the huge gains we have seen in 2017. There is still too much money on the sidelines and too many people waiting on that buying opportunity that never comes.

The S&P is currently 18% above its 100-week average and the widest spread since 1997. It would take a major pullback to put is back within the normal range. That would be around the 2,450 level. On the positive side, the average is moving higher and just holding the existing gains in January could narrow the range somewhat. However, that is a weekly average and it moves very slowly. Eventually, the piper will have to be paid and another cross will appear. That could be a long time in the future.

The Dow posted only a minor decline and remains at the top of its regression channel. This could curb future gains but all we need is for 2-3 Dow stocks to catch fire and we could see another 100-point gain. The winners were lackluster today with HD the biggest gainer with a moderate $1.25 win. The Dow has only had 2 losses in 9 days so today is not likely the start of a new decline. The bulls are running into year-end and Dow 25,000 is still the December target.

The Nasdaq was the weakest link on Tuesday with only one big cap tech stock posting a gain. The uptrend resistance at 7,000 remains strong and could be a challenge to cross. It is that big round number resistance syndrome. Tech stocks have a lot of uncaptured gains for the year and there may be a lot of investors selling their winners to offset their losers for 2017 tax management.

The Russell 2000 is still fighting resistance at 1,550 and today was no different. The small caps should be positive in December but they have been struggling. If that 1,550 level can be broken, it could lift the entire market.

I believe the markets should remain mostly positive for the rest of December. The holidays are normally bullish and there is nothing fundamental on the horizon that should disrupt the pattern.

However, the government funding deadline on Friday is still a potential pothole. Senate leader Mitch McConnell said this afternoon there is "no way" there will be a government shutdown. While I would like to believe him, there are quite a few other lawmakers on both sides that are talking hard-core about forcing a shutdown. Hopefully cooler heads will prevail. I do not care if they kick the can into late January and then have their big fight. The end of year, beginning of January volatility will be over and the market will be in a better position to deal with their temper tantrums.

The trend is still up until it changes. I would continue to hold existing longs but I would not add to them at these market highs ahead of what could be a volatile few weeks.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Testing Our Patience

by Jim Brown

Click here to email Jim Brown

Editors Note:

With only 7 trading days left in 2017, we need to be patient as the year draws to a close. Futures are up +6 on the tax vote and anticipation of the measure becoming law. That means lower taxes in 2018 and no reason for investors to rush to sell in 2017. There may be some tax selling to offset losing positions but it should not be heavy. There is a real risk of a decline in early January. I see no justification to adding new plays just so they can be stopped out 8 trading days from now. With the futures up +6 almost anything we added would receive a bad fill at Wednesday's open. We already have longs that will benefit from continued gains and we have some ETF puts that will benefit from a market decline. There is no reason to add more risk today.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Weakness Returns

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is locked into the two steps forward, one step back trend. The major indexes posted minor declines as analysts started to talk about a possible January correction. The "tax benefits have been pulled forward" crowd are suggesting 2018 gains could be very sluggish in Q1 until companies begin to raise guidance after they study the specific impact to their situation.

I do not believe today's decline was material and sentiment should still be positive for the rest of December.

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

QQQ - Nasdaq 100 ETF
The long put position was entered with a QQQ trade at $157.75.

The short put position was closed 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

AMAT - Applied Materials - Company Profile


No specific news. Most chip stocks were down today.

Original Trade Description: December 4th.

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

Expected earnings Feb 15th.

Wells Fargo initiated coverage on AMAT today with an outperform rating and $65 price target. Chips run the world and with new and faster chip types being announced almost monthly, the chip makers have to continually buy new manufacturing equipment from Applied Materials.

AMAT reported Q3 earnings of 93 cents on revenue of $3.97 billion. Analysts were expecting 91 cents and $3.94 billion. The company guided for the current quarter for earnings of $.94-$1.02 on revenue of $4.0-$4.2 billion.

Flash memory equipment sales surged 38%. Semiconductor revenue rose 14.2%. Sales of equipment to make display screens for phones and TVs rose 50%. Their order backlog rose 32% to $6.03 billion. The CEO said AMAT will see strong double digit growth in 2018 for all their lines of business.

"This is the most exciting time in the history of the electronics industry," said Dickerson. "AI will transform entire industries over the coming years, creating trillions of dollars of economic value, and Applied is uniquely positioned to deliver the innovative materials needed to enable next-generation memory and high-performance computing."

Shares had declined to $50 in the chipwreck over the last week. This is the 100-day average, which has been support since early 2016.

Update 12/7/17: The IBD raised their relative strength rating to 96 and earnings rating to 98. That puts them in the very top of the entire IBD stock universe. That means their relative strength is better than 95% of all stocks and earnings strength better than 97% of all stocks.

Position 12/7/17:

Long Feb $52.50 call @ $3.00, see portfolio graphic for stop loss.

CGNX - Cognex - Company Profile


No specific news. Nice gain in a weak market. Maybe our luck is changing.

Original Trade Description: December 9th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Jan 29th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


No specific news. Minor decline with the sector.

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.

Update 12/7/17: Gilead said it was buying privately-held startup Cell Design Labs for $567 million to boost its CAR-T cancer drug pipeline. Gilead will make an initial payment of $175 million and additional payments of $322 million upon meeting certain milestones. Shares dropped 57 cents on the news.

Update 12/14/17: Down on news their breakthrough cancer treatment Yescarta had only been given to 5 patients despite long waiting lists. The $373,000 treatment is not yet approved by Medicare, Medicaid or any private insurance. There is a long list of people who want to take it but until it is approved for payment, they are out of luck. Numerous candidates on the lists have already died because they could not afford it.

Position 11/8/17:

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

MCK - McKesson - Company Profile


No specific news. Only a minor decline in a weak 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.

Update 12/18/17: The company said CFO James Beer was leaving and would be replaced by Britt Vitalone, a current SVP. They also reaffirmed their full year guidance for earnings of $11.80-$12.50.

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.

PAYC - Paycom - Company Profile


No specific news. Paycom held the gains from Monday.

Original Trade Description: December 16th.

Paycom Software, Inc. provides cloud-based human capital management (HCM) software solution that is delivered as software-as-a-service for small to mid-sized companies in the United States. It provides functionality and data analytics that businesses need to manage the employment life cycle from recruitment to retirement. The company's HCM solution offers a suite of applications in the areas of talent acquisition, including applicant tracking, candidate tracker, background checks, on-boarding, E-Verify, and tax credit service applications; and time and labor management, such as time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting, and geofencing/geotracking applications. Its HCM solution also provides payroll applications comprising payroll and tax management, Paycom Pay, expense management, garnishment management, and GL Concierge applications; and talent management applications that include employee self-service, compensation budgeting, performance management, executive dashboard, and Paycom learning applications. In addition, the company's HCM solution offers HR management applications, which comprise document and task management, government and compliance, benefits administration/benefits to carrier, COBRA administration, personnel action forms, surveys, and affordable care act applications. Paycom Software, Inc. was founded in 1998 and is headquartered in Oklahoma City, Oklahoma.Company description from FinViz.com.

Paycom is the smallest of the payroll, HCM companies with a $5 billion market cap. ADP has $52 billion, PayChex is $25 billion, Workday $14 billion and Ultimate Software $7 billion. However, Paycom has the fastest growth and rising margins.

Paycom is focused on companies with 50-2000 employees. ADP, Workday and PayChex cater to larger companies. Since 2014 Paycom has been growing revenue at an average of 47.7% per year. Their operating margins have risen from 10.4% to 17.9%. For Q3 revenue rose 31% while expenses rose only 16%.

Q3 earnings were 29 cents and much better than the 16 cents analysts expected.

They guided for revenue growth of 28% in Q4 to $111.5-$113.5 million. Adjusted EBITDA in the range of $26-$28 million or +24% growth.

Expected earnings January 30th.

The other companies are too big to grow this fast. Paycom may be the underdog but they are rapidly increasing market share on companies missed by the big processors. Customer service is the number one goal at Paycom and apparently, it is working.

Shares sold off in the Nasdaq sector rotation decline in late November. They are a tech company with a strong chart and that made them a target.

Position 12/18/17:

Long Feb $85 call @ $3.50, see portfolio graphic for stop loss.

PGR - Progressive Corp - Company Profile


No specific news. Still holding at the highs with a minor gain in a weak market.

Original Trade Description: December 11th.

The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com

Expected earnings January 16th.

Despite the hurricanes in Aug/Sep, Progressive reported earnings of 41 cents that rose 13.9% and beat estimates for 30 cents. Premiums written increased by 18% to $7.1 billion. Premiums earnings rose 14% to $6.5 billion. Premiums written benefitted from a 15% rise in prices. Operating revenues rose 15% to $2.1 billion. Investment income rose 20%, fees and other revenue rose 16% and service revenues rose 22%. These are outstanding numbers despite the impact from the hurricanes on auto losses.

At the end of the quarter there were 5.9 million direct auto policies in force and 5.5 million agency auto policies in force, an 11% overall rise.

In early November, they reported premiums written in October totaled $2.758 billion, up 22% from Oct 2016. Total personal policies in force rose 9% to 15.950 million and commercial policies rose 5% to 643,500.

There is no bad news anywhere in their financial disclosures.

Shares have been rising steadily over the last month and Friday was a new high close. Progressive has completely ignored all the recent market volatility.

Update 11/13: Progressive reported results for November. Premiums written rose 20% to $2.022 billion. Premium earned rose 17% to $2.113 billion. Policies in force for autos rose 11%, business policies +20%. It was a very good month for Progressive. Shares closed at a new high.

Position 12/12/17:

Long Feb $55.00 call @ $1.80, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Minor decline with financials weak.

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 reentered 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.

Update 12/13: BMO Capital raised their price target from $80 to $85 saying the sale of the credit business will reduce expenses and increase earnings per share. The sale will free up $1.0 billion in cash for 2018 and $2.5 billion in 2019.

Position 11/30/17:

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

SMH - Semiconductor ETF - ETF Profile


No specific news. The Semiconductor Index was flat after posting two nice gains back to back.

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.

Update 12/12: The industry group, Semi, said at the annual Semicon Japan exposition today that sales of semiconductor manufacturing equipment would rose 35.6% in 2017 to a record high of $55.9 billion. The forecast for 2018 is for a 7.5% rise to $60.1 billion and another record.

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.

TGT - Target Corp - Company Profile


According to UBS, Target could be the winner after Toys-R-Us said it may close a minimum of 100 stores after weak holiday performance. These customers could gravitate to Target instead.

Original Trade Description: December 13th.

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.

TRN - Trinity Industries - Company Profile


No specific news. Shares posted a minor loss.

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.

Update 12/12: Trinity announced a plan to spin off the company's infrastructure related businesses to shareholders. The tax free spin will occur in late 2018. The infrastructure businesses are leaders in their respective sectors with construction, energy and marine markets. Trinity manufacturers highway guard rails, crash cushions and other barriers. It supplies various aggregates including sand, stone, shale, clay, asphalt and steel products for infrastructure projects. Read the description below for the full list.

This will allow Trinity to concentrate on its highly profitable rail business where it manufactures, sells and leases railroad cars.

The company also announced a $500 million share repurchase program.

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


We closed the short side of the put spread at the open. This will give us more options for dealing with future moves and we locked in the $1.28 gain on that side of the spread.

Analysts on stock TV are starting to talk about a potential correction in January. This talk could keep the indexes from moving much higher although Dow 25,000 would still be the sentiment target.

I had considered closing the position but the potential for a negative tax headline, government shutdown, January market crash, etc is too strong to be unprotected. If we were not in this position, I would be adding it now.

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.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.
Net debit $3.45.

QQQ - Nasdaq 100 ETF - ETF Profile


Whenever I put an entry trigger on a position and it is hit, I always kick myself for not just entering the position at the open. Fortunately, the premium only rose 20 cents from the open to our entry point. The Nasdaq posted a decent decline of 31 points and analysts are starting to talk about a correction in January. That could keep a lid on future gains and actually put the idea of selling in January into investor's minds that might not have previously considered it.

Original Trade Description: December 18th.

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq Composite hit 7,000 intraday and came to a dead stop. Less than half the big cap tech stocks made a material contribution. The index has gained 260 points in the last two weeks and the majority of those points were the last two days. The Nasdaq has hit long-term uptrend resistance.

The Nasdaq 100 hit round number resistance at 6,500 and stopped. The $NDX is up roughly 300 points over the same two-weeks.

While there is nothing preventing the indexes from moving higher, they are now well into overbought territory. The lack of participation by half the big cap stocks is troubling. Many investors have large gains in tech stocks after the 1,950 points the index has gained since the election. Since taxes will be lower starting on January 2nd, that gives investors an incentive to hold on to their gains until January. That incentive expired on December 31st.

There have been numerous minor dips along the way but those dips have grown progressively shallower in recent months. The Nasdaq rally may be building to a climax over the next several weeks.

The Nasdaq Composite is 12% over its 50-week average and 24% over its 100-week average. Neither have been touched since July of 2016. These are extreme levels of bullishness.

I am recommending we buy a February put on any weakness in the QQQ. I do not want to jump in front of the moving train but I do want to be short if a derailment occurs. Support is back at $152.

Position 12/19 with a QQQ trade at $157.75
Long Feb $156 put @ $2.40. See portfolio graphic for stop loss.

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