Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/16/2018

Table of Contents

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

Market Wrap

Oops!

by Jim Brown

Click here to email Jim Brown

The markets tripped after opening at news highs and performed an embarrassing face plant.

Market Statistics

The Dow gapped open this morning to 26,086 (+282 points) and almost 100 points over the 26,000 level. That excitement lasted until about 10:00 when sellers appeared. The index fell -383 points from its intraday high to the intraday low but finally found some traction to close almost flat. That was a whopping -1.5% decline intraday. The Nasdaq fell -107 from its high. The Dow Transports fell -253 points before rebounding slightly to close with a -146 loss. The Biotech Index fell -151 points before rebounding to close down -98. It was not a good day in the market but it could have been worse. The Dow almost rebounded to positive territory and damage to the big cap indexes at the close was minimal.


Boeing was the biggest gainer at the open with an $11.52 spike that added 76 Dow points. When Boeing rolled over to drop -$16.40 from its highs it erased -108 Dow points. I have remarked several times that once Boeing's rocket ride ends, the Dow is going to pay the price.


Helping to lift the Dow at the open was earnings from UnitedHealth (UNH) and Citigroup (C). UNH reported earnings of $2.59 ($3.62 billion) compared to estimates for $2.50. Revenue of $52.06 billion beat estimates for $51.52 billion. For the full year of 2018, UNH guided for earnings of $12.30-$12.60. That is up from prior guidance of $10.55-$10.85. Analysts were expecting $11.47 for 2018. In addition to the regular earnings above, they posted a $1.22 gain related to an adjustment of their net tax-deferred liability as a result of tax reform. The company projected cash flow from operations of $15.0-$15.5 billion.

Total enrollment rose from 48.59 million to 49.05 million. Commercial policy enrollment rose from 29.87 million to 30.58 million. Medicaid and Medicare enrollment rose from 13.79 million to 15.58 million. The company's effective tax rate over the past five quarters was 40% according to Morgan Stanley. MS is projecting an earnings increase in 2018 of $1.80 per share as the result of taxes. UNH has beaten earnings for nine consecutive quarters.


Citigroup (C) reported adjusted earnings of $1.28 that beat estimates for $1.19. Revenue rose 1% to $17.3 billion. GAAP results were a loss of $7.15 because of a $19 billion charge for deferred taxes under the new tax reform plan. Citi had previously estimated it at $20 billion. They also took a $3 billion charge for foreign earnings it will repatriate to the US. Even after the charges, Citi will have $21 billion in tax credits remaining on its balance sheet. They expect their effective tax rate in 2018 to be 25% and then decline in 2019.

If you exclude all of those non-cash numbers Citi earned $3.7 billion in Q4. Because of the lower tax rate, they are still on plan to return $60 billion to shareholders over the next three years.

Shares were up slightly after the report. Citi is not an investor favorite but the stock has been rising steadily.


Comerica (CMA) reported earnings of $1.28 that rose 28% and beat estimates for $1.21. Their net interest income rose 19.8% to $545 million. They took a non-cash charge of $107 million to adjust their deferred taxes under the new law. Revenue of $830 million beat estimates for $819.6 million.


After the bell, Boeing and Adient (ADNT) announced a joint venture to build airplane seats. Boeing said passenger seats have been a persistent challenge for customers through the years and they were partnering with Adient to resolve these problems and help address constraints in the market. The seats will be available for new planes as well as retrofit into older planes. Adient is primarily a seat maker for automobiles. The joint venture plant will be located in Frankfort Germany. Adient will have 50.1% stake and Boeing 49.9%. Adient shares were highly volatile and closed down $2 in afterhours.


CSX Corp (CSX) reported adjusted earnings of 64 cents that beat estimates for 56 cents. Revenue of $2.86 billion missed estimates for $2.88 billion. The company reported a $3.6 billion tax reform benefit and a $10 million restructuring charge. Shares closed down about 65 cents in afterhours. The company is struggling in its current restructuring program. The prior CEO that began the program died unexpectedly only 8 months into it. Investors are unsure how the new CEO, Jim Foote, will complete the plan. They have admitted they lost some customers because of the change to a tighter regular schedule rather than operating around the schedule of their major shippers. Rail yard closures have triggered persistent service disruptions. Foote has a big task by taking over in the middle of an unpopular program.


Juno Therapeutics (JUNO), which was a position in OIN until today, broke support intraday and stopped us out. After the bell, a story broke that Celgene (CELG) was in talks to acquire them. Shares rebounded $20 in afterhours. Both companies have partnered on cancer treatments in the past and it would be natural for them to merge. They are both working on CAR-T drugs that teach the immune system how to fight cancer cells. Recently Gilead Sciences (GILD) paid $12 billion for Kite Pharma to get their CAR_T technology. I need a drug for depression after bring stopped out.


Interactive Brokers (IBKR) reported earnings of 43 cents that rose almost 500% with revenue doubling to $515 million. Estimates were for 39 cents and $399 million. Customer accounts rose 25% to 483,000 and customer equity rose 46% to $124.8 billion. Great earnings but shares fell $2 in afterhours.


There were no economic reports of note on Tuesday.

The NY Empire Manufacturing Survey for January came in at 17.7, down just slightly from 18.0 but it was the lowest reading since July. New orders declined from 19.0 to 11.9 but backorders rose from -8.7 to +4.3. Employment took a significant hit from 22.9 down to 3.8. This report is showing seasonal issues and it was ignored.

Tomorrow has a full slate of events with the Fed Beige book the most watched. For the rest of the week there is nothing that is expected to move the market.

The potential government shutdown on Friday is the biggest hurdle. With both sides digging in behind their verbal fortifications and appearing to be moving farther apart than closer together, the odds of a shutdown are growing. The other option is another continuing resolution to kick the can down the road into February and buy them another month of time to try and whittle away at the demands from the other side.


Earnings on deck for Wednesday include Bank of America, US Bank, Goldman Sachs, Schwab and Alcoa. Goldman could provide the most volatility as a Dow component.


Bitcoin fell off a cliff today with the price dropping from $14,000 to almost $10,000 intraday. Those with dollar signs in their eyes back at $19,000 are probably having a rough day if they have not yet sold.

There is always hope. Kay Van-Peterson, an analyst at Saxo Bank, initially projected bitcoin to reach $2,000 in 2017. At the time, it was $900. She turned out to be spectacularly right. Today she said bitcoin could rise to between $50,000 and $100,000 in 2018. Hey, she won the lotto once and now she is going for the Powerball jackpot. She said 50% pullbacks are healthy because it creates additional buying from people that are not traders and will hold for a longer-term investment. At the end of her piece, she did qualify her targets saying it could take ten years for it to reach $100,000. She is not alone. Julian Hosp, co-founder of TenX is projecting $60,000 in 2018 but said it would have to crash first. Dave Chapman, managing director of Octagon Strategy, a coin-trading firm, said bitcoin actually could hit $100,000 in 2018. There are definitely a lot of opinions from zero to $100,000 and I am projecting a price somewhere in between. I think I am safe in my bet.



Markets

It was not just the major indexes selling off today. There was confirmation of growing market weakness in a couple of other sub indexes. The Dow Transports ($TRAN) touched a new high intraday but then crashed to lose -147 for the day. The Dow Transports are seen as a leading indicator for the Dow Industrials. For the transports to decline so sharply is a warning sign. However, they were significantly over extended and they were due for a rest. The question is where that rest will end.


The Biotech Index ($BTK) closed at a new high on Friday and lost -98 points or -2.2% on Tuesday. The JP Morgan Healthcare Conference is over and that could have taken some of the buyers out of the market. However, the biotechs are a major component of the Nasdaq and the Russell and a continued correction in that sector is going to weigh heavily on those indexes. This is another canary in the coalmine to watch for the rest of the week.


The S&P hit 2,807 at the open before falling 39 points to the low of the day. The rebound only recovered 8 of those points. This was far from bullish. The low from Friday was 2,769 and the index hit that level at the lows today. That is the red line indicator for a reversal. If the S&P closes below Friday's low, there could be stronger selling ahead. Support should be in the 2,750 range followed by 2,700.


The Dow fell -383 points intraday from the high to the low before recovering slightly to end just barely negative. If the Dow declines further it should find support at the prior uptrend resistance, which is about 25,500 for the next couple days. The index remains very overbought and is at risk. That does not mean it cannot go higher. We are living on borrowed time and it is eventually going to experience some profit taking.

I wrote over the weekend that I expected the real selling to appear in expiration week in February. I also wrote that we could see some stagnation of the current gains because the index is so overbought. We may not go significantly lower until after the majority of the S&P report earnings but we may not go significantly higher either.



The Nasdaq is also overbought and that should come as no surprise to anyone. However, the Nasdaq has a history of regular declines for profit taking every 2-3 weeks for the last six months. It is due since it has been up for two weeks as of today. I wrote over the weekend I would not be surprised if the decline did not come for two more weeks until after the major big cap tech stocks reported earnings. Investors are always eager to hold those stocks in the graphic below in hopes of a big post earnings blowout. Time will tell if that is the right strategy this quarter.



The Russell 2000 posted the largest percentage decline at -1.2% and that is probably related to the drop in the biotech sector. The index has failed twice at the uptrend resistance and I doubt we are going to just surge through that level this week. Support is 1,550 and prior resistance.


The futures have been down sharply and up sharply in afterhours and now they are just slightly positive. I see no reason to rush into the market. The decline in individual stocks was not enough to create any bargains and the option premiums have inflated because of the volatility. I would recommend buying a real dip if one appears. Until then it is a game to be watched from the sidelines. I never recommend buying new high breakouts on the market. That is a fool's errand in most cases. Today's spectacular reversal is a red flag until proven otherwise.

The pending government shutdown could give us a new entry point if it occurs. A can kick down the road could relieve the cloud over the market until after earnings and that would be positive in the short term.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Red Flag

by Jim Brown

Click here to email Jim Brown

Editors Note:

The futures have been down sharply and up sharply in afterhours and now they are just slightly positive. I see no reason to rush into the market. The decline in individual stocks was not enough to create any bargains and the option premiums have inflated because of the volatility. I would recommend buying a real dip if one appears. Until then it is a game to be watched from the sidelines. I never recommend buying new high breakouts on the market. That is a fool's errand in most cases. Today's spectacular reversal is a red flag until proven otherwise.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not a Bullish Sign

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow almost hit 26,100 but imploded to fall -383 points intraday. This is not a good sign. A move like that screams market top but we would need another decline on Wednesday to confirm it. The Nasdaq closed -107 points below the intraday high. This is our worst nightmare. After weeks in rally mode, having the markets imploded over a couple days rather than just some minor profit taking, could slear out all our stops for losses. We lost two positions today because of the weak market. We definitely need a recovery rebound on Wednesday so keep your fingers crossed.



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


PLAY - Dave & Busters
The long call position was entered at the open.

JUNO - Juno Therapeutics
The long call position was stopped at $46.85.

TXT - Textron
The long call position was stopped at $58.85.



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

ARNC - Arconic Inc - Company Profile

Comments:

No specific news. The IBD relative strength rating rose from 79 to 82. Shares declined with the market.

Original Trade Description: December 27th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company information from Arconic.

Earnings January 22nd.

Arconic was the original Alcoa. They spun off the aluminum business then changed their name to Arconic. This company makes precision aluminum parts for aircraft and transportation equipment. Eliott management has been agitating for change and managed to get the long term CEO Klaus Kleinfeld kicked out and oversaw the five-month process to get 24-year GE veteran Charles Blankenship installed as the new CEO.

Elliott has seen their investment lag for the last year as the spinoff and CEO hunt took the wind out of Arconic's sales. Now they could be reaching the end of their struggle with a potential buyout on the horizon.

One analyst got the fire started a couple weeks ago when he suggested Honeywell was on the prowl and would eventually buy Arconic. Honeywell lost out on Rockwell Collins (COL) when United Technologies bought them for $30 billion or 14 times EBITDA.

Honeywell was under pressure by Dan Loeb to spin off its aerospace unit. Instead, they agreed to spin off the homes and global distributions unit and the transportation business leaving (by the end of 2018) the aerospace unit intact and the surviving business. Now Honeywell needs to bulk up its aerospace business of they will be the nex company acquired.

With Dan Loeb on one side urging Honeywell to build aerospace and Elliott Management on the other side urging Arconic to sell itself, this is a match made in heaven and could happen in early 2018 according to the analyst.

Shares have sprinted higher since the news story broke a couple weeks ago. They are very close to a 52-week high over $28 and a move over that level could trigger additional buying and short covering.

I am using a July option to get well past the January and April earnings. We will not hold it that long but the uncertainty surrounding those events should keep the premium up if we have a market drop in January.

Update 1/8/17: Arconic said it was freezing the pension plans at current levels for 7,900 employees and would make contributions to 401K plans instead. This will save them $140 million.

Position 12/28/17:

Long July $30 call @ $1.50, see portfolio graphic for stop loss.


CGNX - Cognex - Company Profile

Comments:

No specific news. Minor decline with the market.

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 Feb 15th.

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.


FLIR - FLIR Systems - Company Profile

Comments:

No specific news. Changed earnings date to Feb 14th.

Original Trade Description: January 10th.

FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.

The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.

For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.

The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.

Earnings February 14th.

Shares rallied last week to close at a new high at $48.25 and just over two-month resistance at $47.90. They spiked again on Monday when they announced a high-resolution camera kit for self-driving cars. If this breakout continues, it should produce some short covering given the long period of consolidation after the spike from Q3 earnings in October.

I am recommending an inexpensive February ATM option with earnings on the 13th. I intend to hold this position over earnings unless we have profits to protect by that date.

This is also a longer-term position in the LEAPS newsletter.

Position 1/11/118:
Long Feb $50 call @ $1.55, see portfolio graphic for stop loss.


JUNO - Juno Therapeutics - Company Profile

Comments:

No specific news during the day and shares broke support to stop us out. However, after the bell a headline broke that Celgene was in talks to buy Juno and shares spiked $20. This is a real bummer of an event.

Original Trade Description: January 4th.

Juno Therapeutics, Inc., a biopharmaceutical company, engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its CD19 product candidates include JCAR017 that is in Phase I/II trials for adults with relapsed or refractory (r/r) B cell aggressive non-Hodgkin lymphoma (NHL) and pediatric patients with r/r B cell acute lymphoblastic leukemia (ALL); JCAR014, which is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies; and JCAR015 that is in Phase II trials for adult patients with r/r ALL. The company's CD22 product candidate comprise JCAR018, which is in Phase I trial for pediatric and young adult patients with CD22-positive r/r ALL or r/r NHL. Its additional product candidates include CD171, a cell-surface adhesion molecule to treat neuroblastoma; Lewis Y for the treatment of lung cancer; JCAR023, which is in Phase I trial for patients with refractory or recurrent pediatric neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers; and IL13ra2 for treating glioblastoma. Juno Therapeutics, Inc. has collaboration agreements with Celgene Corporation, Fate Therapeutics, Inc., Editas Medicine, Inc., MedImmune Limited, and Memorial Sloan Kettering Cancer Center. The company was formerly known as FC Therapeutics, Inc. and changed its name to Juno Therapeutics, Inc. in October 2013.Company description from FinViz.com

Expected earnings January 31st.

This is a simple story. Juno is developing CAR-T drugs. Their JCAR017 drug treats non-Hodgkin lymphoma. The drug is currently in trials. Two other drugs, Yescarta and Kymriah, developed by other companies are already approved and being marketed.

In the latest JCAR017 trial 80% of patients were in complete response at the end of 3 months. At the end of six months they were still in complete response and after the six month date until the end of the trial, 92% stayed in complete response. That is an amazingly successful trial. In early December Juno reported only a 50% response rate using different term length and dosages and investors were expecting something over 70% based on the early results. Shares were crushed.

In reality, the results are still there. Yescarta and Kymriah only showed a 30% to 40% response rate so even with the downplayed results from JCAR017 it is significantly better. Once the drug is approved it is going to be a major winner in the category.

Investors have begun buying the stock again and shares are up from the $42.50 low to close just under $48 today. This is long term support and the 100-day average.

Position 1/5/18:
Closed 1/16: Long Feb $50 call @ $3.50, exit $2.10, -1.40 loss.


PLAY - Dave & Busters - Company Profile

Comments:

No specific news. Shares opened sharply lower but rebounded slightly in the afternoon.

Original Trade Description: January 13th.

Dave & Buster's Entertainment, Inc. owns and operates venues that combine dining and entertainment in North America for adults and families. It offers food and beverage items combined with an assortment of entertainment attractions, including skill and sports-oriented redemption games, video games, interactive simulators, and other traditional games. The company operates its venues under the names Dave & Buster's and Dave & Buster's Grand Sports Caf. As of June 17, 2014, it had 69 company-owned locations in the United States and Canada. The company was founded in 1982 and is based in Dallas, Texas. Company description from FinViz.com.

On Monday January 8th, Dave & Busters revised earnings guidance for fiscal 2017 from $110-$112 million to $108-$110 million. That $2 million adjustment caused the stock to drop from $56 to $44. They also lowered revenue slightly from $1.148-$1.155 billion to $1.138-$1.142 billion. Same store sales was reduced to -1.0%-0.7%, down from +0.75%.

They had previously warned in the Q3 conference call that Q4 started slow. They expected it to pick up in December, which is normally a busy month but revenue never caught up with the slow start in October. Quarter to date through Jan 6th, same store sales were down -5.1% with the end of year bad weather causing people to stay home. They also suffered from the lack of interest in the NFL games in Q4.

They were positive on their new format stores. They expect to open 14-15 new stores in 2018 and the same class of store in 2016 returned 54% one-year cash on cash returns in 2017. This was an improvement on the returns on their 2014-2015 class of stores. With each generation they are improving the returns.

Expected earnings March 6th.

The sharp decline last week was very overdone for the minimal decline in earnings expectations. Shares are already rebounding and with two months before earnings they have plenty of time for a decent rebound. For Q3 they reported earnings of 29 cents that beat estimates for 23 cents and shares were on an upward trajectory until Monday's guidance warning.

With so many stocks in blowout mode and not currently buyable, investors are going to be looking for less risky buying opportunities and PLAY could be the perfect answer.

Position 1/16/18:
Long April $50 call @ $3.40, see portfolio graphic for stop loss.


RHT - Red Hat - Company Profile

Comments:

No specific news. Declined with the market.

Original Trade Description: January 11th.

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina. Company description from FinViz.com.

Linux has always been immune to most of the attacks on the internet but Red Hat has taken that to a new level. There are multiple versions of free Linux versions but free means little support and questionable fixes. Red Hat has taken their Linux product and built it into multiple enterprise versions for individual applications and cloud use on virtual machines with an entire suite of applications.

In the Q3 earnings the company reported 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. They guided for Q4 for revenue of $758-$763 million and that beat estimates for $754.7 million. They guided for $2.88 for full year earnings and revenue of $2.91 billion. Deferred revenues rose 23% to $2.11 billion and subscription revenue from infrastructure offerings rose 15% to $495 million.

The good news on all fronts was not enough and shares dropped $9 intraday after the report. $120 appeared as support and shares have been rising steadily.

Deutsche Bank reiterated a buy with a $150 target saying the new Amazon Linux product was no threat and they were only targeting a fraction of the market for test systems before eventually going live on the Amazon cloud. The analyst said the Amazon Linux competes with Ubuntu/CentOS and not Red Hat. Finally an analyst that actually understands what he is analyzing.

Expected earnings March 20th.

I am picking a March option even though it expires a week before earnings. Those after earnings are far too expensive. I am expecting some serious profit taking in the market after the majority of Q4 earnings are over, probably around the February expiration. That should take us out of this position before well before RHT earnings.

Options are still expensive so I am turning this into an optional spread to reduce the net debit.

Position 1/12/18:
Long Mar $130 call @ $3.40, see portfolio graphic for stop loss.
Optional: Short Mar $140 call @ 90 cents, see portfolio graphic for stop loss.
Net debit $2.50, maximum gain $7.40.


SYNA - Synaptics - Company Profile

Comments:

No specific news. Shares gave back half of their gains from Friday.

Original Trade Description: January 8th.

Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronic devices and products worldwide. The company offers its human interface products solutions for mobile product applications, including smartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, and entertainment devices; notebook applications; and other personal computer (PC) product applications, such as keyboards, mice, and desktop product applications. Its products include ClearPad, which enables users to interact directly with the display on smartphones and tablets; ClearView products that provide advanced image processing and low power technology for entry-level smartphones; TouchView products, which integrate touch and display technologies to deliver performance and simplified design; and Natural ID, a fingerprint ID product that is used in smartphones, tablets, notebook PCs, PC peripherals, and other applications. The company??s products also comprise TouchPad, a touch-sensitive pad that senses the position and movement of one or more fingers on its surface; SecurePad that integrates fingerprint sensor directly into the TouchPad area; ClickPad that offers a clickable mechanical design to the TouchPad solution; and ForcePad, a thinner version of its ClickPad. In addition, its other product solutions include dual pointing solutions, which offer TouchPad with a pointing stick in a single notebook computer enabling users to select their interface of choice; TouchStyk, a self-contained pointing stick module; and TouchButtons, which provides capacitive buttons and scrolling controls, as well as display interface products. The company sells its products through direct sales, outside sales representatives, distributors, and resellers. It serves smartphone, tablet, and PC original equipment manufacturers, as well as various consumer electronics manufacturers. Company description from FinViz.com

Expected earnings February 6th.

In August, Synaptics reported earnings of $1.18 that beat by a penny and revenue of $426.5 million that exactly matched estimates. However, they guided for the next quarter for revenue of $380-$425 million. That was a sequential decline and they blamed it on the mobile business. However, based on orders in the pipeline they expected future quarters to show significant gains. Investors were not impressed and shares fell from $56 to $33.

In early November, the company reported earnings of $1.03 that beat estimates for 97 cents. Revenue of $417.4 million beat estimates for $397.6 million. For the current quarter they guided for revenue of $410-$450 million. Shares spiked to $44 on the news then fell back to $35 again. The company said it lost market share with Apple's fingerprint sensor business because its product was not completely ready for Apple's manufacturing cycle.

The current quarter is normally seasonally strong for Synaptics. They are now shipping fingerprint sensors in volume to Huawei and Samsung. Huawei sold more than 100 million phones in the first three quarters of 2017 and has outsold Apple since the new iPhones were introduced. Samsung has adopted the Synaptics technology for their Galaxy S8 and Note 8. For the next evolution of the Note 8 the sensor will be built tight into the screen.

Synaptics is also big in touch screen technology and device driver integration or TDDI. This is their specialty. Demand is expected to grow from 100 million units in 2017 to $654 million by 2022.

In the last quarter, the company received 14% of its revenue from IoT devices. That is expected to rise to 24% in the current quarter. They recently bought Conexant and that will expand their addressable market. Conexant makes voice and audio solutions for Amazon's Alexa voice assistant.

The company just announced a partnership with Microsoft to develop voice enabled solutions for Cortana using Synaptics far-field DSP voice technology.

Synaptics has a lot on their plate and much of these efforts are just now reaching broad commercialization with the major device manufacturers. Shares are rebounding and broke over resistance at $42.50 on Monday.

Update 1/13: Keybanc upgraded SYNA to buy with a price target of $60 saying the company was more diversified than ever with strong growth potential. He noted that Vivo demonstrated an OLED phone at CES with the new Synaptics fingerprint sensor. The company claims fingerprint sensors are twice as fast as facial recognition technology and nearly impossible to fool. The analyst said the new smart home technology was an opportunity to partner with not only Amazon and Google but also with Asian operators like Alibaba. New 5-month high today with a $5 gain.

Position 1/9/17:
Long Mar $45 Call, currently $3.10, see portfolio graphic for stop loss.


TGT - Target Corp - Company Profile

Comments:

No specific news. Shares gave back more than half of Friday's gains.

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.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Update 1/9/18: Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36.

Update 1/13/18: MKM Partners reiterated a buy rating and shares gained another $2.80 to a new 52-week high.

Position 12/14/17:

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


TXT - Textron - Company Profile

Comments:

No specific news. New 10-year closing high on Friday but down with the market today. We were reversed from a gain to a loss and stopped out at $58.85.

Original Trade Description: January 6th.

Textron Inc. operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through five segments: Textron Aviation, Bell, Textron Systems, Industrial, and Finance. The Textron Aviation segment manufactures and sells business jets, turboprop aircraft, piston engine aircraft, and military trainer and defense aircraft; and commercial parts, as well as provides maintenance, inspection, and repair services. The Bell segment provides military and commercial helicopters, tiltrotor aircraft, and related spare parts and services. The Textron Systems segment produces unmanned aircraft systems; smart weapons, airborne and ground-based sensors and surveillance systems, and protection systems; armored vehicles, turrets, and related subsystems, as well as marine craft; test equipment and electronic warfare test, and training solutions; piston aircraft engines; and intelligence software solutions. This segment also designs, develops, manufactures, installs, and maintains full flight simulators, as well as offers training services. The Industrial segment offers blow-molded plastic fuel systems, windshield and headlamp washer systems, catalytic reduction systems, and engine camshafts, as well as plastic bottles and containers; golf cars, off-road utility and light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment, and turf-care vehicles; and powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, fiber optic assemblies, underground and aerial transmission and distribution products, and power utility products used in the construction, maintenance, telecommunications, data communications, electrical, utility, and plumbing industries. The Finance segment provides financing to purchase new and pre-owned aircraft and helicopters. Textron Inc. was founded in 1923 and is headquartered in Providence, Rhode Island. Company description from FinViz.com

Expected earnings January 31st.

With Airbus acquiring a stake in Bombardier, Boeing a stake in Embraer, Honeywell, United Technologies, Rockwell Collins, etc, all circling each other like sharks around a wounded whale, Textron is a potential acquisition candidate.

There are no formal rumors but options activity is huge. On Friday there were 5,400 of the Jan $55/$60 calls traded with the $55 calls at $3.50. There were 9,500 of the Feb $60 calls traded at $1.70 against an open interest of 261 contracts.

Textron has lagged the other defense contractors because they are in a contract period where capex is high but the eventual income has not yet appeared.

Last week FedEx (FDX) announced an order to buy 50 of Textron's Cessna SkyCourier 408 aircraft with an option to increase the order to 100. FedEx worked closely with Textron to design the plane for package delivery to small and medium sized markets.

The Textron aviation chief said Amazon was another potential customer because the need to ship express packages to addresses outside major cities was rapidly growing. Textron produces Cessna, Beechcraft and Hawker business jets.

Textron/Bell/Boeing produces the V-22 Osprey aircraft. They just achieved first flight on the new V-280 Valor, which is a new generation tiltrotor aircraft like the Osprey. Bell, as in Bell Helicopter, is the division producing the V-280. The aircraft has twice the speed and range of a conventional helicopter and carries a much larger payload.

The company has so many projects in the works they are right on the edge of a new chapter in their growth. With the $700 billion defense program that passed in September, they will be getting a wide variety of new orders.

There is no way to know if somebody is about to make any offer but the dramatic surge in option volume is typically a sign or rumors making the rounds.

I am recommending the March option to retain premium longer but we will probably exit before earnings on Jan 31st.

Position 1/8/18:
Closed 1/16: Long Mar $60 Call @ $2.15, exit 1.81, -.34 loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

Not a good day for the market with the Dow falling -383 points intraday. If that decline was to repeat, we could be back in business but I am hoping that does not happen.

This position is dead unless we can get a 2-3 day decline ahead of the potential government shutdown. If we can get a decent drop, even just a couple days, we can sell a short put to turn it back into a spread and reduce our loss. This is a March position so we have plenty of time for disaster to strike. I believe it is worth the 40 cents to hold it just in case.

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.




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