Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/24/2018

Table of Contents

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

Market Wrap

Wobbly Market Sets New Highs

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The indices set new highs in a mixed session; traders are waiting on the ECB, GDP and Trump talk from Davos. Through it all earnings continue to roll in. On average businesses are beating expectations and giving positive forward outlook but there are some areas of concern. One concern, estimated tax savings aren't quite what the market was expecting. The savings are there but earnings growth estimates haven't reached the 20% level like some proponents put forth. . . yet.

Asian indices were mostly up on positive earnings and economic outlook although there was one notable laggard. The Japanese Nikkei 225 fell nearly a full percent the day after hitting a 26 year high. The move is driven on profit taking and a stronger yen. European indices were flat to up in the early part of the session but fell later in the day to close with losses near -1%. The move was due to mixed earnings and economic uncertainty. Data over the past month or so has been weak to tepid, consistent with ongoing expansion but not consistent with acceleration in the economy. Today's PMI data shows slowing in the EU manufacturing sector offset by acceleration in the services sector.

Market Statistics

Futures trading was flat to up in the early morning and gained some strength going into the open. The trade was driven by positive earnings and comments from Davos attendees like Jamie Dimon. Mr. Dimon sees tax cuts driving wage growth and inflation, and a surge in economic growth to above 4%. The open was calm, the SPX began the day with a small gain and then moved slightly higher. The index set a new all time high, as did the Dow Jones Industrial Average and NASDAQ Composite, but failed to hold the gains. By 11AM the indices were moving down from the highs and approaching break even. By 1 oclock they were firmly below break even and by 1:30 at the lows of the day. By 2PM they were bouncing off of those lows and once again approaching break even levels where they hovered into the close.

Economic Calendar

The Economy

Markit's Flash PMI reading shows another month of solid growth in the US economy. Although the composite and services readings both showed slowing of expansion both were positive. Composite PMI fell to 53.8 and an 8 month low while services PMI fell to 53.3 and a 9 month low. Offsetting this data and leading the economic expansion is manufacturing PMI which rose to 55.5 and a 34.4 month high. Manufacturing output rose to 56.2 and a 12 month high.


Existing Home Sales fell -3.6% in December but remained positive for all of 2017. Full year 2017 existing sales grew by 1.1% and is the best year for sales since 2006. Economist at the NAR say the gains were driven by strong growth in labor. A shortage of homes for sale has led to higher prices which have in turn curbed what may otherwise have been robust sales. They don't give a forward outlook but do make comments to the effect low inventory could continue to hurt sales this year.

The Dollar Index

The Dollar Index shed more than -1% to hit $89.00 and a 3 year low. The move is driven on improving global economics, trade war fears and comments from Steve Mnuchin. The Treasury Secretary let it be known that the administration is not concerned with a weaker/weakening dollar and may even welcome it. Today's move brings the index down to a possible support target but there is no sign of support as yet. Tomorrow the ECB will release their policy statement, if they alter their policy stance like they've indicated they're ready to do the dollar could see more losses.


The Gold Index

Gold prices moved up to set a 4 month high on today's weakening dollar. The move carried spot price up to $1,359 and may go higher if trade war fears persist. LG has already indicated it will raise prices in response to Trump's tariff's, if more manufacturers follow suit Americans could see washing machine inflation begin to pick up. Gold prices are now approaching resistance targets near $1362.

The Gold Miner's ETF GDX gapped up at the open to create a small green bodied candle and set a 4.5 month high. The move is bullish but not supported by both indicators. MACD is bullish but very weak and divergent from the new highs while stochastic is also divergence and not looking bullish at all. Today's move is highly questionable and may correct quickly. One such chance is tomorrow with the ECB, if the bank fails to meet market expectations the euro could tumble from its new multi-year highs versus the dollar, drive the Dollar Index higher and gold lower. After that 4th quarter GDP on Friday could be a mover, and then of course there is the FOMC meeting next week to watch out for. Regardless, the ETF is likely to remain within the longer term range; top is near $25.60.


The Oil Index

Oil prices surged to set a new 3 year high. The gains were driven by a tenth week of stock draw-downs on top of last week's lower rig count. It looks, for now, as if US production is not meeting the needs of the market but there are risks for the bullish outlook. The first is that the US has seen record cold temperatures across the bulk of the country over the past 6 weeks and this is leading to above average use of heating fuels. The second is that US producers aren't going to sit on the sidelines forever, high prices will bring them and others to the market. Forward outlook remains the same; well supplied market in 2018 are expected to lead to average prices near $53.

The Oil Index gained 0.50% on today's gains in oil. The index moved up to create a small red bodied candle setting a new three year high. This move is trend following, supported by rising oil prices and the indicators although there are some warnings signs. Both MACD and stochastic are bullish and in support of higher prices but both are also showing divergence from the newly set high that is consistent with a weakening rally. This may lead to a consolidation and/or correction at some point in the future, caution is due. Until then the trend is up, new target is 1,500.


In The News, Story Stocks and Earnings

Comcast, one of America's leading cable/internet providers, reported earnings this morning before the bell. The company delivered a line-up of good news that sparked a volatile day of trading. Earnings and revenue beat expectations on 350K new subscribers, the company also increased the dividend, announced a stock buy back and improved guidance. The news sparked buying which drove it up to set a new all time high. This sparked profit taking which caused the stock to fall sharply. Support came back into play however, leaving the stock very nearly at break even creating a long legged doji.


GE also reported before the bell. The multi-national conglomerate reported a -5.1% decline in YOY earnings, missing estimates by $2.66 billion and falling short of EPS as well. The company offset this news with an upgrade to guidance and comments like “cash flow is improving” and plans to cut another $2 billion in structural costs. It also revealed it is the focus of an SEC investigation into insurance payments. Shares of the stock opened with a gain but that was quickly reversed leaving them down more than -2% at the close.


United Technologies also reported before the bell. The company reports revenue grew by 7.0% YOY, beating estimates, leading to adjusted EPS of $1.60. Adjusted EPS beats last year but does not take into account a tax charge related to the tax reform. Forward outlook is good and above expectations. The company is expecting to see accelerating sales and revenue growth in the range of 4-6%. They also say they are planning repatriate $2 billion off shore profits. Shares of the stock opened lower, moved up to set a new high, then fell back to close near the open creating a long legged candle with small green body. This is indicative of resistance at the recently set high. Correction is possible but for now it looks like the stock is forming a consolidation pattern with chance for continuation.


The Indices

The indices hit a hiccup on their march to new highs but new highs were reached in today's session. That being said not all indices set new highs and the one most notable is the Dow Jones Transportation Average. The transports fell more than -2% intraday, closing with a loss near -1.25%, and created a small doji candle. This doji is hammer-like and may indicate near term support although there is potential for further downside. The indicators have rolled over into bearish crossovers which, in an uptrend, usually lead to consolidation or correction. A firmer target for support is near 11,000 and just below that at the moving average.


The NASDAQ Composite also close with a loss but only about half that of the transports. The tech heavy index also set a new all time high but did so while creating a red bodied candle. The candle is a dark cloud cover but a weak one, it may lead to consolidation or near term correction but is not an indication of major market shift. The indicators are bullish and consistent with uptrend if a bit mixed in the near term. A move up would be trend following and bullish, a move lower may confirm the onset of consolidation/correction but not a full reversal.


The broad market S&P 500 posted the smallest gains, near 0.15%, but created a small red bodied candle. The index is drifting higher and showing a little bit of froth with today's action but nothing to be concerned about yet. The indicators are bullish and consistent with higher prices, upside target in new all time high territory. A fall from this level may be bearish but would, at this juncture, more likely result in a consolidation move than deep correction.


The Dow Jones Industrial Average posted the largest gain, about 0.30%, and created a small hanging man doji. Today's candle is indicative of indecision and pause but not in any significant kind of way, it looks like average daily action within an uptrend. The indicators are bullish and consistent with higher prices although they are a bit mixed in the near term. A move lower may find support at 26,000, a move below there would likely go to 25,500. A bounce or move up from this level would be bullish and trend following with upside target near 27,000.


The markets are moving up in the near, short and long term, there is no denying that. Today's action was a bit disconcerting but does not, at the end of the day, appear to be anything for the bulls to worry about. There are some concerns including the renewed threat of trade wars but none have yet had impact on earnings growth or earnings growth outlook. Until that happens I am bullish. I remain cautious for the near term because there just isn't any reason to go nuts.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Exercise Good Judgment

by Jim Brown

Click here to email Jim Brown

Editors Note:

With another 285-point Dow reversal today we need to be careful. The last time the Dow crashed -300 points from its intraday highs, the market rebounded the next day. That will not always be the case. With the S&P futures down -4.50 as I type this, the market could open negative again. There is no reason to add new plays with increased volatility at market highs just because it is a newsletter day.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Volatility Returns

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow fell -285 points from its intraday high but rebounded +144 points to close slightly positive. These 300-point reversal days are starting to be common. This was the fourth one in the last two weeks. Extreme volatility is normally a sign of investor indecision and potential market tops and bottoms. With the Dow Transports down -160 and the chip sector down almost 3% intraday, sellers are starting to appear. Of course they still bought the dip on the Dow so indecision is definitely in play.



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


No Changes



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

BITA - BitAuto Holdings - Company Profile

Comments:

No specific news. Shares posted another minor gain but that confirms the breakout over early January resistance.

Original Trade Description: January 22nd.

Bitauto Holdings Limited provides Internet content and marketing, and transaction services for the automotive industry in the People's Republic of China. The company operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment provides advertising services, including new automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com and taoche.com Websites, as well as mobile applications. It also provides Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates automotive transaction services platform that provides e-commerce transaction services to automobile dealers; and offers online automotive financial platform services to consumers and financial institutions, including banks, auto finance companies, and insurance companies. The Digital Marketing Solutions Business segment provides one-stop digital marketing solutions, such as Website creation and maintenance, online public relations, online marketing campaigns, and advertising to automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

For Q3 BITA reported earnings of 23 cents that missed estimates for 33 cents. Revenue of $352.4 million rose 54% and beat estimates for $334 million. They guided for Q4 revenue of $360.7 to $368.3 million, a 51% increase, and that was well above estimates at $331 million.

Shares were crushed on the earnings miss despite the 54% increase in revenue and strong guidance. Their Yixin website generated approximately 140,000 automobile transactions in Q3. Active monthly users rose to 51 million and they have more than 15,000 dealerships in the network. Transaction services rose 145.7% in Q3. Advertising and subscription service businesses saw revenue rise 19.3%. The company ended the quarter with $487 million in cash.

Their Yixin subsidiary IPOed on the Hong Kong exchange on Nov 15th and that raised a significant amount of money that will allow them to rapidly expand that portion of the business. The perceived dilution was also a factor in the stock decline.

The company is growing rapidly and guidance was very strong. There is no reason why the shares should not continue rebounding. There is strong support at $35.50.

Expected earnings Feb 19th.

Shares peaked at $38.25 on the 9th and then dropped sharply. They have rebounded and closed slightly over that level at $38.50 today. I am expecting a breakout and a resumption of the prior trend.

Position 1/23:
Long March $40 call @ $2.95, see portfolio graphic for stop loss.

Low open interest because the March strikes are new this week.


CGNX - Cognex - Company Profile

Comments:

No specific news. Shares down hard with the tech sector. Missed our stop loss by 10 cents.

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. Minor gain in a weak market.

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.


PLAY - Dave & Busters - Company Profile

Comments:

No specific news.

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.

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.


TGT - Target Corp - Company Profile

Comments:

No specific news. Continuing to decline from the 52-week high.

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.



BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - ETF Profile

Comments:

No specific news. Shares crashed $2.56 with the chip sector.

Original Trade Description: January 20th.

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display worldwide. The company??s system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and logistics providers. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Ambarella was a big manufacturer in the action camera sector. Last week GoPro said it had cut prices significantly on the Hero line of cameras and the company announced it was exiting the drone business. This is especially bad for Ambarella since the drones had multiple cameras, some as many as a dozen. GoPro also indicated they were going to explore strategic alternatives including the sale of the company.

GoPro represents more than 20% of Ambarella's business. That means the dramatic reduction in GoPro products will mean an equal reduction in Ambarella sales.

Ambarella has been rapidly diversifying into other areas including security cameras and cameras for self driving vehicles. That will protect them in the long term but in the short term sales are going to stumble because of GoPro.

Earnings are March 1st.

Shares fell sharply on Jan 10th after the GoPro announcement that earnings would be significantly below expectations. Ambarella had posted a big earnings beat in Q3 of 75 cents compared to estimates for 66 cents. However, without reorders from GoPro in Q4, they could be facing lower guidance and a possible earnings miss when they report March 1st. Investors are selling the stock ahead of the potential lowered guidance, which could appear at any time.

There are no March options yet and May strikes are too expensive. I am using the February strike even though there are only 4 weeks left. It is only $1.36 OTM so we should be ok as long as the stock continues to decline.

Position 1/22:
Long Feb $50 put @ $1.40, see portfolio graphic for stop loss.




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

subscribe now