Option Investor
Newsletter

Daily Newsletter, Monday, 1/29/2018

Table of Contents

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

Market Wrap

Slow Start To A Big Week

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

There's so much going on this week I don't know where to start; the FOMC tops the list but is by no means the only thing moving the markets. Along with the meeting is a round of important monthly macro data that happened to include the PCE price index this morning. Later in the week we'll get important reads on manufacturing, real estate and labor to include the ADP, Challenger and NFP reports. On top of that this is peak earnings. This week is the busiest week of the season, there are 125 S&P 500 companies reporting, and a make or break week for the market. Also on tap is the State of the Union Address which should be interesting if nothing else.

Asian indices began the week mixed. Chinese markets were down across the board while Japan closed with a negligible loss and others in the region posted small gains. Chinese markets were driven by a government sponsored op-ed stating black swan or gray rhino events were due this year; my take, if a black swan is something you can't predict what value does this statement have other than to spook or caution markets? European indices were also mixed but more flat than not as earnings, the FOMC and data come into focus. The EU is expecting a read on 4th quarter GDP along with other data.

Market Statistics

Futures trading was flat to down all morning, the down part taking dominance as we approached the opening bell. Trading was driven by earnings uncertainty, economic/FOMC anxiety, growing scandal related to sexual misconduct and interest rate angst. Interest rates have begun to move higher and that has the market spooked. Traders have begun to move en masse from bonds to stocks and that has, in the past, been a harbinger of doom. My take on that is that was then this is now. The SPX opened with a loss near -0.25% and extended to that to roughly -0.75% by mid day. The lunch time lows turned out to be intraday bottom resulting in a small bounce. By mid-afternoon the indices were very nearly back to the opening levels before selling took hold of the market again. The late day push lower left the indices trading at new lows for the day where they held into the close of the session.

Economic Calendar

The Economy

Today's report of primary importance and sole release of the day is Personal Income and Spending. Personal income increased by 0.4% and a tenth ahead of expectations while spending rose by 0.4% and missed by a tenth. The good news is that both figures are strong and point to expansion within the economy. The gains income were due to salaries and wages suggesting they will be long lasting. The all important PCE price index came in at 0.1% headline and 0.2% core, both as expected, with YOY gains of 1.7% and 1.5% respectively. While these numbers are not hot they do suggest the FOMC will stick to their time line with a chance of picking up the pace if inflation shows further signs of acceleration.


Moody's Survey of Business Confidence shows business sentiment is trending near multiyear highs. The latest read came in at 35.0, up from 34.3 but below the recent high of 38.2. Regardless the index is consistent with positive business conditions and forward outlook. Mr. Zandi says businesses are feeling good. The survey results show an economy growing above potential with few concerns. One is legal and regulatory issues but that is receding. Another is labor scarcity and cost and that one is getting worse.


With 24% of the S&P 500 reporting the earnings season is looking very good. I have to say that at this time there are many earnings fueled tailwinds driving the market and it doesn't look like they are going to run their course for at least another year and probably much longer. These include positive earnings outlook, earnings expansion within that outlook, improving expectations and, at least for now, businesses that are still beating despite increased analyst confidence.

So far 24% of the S&P 500 has reported with 76% beating EPS estimates and 81% beating revenue estimates. Both the EPS and revenue beat rates are above average, the revenue rate is at an all time high. The blended rate of growth has risen to 12% already and may continue higher. All 11 sectors are showing growth while 8 are outperforming expectations.


Looking forward growth is good. All four quarters of 2018 are expected to show double digit growth and those estimates have been rising. The first quarter is now expected to see 16% earnings growth as is the second. The third quarter is expected to see growth expand to 17.3% and then again in the fourth to 28%. Yes, 28%. The last time that happened the economy was rebounding from the Global Financial Crisis and hitting a peak, this time around it is growing and and growth is accelerating.


The Dollar Index

The dollar steadied a bit after last week's fall. The Dollar Index gained about 0.20% creating a small green bodied candle sitting on a support target. Support is currently near $89.00 and may hold provided the FOMC sticks to its guns. If they back off their stance the dollar could fall further. If they sound hawkish the dollar may be able to gain ground versus the basket of world currencies. The risk is that global growth is accelerating as well and that will continue to undermine dollar strength keeping the index range bound.


The Gold Index

Gold prices edged lower extending losses begun last week. The metal is moving down off of a long term peak and is indicative of resistance at the $1,350 level. Today's move was driven by strength in the dollar and may continue lower should the dollar begin to strengthen longer term. The indicators are both consistent with a peak and correction showing divergence and bearish crossovers. At this time spot prices are well above the short term moving average and within a trading range so a move down to the average is possible, near $1,320, with a chance of going lower.

The Gold Miners ETF GDX fell -2.75% on the fall in gold. The ETF broke through the $24 support target and is now resting on the short term moving average. Support is near the middle of the long term range and likely to be tested again. The indicators are mixed, consistent with range bound trading and a move lower within the range. A fall below the short term moving average would be bearish with downside target near $22.50 in the near term.


The Oil Index

Oil prices fell nearly a full percent in today's session. WTI was pressured lower on strengthening dollar and signs of rising output in the US. The number of rigs operating in the US/Canada region increased by 24 in the last month, up 228 in the last year, and suggest markets will remain well supplied despite the OPEC production cap. Today's move gives further indication that resistance exists above $66 but no signs of reversal have emerged yet. Contrarily, JP Morgan just raised their price target to $70.

The Oil Index fell -1.54% in response to the fall in oil prices. The index appears to be on the verge of correction and no surprise there, the prices is up substantially in the last few months. The indicators are consistent with a decline in prices, both showing divergences from recent highs and bearish crossovers. A fall from this level may find support at the short term moving average, about -3.5% from today's close, a move below that may go as low as 1,350 or 1,300.


In The News, Story Stocks and Earnings

Wynn resorts stock fell another -16% on growing scandal centered around CEO Steve Wynn. New allegations came out today expanding the scope of the abuse case which rocked the market last week. Simply speaking to the company and Mr. Wynn's ability to run it, most of Wall Street agrees the business is in peril without him. Today's move created another large red candle, broke below the short term moving average and looks like it will test $160 if not move lower.


Dominion Energy reported before the bell delivering mixed results. The company grew revenues by more than 4% over the prior year but fell short of estimates. EPS of $0.91 beat by $0.02. On an as-reported basis the bottom line nearly tripled on benefits from tax-reform. Forward guidance is in line with expectations helping the stock to inch up in early trading. Late in the day market angst took its toll, driving shares back to break even and below.


Lockheed Martin reported before the bell dropped an earnings bomb. The company reported revue grew more than 10% resulting in earnings of $4.23. EPS beat consensus estimates by more than $0.20 and last years results by more than a dollar. All segments save space produced double digit growth with strong outlook for 2018. Shares of the stock jumped 3.5% in the premarket session, opened with a gain near 2% and closed at that level after a volatile day of trading.


The Indices

Today's action was bearish at face value but not overly alarming when looking at the daily charts. All the major indices created red candles, some stronger than others, but none strong enough to indicate reversal or even correction with so much ahead of us this week. The S&P 500 made the biggest decline but only -0.67%. The broad market created a small bodied red candle that qualifies as an inside day but not one I would trade on. The indicators remain bullish and consistent with ongoing rally although they are showing some weakness in the near term. This could result in correction and a possible move down to the short term moving average but no guarantee there. Bottom line, the trend remains up with expected, possibly bullish, catalysts at hand.


The Dow Jones Industrial Average posted the 2nd largest decline, -0.66%. The blue chips created a small to medium sized red candle that is forming a dark cloud cover but not one that looks significantly different from any other red candle we've seen over the past few months. The index is in up trend and that has not changed. The indicators remain bullish but have begun to show peaks consistent with consolidation and/or correction. A move lower may be bearish but would likely find support at 26,000 or just below that at the short term moving average.


The NASDAQ Composite fell -0.52% creating a small red candle. Today's candle is to the side of Friday's and completely inside of it. The indicators are bullish but consistent with a consolidation and set up to fire trend following signals should the index move higher. A move higher would be bullish with upside targets near 7,750 and 8,000.


The Dow Jones Transportation Average posted the smallest decline in a light session of trading. The index closed with a loss of -0.10% creating a small doji candle. The index is bouncing up from the short term moving average in a trend following move but some resistance is still present. The indicators are still pointing lower following bearish crossovers so support may be tested again. A break below the moving average would be bearish with target near 10,500. A bounce would be trend following and bullish with target near 11,500.


I've been bullish a long time and, if my perspective is true, I will be bullish for a long time to come. That being said the market looks like it could correct right now. The problem is that we are at the start of a really big week for the market. Data and the FOMC are going to affect trading but what I am really looking to is the 125 S&P companies that are reporting earnings this week. If they produce stats like the first 24% did I don't see the market moving lower. I'm bullish, cautious, but bullish.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Downgraded

by Jim Brown

Click here to email Jim Brown

Editors Note:

JP Morgan dumped on this tech stock last week and shares are falling. There are just as many positive analysts as negative but the last one with a rating change was a big one.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

NTNX - Nutanix Inc - Company Profile

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix Enterprise Cloud OS software leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications and services. Company description from Nutanix press release.

Expected earnings March 1st.

Nutanix is a good company. They have a great software product. Their challenge is a lot of competition and a rapidly evolving market place. They are faced with educating potential customers about the long-term benefits of the products and then convincing them to lay out a lot of money to change the way they run their server farms.

They are moving into a new layer of software development that will converge all factors of enterprise computing and cloud operations. JP Morgan said that moving to a "new software-oriented model" could "create near-term business disruption" give that it will require operational adjustments for new and existing customers alike. The analyst also warned a recent change to the leadership team might be disruptive as well. Given the recent 4-month rally in NTNX shares, there could be some material impact from implementing the new model.

Shares closed at a two-month low on Monday.

Buy March $30 put, currently $1.85, initial stop loss $35.50.



In Play Updates and Reviews

Refreshing!

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was refreshing to see some minor profit taking to remove some of the overbought pressures. There was no urgency to exit although the selling pressure did pick up as we neared the close. This could be a one day wonder or even the start of a multiday decline but there was nothing in the internals that suggests there is a bigger crash coming this week. Anything is always possible but today was orderly rather than panic selling.



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


DLTR - Dollar Tree
The long call position was entered at the open.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

BITA - BitAuto Holdings - Company Profile

Comments:

No specific news. Big decline in a weak market.

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.


DLTR - Dollar Tree - Company Profile

Comments:

No specific news. Shares broke out over resistance at $115.50 to close at a new high.

Original Trade Description: January 27th

Dollar Tree, Inc. operates variety retail stores in the United States and Canada. It operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates under the under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as blankets, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. As of January 28, 2017, the company operated 14,334 stores in 48 states and the District of Columbia, and 5 Canadian provinces. Company description from FinViz.com

In late November, DLTR reported earnings of $1.01 that beat estimates for $90 cents and was well above the 70 cents reported in the year ago quarter. Revenue of $5.32 billion beat estimates for $5.28 billion. For the current quarter, they guided for revenue in the range of $6.32-$6.43 billion and analysts were expecting $6.26 billion. Full year earnings guidance was $4.64-$4.73 and $22.2-$22.31 billion. That is up from $4.44-$4.60 in prior guidance. Analysts were expecting $4.69.

Same store sales (SSS) for the system rose 3.3% and beat estimates for $2.4%. Dollar Tree SSS rose 5.0% and Family Dollar sales rose 1.5%. Next earnings Feb 20th.

After earnings, Moffett Nathanson initiated coverage with a buy. Two weeks ago Guggenheim initiated coverage with a buy rating and $125 price target. The Guggenheim buy rating saw the shares spike from $110 to $115 and then traded sideways to down for a week as traders took the unexpected profits.

Dollar Tree is Amazon proof. With everything in the store $1 or less even Amazon cannot sell and ship items that cheap. Since their acquisition of Family Dollar, they now operated 14,334 stores. This is a retail powerhouse and even if the economy weakens, their business will thrive because of the low price point.

Last week Oppenheimer started DLTR with a buy rating and $130 price target. The analyst said the company is going to grow earnings at a double-digit rate on low single-digit comps. They will benefit significantly from the lower taxes and from consumers having more money in their pocket. The acquisition of Family Dollar in 2014 is still being integrated and the company is remodeling all the old stores using "multiple improvements in merchandising and other improvements that will drive up profitability long term" according to the analyst. They currently have about 14,500 stores and management said they can grow to 25,000 stores.

I believe DLTR is going to break out to a new high.

Position 1/29/18:
Long March $120 call @ $3.27, see portfolio graphic for stop loss.


FLIR - FLIR Systems - Company Profile

Comments:

No specific news. Minor decline from the record high close.

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. Three consecutive declines. Closing in on our stop loss.

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. Shares gave back half of Friday's $4 gain.

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.

Update 1/25: Nomura said Red hat could see a total addressable market of $66 billion by 2020. The company initiated coverage with a buy rating and $152 price target. The analyst was very positive. Here is the recommendation. LINK

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.

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.

Update 1/25/18: Target announced same day delivery using Shipt from multiple locations in Florida beginning on Feb 1st. More than 6.3 million Florida residents will be in the covered areas. Shipt, which Target is buying for $550 million, serves more than 30 million households in 70 markets across the country. Customers pay an annual fee of $49 to $99 and shipping is free from multiple vendors in their coverage area.

Position 12/14/17:

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



BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - Company Profile

Comments:

No specific news. Big drop despite a flat 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.


CNI - Canadian National - Company Profile

Comments:

No specific news. Minor gain on a corporate headline on environmental action.

Original Trade Description: January 25th.

Canadian National Railway Company engages in rail and related transportation business. The company transports cargo, serving exporters, importers, retailers, farmers, and manufacturers. It operates a network of approximately 20,000 route miles of track spans Canada and mid-America connecting the Atlantic, the Pacific, and the Gulf of Mexico. The company serves the cities and ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama), as well as the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth (Minnesota)/Superior (Wisconsin), and Jackson (Mississippi) with connections to various points in North America. Canadian National Railway Company was founded in 1919 and is headquartered in Montreal, Canada. Company description from FinViz.com.

CN reported Q4 earnings of 94 cents that missed estimates for 98 cents. Revenue of $2.57 billion also missed estimates for $2.61 billion. Earnings rose only 1.1%. Rail freight revenues per carload declined -4%, petroleum and chemicals declined -4%, grain and fertilizer -1% and intermodal volumes declined -5%. Operating income declined -7%. Higher fuel and labor costs were blamed. Free cash flow declined from $777 million to $457 million Canadian. Debt declined slightly to $11.306 billion. They did hike the dividend by 10% to 45.5 cents Canadian payable March 29th to holders on March 8th. They plan to spend $3.2 billion in 2018 on track repair and upgrades and 60 new locomotives and increase that to 200 over the next three years.

Next earnings are April 24th.

Earnings were Jan-23rd and shares began to decline immediately. They have broken support at $78.75. I am recommending we buy an April put option with a wide stop loss.

Position 1/26:
Long Apr $75 put @ $1.35, portfolio graphic for stop loss.




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