Option Investor

Daily Newsletter, Tuesday, 1/30/2018

Table of Contents

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

Market Wrap

Blame Game

by Jim Brown

Click here to email Jim Brown

The markets opened negative and hit their lows about 10:30 on only a minor increase in volume.

Market Statistics

In a big market selloff, you want to see capitulation by existing holders. That normally means a large advance to decline imbalance and very high volume. That tells analysts that the dip is meaningful and investors are racing to the exits. Today was not one of those days. An A/D imbalance of 8:1 or even 10:1 normally signals capitulation at either the top or bottom of a regular market cycle. Today declines were 4:1 over advancers. While that is elevated, it is far from a panic. Volume was 8.03 billion shares and only about 10% over levels seen so far in 2018. There was definitely no rush to the exits.

The two day decline of -1.75% was the worst since September 2016. That should give you an idea of how few declines we have had. Actually, there were only two declines of more than 2% in 2017 and this was the first one in 2018.

The blame game started before the market even opened as market commentators tried to assign blame for the negative market. Some blamed the spike in treasury yields to 2.72% on the ten year. Since the yield closed at 2.696% on Monday, I hardly think that was the problem.

Others blamed the end of month portfolio rebalancing by pension fund managers. In theory if you have a balanced portfolio of 60% stocks and 40% bonds, the manager is supposed to rebalance whenever those ratios become unbalanced. With the markets up roughly 8% for the year in January coupled with gains in December, the ratios could have risen to more than 70% equities and 30% bonds. Analysts have been predicting a $16-$20 billion sale of equities at month end to bring the portfolios back into balance. While that theory was making the rounds, there was no material flow into treasuries that would have offset the decline in equities. It may have had an impact and it could be spread over the last three days and the first two days of the month. This may have had some impact on the market but there was no material increase in volume.

The most likely cause of the decline was simply being extremely overbought and the announcement by Amazon, JP Morgan and Berkshire that they were forming a company to provide cheaper healthcare for their 1.1 million employees. That caused the bottom to fall out in the healthcare, pharmacy and drug stocks. The carnage was deep and wide spread. The goal is to reduce healthcare expenses by 20% or more. JP Morgan spent $1.2 billion on healthcare in 2017. If they were able to accomplish this feat, it would be a major blow to nearly every provider of drugs and services.

The group had to go public with their plans because they are starting a hunt for a CEO. The company will be separate and will be "ring fenced" from the parent companies to avoid conflicts of interest. That would also make it potential magnet for dozens if not hundreds of other major corporations also trying to cut expenses. Given Amazon's resources and the razor thin margins they produce, there is a very good chance they will exceed their cost reduction goals and that could upset the entire healthcare industry.

America has the highest drug prices in the world and every drug has to go through multiple hands before it is given to you by the druggist. Some people claim there is 20-40% in costs generated by the various middlemen including distributors, wholesalers, pharmacy benefit managers, etc. With Amazon's clout, they could go direct to the manufactures and force them to bid for the business and discount their own products.

Amazon disrupts. The fear of Amazon disrupting the very profitable drug pipeline business caused massive declines in the various stocks. UnitedHealth (UNH) lost more than $10 to cause a -74 point impact to the Dow.

When markets suddenly decline, stocks that are not a part of that reason, sell off as well. This is the "whoosh" effect. Since most investors do not know minute by minute why the market is moving, only that their charts are falling, they tend to pull the ripcord and bail from their positions to protect their profits. This morning was a whoosh market. As the various reasons being given were discounted by analysts, the market stabilized around 10:30 and traded in a narrow range the rest of the day.

To prove the points above the Volatility Index ($VIX) spiked to 15.40 at the open then faded to trade relatively sideways the rest of the day. There was no panic other than at the open. The spike over 15 was the highest level since August 17th. The VXX futures ETF rose more than $2 on Monday but only 96 cents today. Traders were more concerned about volatility on Monday than today.

The economic news this morning was positive and had no impact on the market decline. The Consumer Confidence for January came in at 125.4, up from 123.1 in December. That is still down from 18-year high of 128.6 in November but still near the high. The present conditions component declined from 156.5 to 155.3 but the expectations component rose from 100.8 to 105.5. That is directly related to the passage of the tax reform package at the end of December and the announcement by more than 100 companies that will give their employees significant bonuses as a result.

Those thinking jobs were plentiful rose from 36.3% to 37.6%. Those respondents thinking of buying a car rose from 13.0% to 13.4%. However, those planning on buying a home declined from 7.4% to 6.0% and appliance buyers from 59.3% to 49.6%. Rising interest rates were blamed on the decline in homebuyers.

The S&P CoreLogic Case Shiller home price indexes showed a 6.4% rise in prices. This was for the November period and the report was ignored as old news.

After the bell, the weekly API crude inventory report showed a build of 3.229 million barrels compared to expectations for a minor build of only 126,000 barrels. Gasoline inventories rose 2.692 million barrels and a decline of -4.1 million barrels of distillates. Prices declined -$1.57 in regular trading and another 10 cents after the bell. The EIA expects US production to top 10.0 million bpd in this week's report or next week at the latest.

The calendar for tomorrow has the FOMC meeting announcement and no rate hike is expected. Currently analysts expect an average of 3.2 rate hikes in 2018. This is Janet Yellen's last Fed meeting and Jerome Powell will take over the Chairmanship after tomorrow.

There is a 94.8% probability of no hike on Wednesday with only a 5.2% chance of a hike. The March meeting has a 72.1% probability.

The consensus estimates for the ADP Employment have risen from 173,000 to 185,000 over the last three days. The estimates for the Nonfarm Payrolls on Friday have risen from 163,000 to 180,000. Unless both reports miss the estimates by a mile there will be no impact on the market. Unemployment is near record lows and everyone expects fluctuation from month to month.

The State of the Union speech tonight could have an impact on the market depending on the content. Everyone is expecting some details on an infrastructure package that could run from $1.0-$1.7 trillion. This would boost materials stocks and is probably why Caterpillar (CAT) was positive in a very weak market today.

The government funding deadline for Feb 8th is going to be a challenge. The partisan divide is actually increasing in hostility and the odds are good we will have another government shutdown that could last longer than the one in mid January. Earnings reports will be declining by that date and the market may not be willing to ignore larger conflict.

The only calendar that means anything to investors for the rest of the week is the earnings calendar. This is big cap tech earnings week and the deck is stacked for the next two days. There are eight additional Dow components reporting over the next three days.

There were some big losers after the earnings reports today. Dow component McDonalds (MCD) fell -3% after reporting good earnings. The company reported earnings of $1.71 that easily beat estimates for $1.59. Revenue of $5.34 billion beat estimates for $5.23 billion but declined from the $6.03 billion in the year ago quarter. Same store sales rose 4.5% in the US and 5.5% globally. The company blamed the sales increase on the McPick 2 menu, beverage value items and "strong consumer response" to the Buttermilk Crispy Tenders and delivery options. The company plans to open 1,000 new stores with 75% funded by affiliates and licensees. The company is also going to spend $2.4 billion to modernize existing locations and provide digital upgrades.

Shares declined -$5 (-3%) on worried the new $1, $2, $3 value menu would reduce sales on other higher priced, higher margin items. Shares closed at a new high on Friday and I am sure they were caught up in the whoosh effect with the Dow crashing -411 points intraday. This is a buying opportunity with a drop to uptrend support.

Dow component Pfizer (PFE) reported earnings of 62 cents that beat estimates for 56 cents. Revenue of $13.7 billion beat estimates for $13.67 billion. They guided for full year revenue of $53.5-$55.5 billion compared to estimates for $53.83 billion. Earnings guidance was $2.90-$3.00 compared to estimates for $2.78. They anticipate buying back $5 billion in stock in 2018 and investing $5 billion in capital projects. They shocked investors with an expected tax rate of 17% and $15 billion in repatriation taxes over the next 8 years. The tax rate was a shock after AbbVie projected a 9% tax rate with their earnings on Friday. Investors had hoped to hear similar numbers from Pfizer. Shares fell on the earnings and the imploding Dow.

Harley-Davidson (HOG) reported earnings of 54 cents compared to estimates for 46 cents. Revenue of $1.05 billion beat estimates for $1.01 billion. These numbers were up from 27 cents and $933.0 million in the year ago quarter. That is where the good news ends. The company said it was going to incur consolidation costs of $170-$220 million and $75 million in capital costs over the next two years. The consolidation of plants would save them $65-$75 million annually after 2020.

The company said Q4 sales declined 9.6% year over year with sales down -11.1% in the USA. Industry sales were down -6.5%. Overall shipments by Harley in 2017 were the lowest in six years. The company said the customer base was getting older and younger customers were lukewarm to the brand. They lowered 2018 guidance for shipments of 231,000-236,000 motorcycles, down from actual shipments in 2017 of 241,498 and its prior 2018 forecast of 241,000-246,000. Shares fell 8% on the lowered guidance.

Polaris Industries (PII) reported earnings of $1.47 that matched estimates. Revenue of $1.43 billion beat estimates for $1.35 billion. They guided for the full year for earnings of $6.00-$6.20 per share compared to estimates for $6.03. However, revenue guidance for 3%-5% growth was well below the 9% analysts were expecting. Shares fell $18 on the news.

Aetna (AET) reported earnings of $1.25 that beat estimates for $1.18. Revenue of $14.74 billion missed estimates for $14.89 billion. CVS is in the process of acquiring Aetna for $69 billion. Shares fell $6 on the earnings.

Harris Corp (HRS) reported earnings of $1.67 that blew past estimates for $1.40. Revenue of $1.54 billion beat estimates for $1.48 billion. They guided for the full year for earnings of $6.30-$6.50, up from $5.85-$6.05. Revenue guidance of $6.08-$6.14 billion was up from $6.02-$6.14 billion. Shares soared for a $9 gain.

After the bell, Advanced Micro (AMD) reported earnings of 8 cents that beat estimates for 5 cents. Revenue of $1.48 billion beat estimates for $1.41 billion. They guided for Q1 for revenue of $1.5-$1.6 billion and analysts were expecting $1.25 billion. Unfortunately, they backtracked on the comments the Meltdown and Specter hacks would not be material to results. Now they fear the Specter hack could be costly and the efforts to fix the security flaw in their chips could be ineffective.

Nearly every computing device made by AMD, Intel and ARM Holdings over the last 20 years contains the design flaws that "could" allow hackers to steal information. Shares fell -5% initially but rebounded to flat in afterhours.

Juniper (JNPR) reported earnings of 53 cents compared to estimates for 52 cents. Revenue of $1.24 billion narrowly beat estimates for $1.23 billion. The company guided for earnings of 25 cents and revenue of $1.05 billion in Q1. That was less than the 42 cents and $1.15 billion analysts were expecting. The company said the weakness came from delays in installations by key customers and did not impact ongoing sales or market share. Shares fell $2 in afterhours.


It would be really hard to come up with a comprehensive forecast for the markets on Wednesday. The markets closed near the lows for the day and there was no rebound at the close. Typically, when the markets are going to rebound from a big dip they tend to show some signs of buying at the close. On Tuesday, there was actually some sell on close orders but they were light.

We all know the market was very overbought and was due for a rest. Declining -1.75% in two days is a decent drop but it only took us back to where we were trading last Monday. We have gone for more than a year without a material decline and two days, even at -1.75%, is not much given our recent gains.

I would love to jump in and buy the dip but as I wrote on Monday night, I would not jump in on the first drop. We could easily see an intraday rebound attempt that gets slammed again OR could just explode higher again on Wednesday. The recent pattern to triple digit losses is that they were followed by triple digit gains. Will that happen again? Nobody can tell tonight.

The futures are mildly positive at +3 while the SOTU speech is in progress. That is good so far. That means nothing has been said to tank the market at this point. A positive speech should be good for the market.

Last week Bank of America warned of a potential imminent sell off of 5.6% to 2,686. The S&P declined today to 2,820. A forecast is an opinion not a guarantee. If we were going to return to the long-term uptrend line that would be about 2,650-2,700 depending on the speed of the decline. The 100-day average is currently 2,622 and I have written about that several times recently. The 50-day average is 2,700 and far more likely to be hit but maybe not until mid February.

I still believe we have a good chance of remaining in our present range until the first full week of February when the earnings activity begins to decline.

The Dow has 8 more components announcing earnings this week. Boeing could be the most volatile on Wednesday. The stock has been the biggest supporter for the Dow and any disappointment could be ugly. I do not expect it but nobody expected the Amazon, JPM announcement either. The Dow declined -411 points at its lows.

Initial support is 26,000 followed by 24,700 and that would be a long drop.

The Nasdaq declined only 0.85% compared to the -1.4% on the Dow. I believe that is because investors were hanging on to their big cap techs in hopes of blow out earnings this week. I hope they are not disappointed. The index has initial support at 7,400 but then a sizeable drop to 6,900 if the market continues to be weak.

The Russell 2000 came to a dead stop at 1,580 and exactly uptrend support. This was encouraging. Any further decline could test 1,550. The small caps are not as overbought as the big caps but in any material market decline, they tend to get slaughtered.

I sincerely hope the market explodes out of the gate on Wednesday and the two-day decline was a onetime event. Hope is not a successful trading strategy but it is one investors rely on constantly. If the market opens higher, beware of a lower high where the bounce is sold. If you are going to buy the dip, try to wait until you see a rebound with decent volume and velocity before jumping in.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Pause to Refresh

by Jim Brown

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Editors Note:

The S&P has declined -1.75% in two days. That is the most since September. Is the decline over? Will the market blast off to triple digit gains again on Wednesday? Nobody knows and trying to recommend new positions ahead of the unknown is not something I want to do today. There is always another day to trade when the direction is clearer.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

House Cleaning Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big market decline fed on investor stop losses and many found their positions closed. Monday's -177 drop on the Dow was calm and orderly. There was nothing calm about the -411 point intraday decline today. The Dow gapped -305 points lower at the open and never recovered. The opening gap lower knocked us out of four call positions. This is the kind of day I fear the most. When stops are hit on a gap down open, we are normally filled at the low for the day. Everyone pulls their bids and when the stops trigger, the resulting fill is ugly. On the plus side, a day like this lets us see which stocks have the best relative strength so we know who to play when the market rebounds.

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

NTNX - Nutanix Inc
The long put position was entered at the open.

BITA - BitAuto Holdings
The long call position was stopped at the gap down open.

PLAY - Dave & Busters
The long call position was stopped at the gap down open.

TGT - Target
The long call position was stopped at the gap down open.

RHT - Red Hat
The long call position was stopped at the gap down open.

AMBA - Ambarella
The long put position was stopped at $51.25.

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


No specific news. BITA gapped lower with the market to stop us out.

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:
Closed 1/30: Long March $40 call @ $2.95, exit $1.35, -1.60 loss.

DLTR - Dollar Tree - Company Profile


No specific news. Shares fell back to uptrend support in a weak market. However, the higher consumer spending report this morning suggests there are better days ahead for DLTR.

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


No specific news. Market related decline from the record high close on Friday.

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


No specific news. Down with the market to hit 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:
Closed 1/30: Long April $50 call @ $3.40, exit $2.69, -.71 loss.

RHT - Red Hat - Company Profile


Red Hat said it had entered into a definitive agreement to acquire CoreOS for $250 million. CoreOS is a leading innovator in Kubernetes and container-native solutions. I have 50 years of technical experience in IT and I still had to look up Kubernetes to see what they are talking about. LINK This should be a big plus for Red Hat for the future. Google runs billions of Kubernetes type container processes a week to scale their workload to the available resources in real time.

Unfortunately, we were stopped out at the opening gap lower this morning. I wanted to recommend reentering the position using the March $135 call, but the market closed near its lows and this decline may not be over.

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:
Closed 1/30: Long Mar $130 call @ $3.40, exit $7.30, +$3.80 gain.
Closed 1/30: Optional: Short Mar $140 call @ 90 cents, exit $2.38, -1.48 loss.
Net gain $2.32.

TGT - Target Corp - Company Profile


No specific news. Shares gapped lower with the market to take us out of this profitable position.

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:

Closed 1/30: Long March $65 call @ $2.90, exit $11.30, +$8.40 gain.

BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - Company Profile


No specific news. Shares exploded higher with a $2.61 gain to stop us out.

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:
Closed 1/30: Long Feb $50 put @ $1.40, exit $1.45, +.05 gain

CNI - Canadian National - Company Profile


No specific news. Minor decline in a weak market. Investors may have seen CNI as a safe port in a market storm.

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.

NTNX - Nutanix Inc - Company Profile


No specific news. Shares gapped down to $30.63 at the open thanks to the weak market. You never want to buy puts on a gap down open or calls on a gap up open because you normally get filled at the highest premium for the day. Unfortunately, I cannot control that in this newsletter so we are stuck with a bad fill.

Original Trade Description: January 29th.

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 FinViz.com.

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.

Position 1/30/18:
Long March $30 put @ $2.49, see portfolio graphic for stop loss.

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