Option Investor

Daily Newsletter, Tuesday, 2/20/2018

Table of Contents

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

Market Wrap

Walmart Whoopsie

by Jim Brown

Click here to email Jim Brown

Walmart's earnings surprised investors but not with a big beat.

Market Statistics

Walmart (WMT) reported earnings of $1.33 that missed estimates for $1.37. That was a significant surprise. Revenue of $136.3 billion did beat estimates for $134.91 billion. Same store sales rose 2.6% and beat estimates for 2.2% and store traffic rose 1.6%. However, ecommerce sales rose 23% and well below the 50% rise in Q3 and that is a material decline since it covered the holiday shopping quarter. I reported several times in the past that Walmart raised their prices online and they actually point it out on the product page. This item is $15.95 but it is $13.85 in our stores. That is a sale killer for sure. Management guided for full year earnings of $4.75-$5.00 and analysts were expecting $4.91. The company increased its annual cash dividend by 2% to $2.08 or 52 cents per quarter.

With the earnings miss, decline in ecommerce growth and the light guidance, shares were knocked for a $10.67 loss. That knocked 73 points off the Dow. However, the damage was worse than that. The retail ETF (XRT) fell -2% as nearly every major retailer followed the drop in Walmart shares.

The other retailer to report was Home Depot (HD) with earnings of $1.69 that beat estimates for $1.61. Revenue of $23.88 billion rose 7.5% and beat estimates for $23.66 billion. The company took a charge of $127 million due to tax reform. They also took a charge of 17 cents a share for the onetime bonus payment to hourly associates as a result of the tax reform law. Same store sales rose 7.2% and beat estimates for 6.5%. Customer transactions increased by 2% and the average check rose by 5.5%. They guided for the full year for earnings of $9.31-$9.73 and for revenue to rise 6.5%. They will repurchase $4 billion in shares, have a tax rate of about 26% and spend about $2.5 billion in capex. They will open three new stores. Home Depot put their store expansion program on hold in 2017 to focus that money on improving existing stores and upgrading their infrastructure. Apparently, that move was successful. Shares rallied $5 at the open but fell back with the market.

MGM Resorts (MGM) reported earnings of less than a penny and missed estimates for 7 cents. Revenue of $2.6 billion did beat estimates for $2.5 billion. The company was hit with a short-term occupancy problem after the October shooting from the Mandalay Bay. Occupancy there fell from 85.8% to 80.5%. Net revenue from the Mandalay Bay fell 13.5% and adjusted earnings declined -20%. Nearby properties including the Luxor and Excalibur also saw revenues decline after the shooting. Over all of MGM, revenue per room fell -4.9% and occupancy fell from 89% to 85%. Casino revenue was flat. MGM shares gained 24 cents for the day.

Afterhours earnings were mostly negative. Lending Club (LC) posted earnings of 1 cent that missed estimates for 2 cents. Revenue of $156.5 million missed estimates for $157.6 million. The company said it lost $92.1 million in GAAP earnings. There was a class action litigation settlement of $77.25 million that caused the loss. The company was found guilty of falsifying some documents when selling $22 million in loans to an investor. Shares declined 10% in afterhours.

Boyd Gaming (BYD) reported earnings of 22 cents that missed estimates for 26 cents. Revenue of $590.8 million also missed estimates for $596.2 million. Shares fell -5% after the bell.

Texas Roadhouse (TXRH) reported earnings of 40 cents that beat estimates for 37 cents. Revenue of $545.1 million narrowly beat estimates for $544.2 million. Same store sales rose 5.8% at company stores and 4.8% at franchise stores. They increased the dividend 19% to 25 cents. They said same store sales for Q1 were currently up 4.7%. Shares fell about $1.50 in afterhours.

Devon Energy (DVN) reported earnings of 38 cents that missed estimates for 60 cents. Revenue of $3.98 billion did beat estimates for $3.55 billion. The company said it produced an average of 548,000 Boepd, which was 14,000 Boepd less than its own guidance. For the current quarter, they guided for production from 530,000 to 554,000 Boepd. They guided for full year production of 552,000 to 576,000 Boepd or a 14 % increase. Shares fell about $2.25 in afterhours.

Qualcomm (QCOM) said it was raising its bid for NXP Semiconductors (NXPI) from $110 to $127.50 per share. In exchange, they received binding agreements from nine NXP shareholders that control 28% of the stock. Tendered shares had been very low in this long running acquisition battle. Analysts knew Qualcomm would raise the bid once they got final approvals from regulatory agencies but China has not yet given their approval.

This increased bid is probably enough to get the tender from 70% of shareholders, which is the new threshold required. The bid will also hinder Broadcom from successfully completing an acquisition of Qualcomm. Broadcom has put forward six director nominees for the Qualcomm board and proxy advisors ISS and Glass Lewis have recommended electing all six so that Broadcom can complete an acquisition of Qualcomm for $82. If Qualcomm was able to secure NXPI for $44 billion, that would kill the Broadcom bid for Qualcomm and force them to either come up with a lot higher offer or back out of the deal. The Qualcomm CEO said the Broadcom bid valued the company at a PE of 9-11 and the going PE for semiconductor companies was 17 or higher indicating the bid was far too low.

Privately held Albertsons said it would buy Rite Aid (RAD) in a cash or stock deal. Rite Aid had agreed to sell 1,932 stores to Walgreens (WBA) for $4.4 billion after the company failed to get regulatory approval to buy the entire Rite Aid chain. Albertsons will be acquiring the remaining 2,569 stores and that will significantly boost Albertson's footprint. After the acquisition, Albertsons will have 4,350 pharmacy counters and 320 clinics across 38 states serving 40 million customers per week. Albertsons will also be getting the pharmacy benefit manager EnvisionRX, which works with employers and government health programs.

The company said they would extend the Rite Aid brand into their stores including Safeway, Vons, Jewel-Osco, Shaw's Acme, Tom Thumb, Randalls, United, Pavilions, Star Market, Haggen and Carrs. Shares of Rite Aid rose only fractionally. For every 10 shares or Rite Aid, holders can elect to receive either 1 share of Albertsons plus $1.83 in cash or 1.079 shares of Albertsons. Rite Aid shareholders will own 28% of the combined company. Albertsons is currently private but immediately after the share exchange, they will list on the NYSE.

Samsung is slashing output of the OLED screens used in the Apple iPhone X after Apple was rumored to be cutting production of the phone due to weak demand. Samsung is now planning to make 20 million of the screens in the Jan-Mar quarter compared to prior plans for 45-50 million phones. They have yet to set a production target for the Apr-Jun quarter but are expected to slash output there as well. The Nikkei Times reported last month that Apple was cutting production in half for the current quarter. There are significant rumors that Apple could kill the model X in its next refresh cycle because of persistent technical problems. Rumors claim there will be three new iPhone models rather than one in the next release. Despite the confirmation from Samsung on the production cut, Apple shares declined only slightly in a bad market.

There were no economic reports today. There are only two material reports for the rest of the week and those are not market movers unless they miss estimates by a mile. The biggest event remains the Powell testimony next week and treasury yields are rising ahead of that event. Yields on the 10-year rose to 2.91% intraday but faded back to 2.89% at the close.

The only high profile earnings reporter on Wednesday is Jack in the Box followed by the Hewlett Packard twins on Thursday. The number and quality of earnings reporters are declining as the Q4 cycle comes to a close.

Amazon (AMZN) has quietly entered the over the counter drug market. Amazon launched the Basic Care brand, which is an exclusive line of Perrigo OTC health care products. This could be the first wave of attacks on retail drug stores like Rite Aid, Walgreens and CVS. While Amazon is not manufacturing these products, you can bet they got a sweetheart deal with Perrigo that will allow Amazon to be the price leader. The Basic Care line actually launched last August with 60 products including things like ibuprofen and Rogaine. Since pharmacies make their most money from impulse sales when customers come in for a prescription or an OTC drug like cough syrup but then walk out with an entire sack of stuff like makeup, hair products, candy, etc, this could be a blow to those sales. Everybody likes the convenience of Amazon shopping and being able to buy the same branded and generic products without a trip to the pharmacy, is going to be appealing. Amazon is selling private label ibuprofen for $6.98 for a 500-count bottle. CVD, Walgreens and Rise Aid each get from $14.99 to $15.99 for the branded version. Amazon shares rallied on the news to close at a new high despite the ugly market.


The Dow was negative from the start but the Nasdaq, S&P and Russell all struggled to intraday gains despite the weak blue chip index. The Nasdaq surged to a 58 point intraday gain before falling back at the close to post a 5 point loss. This was excellent relative strength and suggests the overall market weakness is only going to be temporary. There were only 5 big cap tech stocks that closed with losses.

The Nasdaq has closed over 7,200 for three days and came within 4 point of 7,300 intraday. The tech sector is where you find growth and the big blue chip non-tech stocks were already overbought again. The 7,200 level should be light support for the Nasdaq index and the tech futures are up +14 in afterhours.

The S&P ran into some light resistance at 2,735 and slipped slightly to close back under the 50-day average at 2,726. Real support is well back at the 2,675 level and I would be surprised to see that tested but I would be more surprised to see it fail.

Walmart is going to get a lot of the blame for the Dow's decline but the futures were already negative well before Walmart reported earnings. This was simply profit taking from six days of consecutive gains. Walmart was a contributing factor because they caused an implosion in the retail sector and weighed on other Dow stocks but they were not the cause.

The Dow rebounded 1,025 points last week and 2,072 points from the Feb 9th intraday low to Friday's intraday high. That is too many points for only six days of gains.

The index has strong support at 24,700 and a retest there is always possible but it would be surprising.

The Russell small caps struggled to stay positive intraday but finally caved in at the close. They had a good week and they are fighting strong resistance at 1,550.

I believe this is a buying opportunity because the fundamentals remain very strong. The market was overbought and needed to rest. Today's -254 point drop in the Dow was exactly what the doctor ordered. I wrote over the weekend the market needed to rest soon with a decent triple digit decline. We can now check that off our list. Any further dip should be bought, in my opinion.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Not Unexpected

by Jim Brown

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Editors Note:

Nothing goes straight up forever. The Dow and S&P had completed six consecutive days of gains with the Nasdaq posting a slight decline on Friday. It was time for the Dow to rest. The Walmart earnings were getting the blame but futures were already down significantly before Walmart reported. Now that the rebound rally has rested, we could see a new rebound begin this week.


New positions are only added on Wednesday and Saturday except in special circumstances.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Retail Train Wreck

by Jim Brown

Click here to email Jim Brown

Editors Note:

Walmart earnings poisoned the sector causing major declines. Walmart shares fell $10.67 to knock -73 points off the Dow but the futures were already negative. The pressure on the retail sector from the Walmart earnings even drug Home Depot lower after strong earnings and guidance. Target, Kohl's, Macy's, Nordstrom, Burlington, Ross and others were all down hard.

We did not have a stop loss on Walmart and it would not have helped us if we did. The big gap lower at the open would still have caused an exit at the low for the day.

I am not putting any stop losses on our positions. With volatility still high and triple digit intraday moves that is just an opportunity to be stopped at the lows for the day. These are April positions or longer and the volatility should not last more than two more weeks.

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

JPM - JP Morgan
The long call position was entered at the open.

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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

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BEARISH Play Updates (Alpha by Symbol)

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