Option Investor

Daily Newsletter, Wednesday, 1/16/2019

Table of Contents

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

Market Wrap

Moving On Up

by Thomas Hughes

Click here to email Thomas Hughes


Equities market shrug off slowing growth, trade concerns, and a failed Brexit in favor of earnings. I'm reasonably sure one of the aforementioned problems will raise its ugly head again but for now, it seems as if the market is focusing on what is really important; corporate profits. The season is still in its infancy but the signs are good we're going to see a good earnings cycle. So far we've gotten reports from most of the big banks and, while there has been some isolated weakness, core consumer businesses are good.

A look at the Banking Index says it all; A VEE bottom is confirmed.

On the political front, the government shutdown wears on. There is growing speculation on the impact of the shutdown should it linger into the end of the quarter but no two sources seem to agree. Pelosi and Trump don't seem to be on a path to get it ended so we may find out. Today's news is a message from the new Speaker of the House to President Trump, reschedule the State of the Union or submit it in writing.

Market Statistics

On the Brexit front, Theresa May's deal with the EU was soundly rejected and resulted in a new vote-of-confidence. The vote, this afternoon, confirmed the May government but did little to enlighten us on the path forward. May says Parliament must find solutions that are negotiable and have a majority of support from UK citizenry, a goal they've been working towards for two years. The question now is what happens next. It seems more and more likely a hard-Brexit is inevitable, Jamie Dimon says the UK may have to take whatever the EU offers if they want to get this thing done.

Economic Calendar

The Economy

There was quite a bit of data due out today include the December read on retail spending. The data was delayed by the government shutdown and is not likely to be released until the shutdown is over. Without data to guide it the market will be forced to rely on secondary and anecdotal sources, analysis, and conjecture which is not a good foundation to build on.

We did get a read on Home Builder Sentiment and Import Prices. Home Builder Sentiment rose by two points to 58 as buyers begin to come back to the market. The gains were driven by lower interest rates, evidenced by high double-digit increases in mortgage applications over the past two weeks, and are likely to continue into the coming months. The three sub-indices all showed improvement but the traffic of buyers remains below 50 and levels seen last year.

Import prices fell a full percent in the last month which is a good thing. The only problem is that the analysts had been expecting -1.3% which makes this month's figure a miss. Regardless, the data show downward pressure in inflation and further evidence the FOMC needs to hold off on future rate hikes.

The CME Fedwatch tool shows an equally low chance for a single rate hike or rate cut this year, about 14% each. What this means is that we're probably going to see no hikes or no cuts this year without some change to circumstances. One possibility is the shutdown could last all quarter and lead the US to the brink of a recession or worse (not likely in my view), another is that a trade deal will be struck with China and global activity will rebound (more likely I think).

The Dollar Index

The Fed's Beige Book was much as expected and did little to move the dollar. According to the monthly report on US economic activity continues to increase in most of the country; eight of the twelve districts reported modest to moderate growth. Non-auto retail sales grew modestly, manufacturing continues to expand if at a slower pace, and the outlook remains generally positive. Market volatility, rising rates, trade uncertainty, and geopolitics have had a negative impact on outlook.

Employment and wages grew throughout the country, no surprise there. The majority of districts are reporting a shortage of workers with some noting some establishments are turning away business due to a lack of staffing. Regarding prices, prices continue to rise at a modest to moderate pace. Most firms are indicated a rise in input costs but a smaller amount have been able to pass those costs on to the consumer.

The Dollar Index edged higher in the early part of the session but gave up the gains well before the Beige Book was released. The index created a small green candle but the upper shadow confirms yesterday's resistance at the short-term moving average so I'm not expecting much of a move higher. Tomorrow's Philly Fed Index is likely to echo the Empire State survey from earlier this week; if it does it will be a weak read and could push the Dollar Index lower. A move above the short-term 30-day EMA could be bullish but would leave the index within the long-term trading range, a fall from this level may be bearish but only if it can break below $95.05.

The Gold Index

Gold prices were able to drift higher in the Wednesday session but spot gold remains within the near-term congestion band. The band, between $1,280 and $1,300, bears the hallmarks of a bullish flag pattern that may soon be confirmed. A move up and above $1,300 would be bullish but is not yet seen in the indicators. The indicators are showing some weakness that may lead the metal lower but, until then, are consistent with consolidation within the uptrend. If prices do move higher and break resistance I'd expect to see gold hit $1,325 and $1,350 over the next few weeks.

The Gold Miners ETF GDX has retreated to support at the $20.50 level and may be ready to move higher. This is assuming that gold moves higher because if it doesn't there isn't much hope for this index. The support level is probably a strong one, it has been a crucial pivot point since the gold correction last summer and confirmed by the short and long-term moving averages. The indicators are moving lower which is a cause for concern but until prices break $20.50 and then fall below the long-term moving average things are looking good for price action to rebound. A move up would be bullish but may be capped at $21.50, a move above there could go to $22.00 or $23.00 in the near to short-term.

The Oil Index

Oil prices were able to hold steady amid today's mix of inventory data. The EIA says crude stockpiles fell 2.6 million barrels, about double the expected, but distillates and gasoline more than made up the difference. Distillate stockpiles rose almost 3 million barrels, also double the expected, while gasoline stocks rose by 7.5 million barrels, almost 3 times the expectations. Along with this, the EIA says US crude production could top 12.9 million barrels per day by next year which means we will be pumping more than enough to offset OPEC's production cuts. Today's price action has WTI trading above the short-term moving average but still below a key resistance point. If resistance is not overcome soon, and considering the inventory data, oil prices could begin falling again.

The Oil Index tread water in today's session and is positioned much like the underlying commodity. The index is consolidating above the short-term 30-day EMA but below a resistance point with the future in question. With oil prices so low the energy sector is expected to post the worst earnings of the year which includes negative growth for most quarters. The only thing supporting the sector is buybacks, dividends, and potential for dividend increases. A move up from here would be bullish but may not go far, there is resistance at the 1,300 level and then the long-term moving average near 1,350.

In The News, Story Stocks and Earnings

Blackrock reported earnings before the bell and the money manager reported a -50% decline in net-inflows. Total revenue missed by a hair but was down from the sequential quarter and the same quarter in the previous year. Assets under management also fell. The results were bad but not so bad considering the market was expecting worse. Reports from Citigroup, JP Morgan, and others showed significant weakness in trading-related revenue that could have cut much deeper into Blackrock's bottom line. The market chooses instead to focus on a 5% increase to the dividend which helped drive the stock higher. Blackrock advanced more than 4% in today's session and looks like it could be reversing a downtrend that has shaved nearly 50% off its share price over the last year.

Bank of America reported before the bell and blew past consensus estimates. The company reports revenue grew more than 11% over the last year and that the consumer is strong. EPS of $0.70 beat by $0.07 on strength in Consumer Banking and Global Wealth Management. Consumer Banking net income grew 52%, Global Wealth by 43%. There was a small decline in trading revenue, about -6%, but nothing like what we've seen from banks with exposure to the segment. Shares of the stock gapped up at the open, opened above the long-term moving average, and moved higher from there. By the end of the day the stock was up more than 7.60% and supported by strong momentum.

Goldman Sachs also reported before the bell and absolutely smashed the consensus estimates. The company reported revenue of $8.08 million, down in the YOY comparison, but a half billion above the expected. The strength in numbers was driven by strength in net investment income, Investment Banking, and Institutional Services, and aided by an improvement in operating costs. Shares of this stock gained nearly 10% and closed at the high of the session.

Rail giant CSX reported after the bell and delivered a package of nice surprises. The company beat on the top and bottom lines with revenue up more than 10% over the last year. Revenue is driven by broad-based volume growth, pricing gains, and a favorable mix. The company also announced its best ever operating ratio, up 40 basis points in the last quarter, and a fresh $5 billion share repurchase program that has the stock trading down -2.0% in the after-hours session.

The Indices

The indices moved higher and the price action looks good. In all cases, a VEE-ish bottom is forming after the December low and most indices are confirming the move.

The Dow Jones Industrial Average led today's market with a gain near 0.60%. The blue-chip index opened slightly above yesterday's close, above the baseline of said VEE bottom, and moved higher from there. The index is supported by rising momentum and stochastic that point to a continuation of the 2019 rally. A move higher is likely to find some resistance at the long-term moving average, a move above that would be bullish for the long-term and likely result in a retest of the all-time highs.

The Dow Jones Transportation Average posted the second largest gain in today's session but is the least advanced in its reversal. This index is still below the baseline of its potentially VEE bottom and that is a concern. The indicators are bullish but also still showing some weakness in an index I'd rather see leading the market than lagging. Today's resistance was just above 9,610, a move above that would then to cross another resistance target at 9,750 before it would be in the same position as the broader market. Today's after-hours report from CSX

The S&P500 posted the largest advance with a gain near 0.30%. The broad market index is well above the baseline of its reversal pattern and set a new high with today's candle. The index is also indicated higher so a move to test the long-term moving average is likely. My next target is 2,700, a move above that may find resistance at the 2,750 level.

The NASDAQ Composite was the weakest mover in today's session, no surprise since it isn't very heavily weighted toward financials. The index is above the baseline of a reversal pattern, and above the short-term moving average so further upside is likely as the earnings season progresses. The indicators are a bit weak but consistent with consolidation within an uptrend so I am not worried at this time. A move higher will confirm this outlook but may face some resistance at the long-term moving average. A move above that would be bullish.

I am so happy, earnings season is here and the market is not focused on the FOMC, or too heavily on trade. The results are good so far and, based on what the bankers are saying about the consumer, should continue to be good throughout the cycle and on into the rest of the year. Like they say, when its bad for Wall Street it's good for Mainstreet and that is what we've seen over the last year. Wall Street has been struggling with a lot of issues while labor markets, wages, consumer health, and retail spending all improve. Now, Mainstreet is back and ready to drive the economy to new highs over the next year (s). I am firmly bullish for the long-term and cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Betting on the Future

by Jim Brown

Click here to email Jim Brown

Editors Note:

Periodically shares of a stock react negatively to a headline that is really good. Medtronic tanked last week despite positive guidance for 2019.


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


MDT - Medtronic - Company Profile

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. The Cardiac and Vascular Group segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation product; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software. It also provides aortic valves; percutaneous coronary intervention stents, surgical valve replacement and repair products, endovascular stent grafts, percutaneous angioplasty balloons, and products to treat superficial venous diseases in the lower extremities. The Minimally Invasive Therapies Group segment offers surgical products, including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, and gynecology products; hardware instruments and mesh fixation device; and gastrointestinal, inhalation therapy, and renal care solutions. The Restorative Therapies Group segment offers products for spinal surgeons, neurosurgeons, neurologists, pain management specialists, anesthesiologists, orthopedic surgeons, urologists, colorectal surgeons, urogynecologists, interventional radiologists, and ear, nose, and throat specialists; and systems that incorporate energy surgical instruments. It also provides image-guided surgery and intra-operative imaging systems; and therapies for vasculature in and around the brain. The Diabetes Group segment offers insulin pumps and consumables, continuous glucose monitoring systems, and therapy management software. The company was founded in 1949 and is headquartered in Dublin, Ireland. Company description from FinViz.com.

Medtronic tanked after the JP Morgan Conference after the CEO updated guidance and some analysts took it negatively. The company lowered 2019 guidance slightly due to worries over paclitaxel and higher mortality signals. However, the company feels "very confident" the devices are safe and has the necessary data to back up the claim. An analyst at BTIG said the guidance was "very conservative" after talking to the CEO. He said Medtronic should be able to at the very least match its guidance and more than likely beat it.

BTIG said beyond 2019 the company has a "broad and rich" pipeline for fiscal 2020 that will generate more than a 4% growth in several specific areas. He upgraded MDT shares from neutral to buy with a $100 price target.

On Tuesday Medtronic announced a new mobile app that communicates directly with its portfolio of pacemakers. Patients and doctors can monitor the pacemakers on a smartphone or tablet. That means the pacemaker can transmit vital data to the patients smartphone without intervention and the app can communicate with the doctor for analysis. Patients no longer need to be tied to home based monitoring equipment.

Shares rallied the last two days on the new mobile app news and the analyst upgrade.

Earnings February 19th.

I am recommending a May option because there are no March or April options at this time. We can buy time but we do not have to use it.

Buy May $90 call, currently $2.84, stop loss $82.85.


No New Bearish Plays

In Play Updates and Reviews

No Mystery

by Jim Brown

Click here to email Jim Brown

Editors Note:

There was no mystery on why the S&P came to a dead stop in the afternoon. The S&P stopped almost dead on the Fib resistance at 2,624 with only a 1-point penetration before sellers appeared. However, the entire day was a buyer's boycott rather than an abundance of sellers. The index gapped open to resistance and held there the rest of the day.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

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

BULLISH Play Updates

CAT - Caterpillar - Company Profile


No specific news. Shares holding just over resistance while we wait on China trade talks. We may have to close soon before our premium decays and they announce earnings on Jan 28th.

Original Trade Description: Dec 22nd

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois. Company description from FinViz.com.

CAT has failed to decline with the market until the last couple of days. Earnings were good and forecasts were good. CAT has been hobbled by the trade war with China. Investors are worried that tariffs could disrupt its rapidly growing business. CAT said it has raised prices three times to cover the majority of the increased costs and the net impact has only been around $150 million. When a trade deal is reached, you can bet those price increases will not be completely erased. They will make up their losses.

Earnings are January 22nd.

Position 12/24:
Long Feb $135 call @ $2.43, see portfolio graphic for stop loss.

CRM - SalesForce.com - Company Profile


Shares declined slightly on news they were in talks to buy ClickSoftware for $1.5 billion.

Original Trade Description: Dec 22nd

SalesForce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. The Nasdaq was the strongest index on Monday and hopefully we are nearing an actual bottom. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Earnings February 26th.

Salesforce will be a fast mover if the market turns positive. This is a crowd favorite and has only declined because of the market.

Position 12/24:
Long Feb $135 Call @ $4.04, see portfolio graphic for stop loss.

HD - Home Depot - Company Profile


Retailers down after Sherwin Williams guided below expectations. That put a cloud over HD and LOW.

Original Trade Description: Jan 9th

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares declined after six consecutive months of declining home sales. The rising mortgage rates were also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that will continue into this summer that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Earnings February 12th.

The company reported Q3 earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75.

Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.

HD will rally with the Dow for the rest of January as long as the Q4 earnings guidance from other companies does not turn negative.

The market is poised to open lower on Thursday so we should be able to buy a dip at the open. With the February option expiring on the 15th and earnings on the 12th, the premium should have decent support.

Position 1/10/19:
Long Feb $185 call @ $2.66, see portfolio graphic for stop loss.

MRK - Merck - Company Profile


Merck's Keytruda reduced risk of death by 31% in esophageal cancer. Shares are still bumpy with the sector.

Original Trade Description: Jan 5th

Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey. Company description from FinViz.com

Keytruda is expanding its base and is now approved for eight different cancer types. The drug has been approved in China, which has a serious melanoma problem. Sales of Keytruda are expected to reach $22 billion a year by 2022.

The FDA granted MRK a priority review on using Keytruda on a rare form of skin cancer. In a study with 14 patients 64% responded well to the treatment and all 14 saw tumor shrinkage.

Hardly a week goes by that Merck does not receive a new approval on some drugs. They have a very strong pipeline.

Merck shares declined in October after the company reported earnings of $1.19 that beat estimates for $1.14. Revenue of $10.79 billion rose 4.5% but missed estimates for $10.88 billion. They raised guidance for the full year from $4.22-$4.30 to $4.30-$4.36. Revenue guidance was narrowed but stayed in the same range. Shares fell $4 on the earnings but recovered almost immediately to set new highs in early December.

The company raised full year earnings guidance from $4.16-$4.28 to $4.22-$4.30. Revenue is expected to range between $42.0-$42.8 billion, up slightly from the prior $41.8-$43.0 billion guidance.

The company raised its dividend 15% to 55 cents. They also announced another $10 billion share buyback.

The company successfully avoided the October/November market decline but rolled over in early December after they announced the $2.3 billion acquisition of Antelliq, which will join their animal health division.

Shares have started to recover and market willing should be making new highs in the near future.

Merck has earnings on January 24th. I am recommending we buy a cheap February call and hold over the earnings report.

Position 1/7/19:
Long Feb $80 call @ 85 cents, see portfolio graphic for stop loss.

QCOM - Qualcomm - Company Profile


Shares declined slightly after founder and former CEO Paul Jacobs said the time is not right for a takeover bid. He has been considering buying the company back but with earth shaking decisions due from several courts over the next couple of months, he is biding his time.

Original Trade Description: Dec 31st

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.

The last 12 months have been turbulent for Qualcomm. First they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.

Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.

Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.

While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.

The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.

The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.

This suit is expected to be settled soon. Qualcomm has been successful in getting some models of iPhones blocked from sale and with each court action they are making it more likely there will be a settlement soon. The CEO said he thought it would be in Q4 but it has not happened yet.

With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.

Qualcomm reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $5.80 billion also beat estimates for $5.52 billion. However, the company guided for Q4 revenue of $4.5-$5.3 billion and earnings of $1.05-$1.15. Analysts were expecting $5.57 billion and 95 cents. The decline was due to a lack of Apple sales. Apple normally buys 35-50 million chips in Q4 but they have dropped Qualcomm as a supplier until the royalty fight is concluded in court. Shares lost $7 post earnings.

Cowen recently reiterated a buy rating and $73 target. Canaccord Genuity reiterated a buy and $75 target. Bank of America reiterates a neutral and $67 target.

Earnings Feb 6th.

Apple is trying to push out a software update to force phones to remove patent liabilities in China. Qualcomm is pressing the court to force an immediate halt to sales. Apple said late in the day that the China sales ban would force them to settle the patent suit with Qualcomm. Obviously that is exactly what Qualcomm has been trying to accomplish. Apple said being forced to settle with Qualcomm would force all other manufacturers to pay higher royalties as well. Everyone has been hoping Apple would be victorious and they would benefit from the same lower royalties if Apple won. Apple is trying to claim that Qualcomm's royalty agreements, which they signed and paid royalties on for years, is no longer valid because the price of the phone has risen so high. The agreement calls for a set percentage of the sales price as the royalty amount. When phones sold for $400 it was a smaller amount but now with $1,000-$1,500 phones that same percentage is a lot bigger number.

Apple is also playing politics in their court filings warning that China will lose millions of dollars in taxes and revenue if the ban is enforced. Of course, they could just pay Qualcomm what they owe and there would be no ban.

Qualcomm also won an injunction in Germany to force Apple to halt sales of iPhones.

Starting on January 4th, Qualcomm will participate in a 10-day non-jury trial against the FTC. This trial is the key to the settlement of Apple's suits around the world. Qualcomm will argue for its current patent and licensing model and fee schedules. The outcome of the trial will either boost Qualcomm's $5.2 billion a year royalty stream or crash it to a fraction of that amount. LINK

Nobody disagrees that Qualcomm's engineering and designs are the best in the business. They are simply whining that Qualcomm charges too much to license those technologies.

The outcome of this trial could move the stock $10 or more in either direction. I am proposing we buy a call and a put and hang on for the ride. One of them could been deep in the money and the other will expire worthless.

Update 1/5: Qualcomm acted to enforce the ban on iPhones in Germany and Apple was forced to pull the specific models from stores. Germany's biggest retailer, Gravis, said it still had all Apple products on sale but that is likely to end quickly. Qualcomm posted a bond of 1.34 billion euros in order to put the enforcement into effect. According to the court order, Apple has to stop the sale, offer for sale and importation for sale of all infringing iPhones in Germany. The court also ordered Apple to recall the affected iPhones from third-party resellers in Germany.

The 10-day non-jury trial with the FTC over patent procedures began on Friday. Position 12/31/18:
Long Mar $60 Call @ $2.06, see portfolio graphic for stop loss.
Long Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

We should know from the trial watchers if Qualcomm proved their case by the middle of January. I only recommended the Feb put because any downside move should be nearly immediate while any upside move could be lasting.

QQQ - Nasdaq 100 ETF - ETF Profile


The QQQ failed to post a gain on Wednesday and that effectively killed the January position.

Original Trade Description: Dec 7th

Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq looks like it wants to decline further. I am profiling a dip buy at $158.15 on the hope that the Nasdaq/ETF will not decline below 6,800/155.00.

Position 12/17 with a QQQ trade at $156.85:
Long Jan $168 Call @ $1.12, see portfolio graphic for stop loss.

Position 12/24:
Long five Jan $168 Calls @ .12 each.
Adjusted cost for 6 = $.29 each.

Position 1/14/19:
Long March $170 Call @ $1.77, see portfolio graphic for stop loss.

SPY - S&P-500 SPDR ETF - ETF Profile


No gain today thanks to some tech weakness. The Goldman Sachs gain was not enough to offset the decliners.

Original Trade Description: Dec 22nd

The SPY is the SPDR ETF for the S&P-500. It was the first exchange traded fund listed in the USA starting in 1993.

If the market is going to rebound the SPY would be our vehicle of choice. This avoids single stock risk and capitalizes on the most oversold big cap index.

This is a bet on an end to tax loss selling and a post-Christmas market rebound. There is no guarantee there will be a rebound and there is the risk of some early January volatility.

There are hundreds of billions in cash on the sidelines waiting for the selling to end. Investors want to establish positions for 2019 and at the current lows there are plenty of bargains.

Position 12/24:
Long Feb $255 Call @ $3.25, see portfolio graphic for stop loss.

TGT - Target - Company Profile


Earnings misses in the retail sector continue to drag down stronger stocks like Target.

Original Trade Description: Jan 9th

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings in November. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.

They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales. On Thursday Jan 10th, Target said same store sales for the November-December period rose 5.7% thanks to higher store traffic and a minor increase in ticket size. This compares to 3.4% in the same period in 2017. The company affirmed its Q4 guidance for same store sales of 5.0% and full year earnings of $5.30-$5.50. This came on the same day that Macy's warned on earnings and shares fell sharply all across the retail sector. Shares rebounded sharply by almost 2% in a weak market on Friday.

Earnings February 19th.

Since Target has already affirmed guidance, the odds are good they will beat it. The risk has been removed from the stock and their positive comments suggest the Q4 earnings and 2019 guidance will be good. I am recommending a March option to retain the call premium, but we will exit before the earnings.

Position 1/14/19:
Long March $72.50 call @ $2.08, see portfolio graphic for stop loss.

BEARISH Play Updates

No Current Puts