Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/23/2019

Table of Contents

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

Market Wrap

Market Wobbles, Support Holds

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The equity market tried to rebound from Tuesday losses but gains didn't hold. The good news is that support is still present. Price action was very indecisive but no wonder, there is a lot for investors to think about and no end in sight for many of the market's woes. Earnings are coming in at a decent clip and better than expected but the cautionary tone from Davos and uncertainty on trade has people on edge.


Today's Davos headline(s) come from Jamie Dimon. He says the US economy is doing well and on course to do keep doing well. He also says there are obstacles (trade, Brexit, shutdown) that could slow or alter the economy if they are not overcome. The salient point I think is that the economy is doing well and on track to do well. The obstacles are there, yes, but when are there not obstacles for the market to overcome?

On the trade front, reports that the White House had canceled preparatory meetings scheduled ahead of next week's higher-level trade meeting have been all but forgotten. Kudlow's message that there was no meeting scheduled, no meeting canceled, was enough to sooth the restless beast. The general consensus is some progress will be made at the trade-meeting next week, at least enough to allow another meeting and postponement of threatened tariffs.

Market Statistics

In earnings news, UTX and Proctor & Gamble were among the top movers in the early session. Both reported before the bell and both delivered better than expected results and guidance. While the two have little in common they both report strong or solid sales growth in key units and expect that trend to continue. It is important to note that PG's results were boosted by higher prices and show successful pass-through of cost to the consumer.



The Economy

Economic Calendar

There was no economic data today and there is very little due out this week. Tomorrow is going to be the big day because everything scheduled for Friday won't come out, government shutdown. The shutdown rages on and still no sign of a solution. Trump said today he will deliver a State of the Union Address despite Pelosi's request otherwise. Pelosi later responded that the House wouldn't allow the State of the Union until the government is reopened. The two are now locked in battle, hopefully, it won't blow up in all of our faces.

The Dollar Index

Another central bank cycle is at hand, today's policy statement comes from the BOJ. The BOJ kept policy unchanged, lowered their inflation targets, and cited growing risks to the global economy. The news had the yen trading lower versus the dollar although the generally weaker outlook for global growth, trade, and political uncertainty had it down against just about everything else. The index fell below the short-term moving average in today's session and may move lower. The risk is in tomorrow's ECB meeting, a meeting that could send the dollar back to retest the recent highs if Draghi and crew turn dovish like the rest of the worlds central bankers.


The Gold Index

Gold moved sideways in today's session as traders wait on tomorrow's ECB meeting. The meeting isn't expected to bring a change in policy but it could bring a change in outlook that could keep the EUR, the USD, and gold moving sideways over the next week or more. Today's action shows support is still present at the short-term moving average, near $1,275, where it is possible a bounce may form. A move higher may take the metal up to retest the $1,300 level, a move lower may find support at my near-term trend line.


The Gold Miners ETF GDX moved sideways in today's action and is sitting on support at the long-term moving average. The ETF appears to be setting up for another push higher but that is dependent on gold prices, the dollar, and geopolitics. The indicators are consistent with consolidation and test of support so, while the ETF is above the 150-day EMA, I am cautiously bullish for this sector. A fall below the moving would negate that outlook and could happen as soon as tomorrow if the ECB meeting is substantially more dovish than what I expect.


The Oil Index

Oil prices continue to trend sideways near the $52.50 level. Today's action was light, weak, and within a tight range that produced a small spinning top candle. The market looks like it wants to move higher, perhaps because it believes OPEC can tighten the market again, but the slowdown in global economic activity and continuously rising US output won't let it. Sooner or later the outlook will change or US output will top-out but until it does I think there is more risk to the downside than up. A move below the short-term moving average could retest the long-term low below $44.


The Oil Index moved lower in today's session and is testing for support at the short-term moving average. The index is poised to move lower and may do so considering the outlook for earnings this year is the worst of all 11 S&P 500 sectors. The energy sector, due to low oil prices and slowing global growth, is expected to see EPS decline and that is a heavy burden for it to bear. If oil prices fall again the sector could fall hard too. A move below the 30-day EMA would be bearish and may lead to a retest of the 1,100 level.


In The News, Story Stocks and Earnings

Tesla got a downgrade from RBC that tips the scales in favor of the bears. Now that RBC is recommending an underweight holding there are more bears among the sell-side analysts than bulls. The downgrade is due to valuation lofty expectations the company has yet to meet. Goldman Sachs issues a similar warning and downgrade yesterday.

In company news, Tesla slashed its workforce in what it says are moves made for efficiency and continuing improvements. We can only assume these cuts will aid the company its quest for profitability. Many of the cuts were in non-essential areas like sales and delivery but there were cuts in the production staff as well. Shares fell -4.0% and could retest $260 in the near future.


Texas Instruments was among a number of tech companies to report after the bell. The company reported a mixed quarter that included a slight miss on revenue and a slight beat on the EPS end. Sales were weaker than the headlines show, a surprise widening of the gross margin offset the revenue miss to aid EPS. Forward guidance was also a bit on the weak side but investors didn't care, the company is yielding over 3.0% at current prices and able to cover its payment. Shares were up 0.50% in after-hours trading.


Ford reported a mixed quarter that resulted in a slight beat on the top line and a slight miss on the bottom. The company reports that sales in the US were strong but offset by losses in the EU, Latin America, and China. Mix and product pricing was favorable in the US as consumers move away from sedans into the SUV/Crossover category. Shares of the stock were up about 0.60% in after-hours trading.


Briggs & Stratton is another to report a mixed quarter and have investors shrug it off. The icon of small engines grew revenue a surprising 13.2% beating estimates by a substantial margin. EPS fell short on both a GAAP and non-GAAP basis but that shortfall was offset by the outlook. The company makes note of favorable momentum in sales of small engines and parts for commercial markets that is expected to continue. The news that really got the market's attention, however, was the revised guidance. Guidance was lowered to a range of $1.10 to $1.30 from $1.40 to $1.60, a big change, but not as much as some had feared the Sears bankruptcy would bring. Shares were up 1.5% in after-hours trading.


The Indices

Today's index was up, it was down, it was sideways but in all cases, it shows support is still present. The worst looking chart, the Dow Jones Transportation Average, shed -1.0% but even it shows the market is still supported. The candle is medium sized and red but the wick shows prices bounced off of the short-term moving average. The bounce was not strong but prices were able to hold the rebound into the close and momentum is bullish. Earnings are the key to the rally, so long as those continue to be good and the outlook for 2019 holds up the rally should be able to regain its footing. A move up would be bullish, my targets are 10,000 and then 10,280 if the index closes above 9,750.


The NASDAQ Composite also posted a loss but only about -0.10%. The tech-heavy index moved down in today's session to retest support at 7,000 and the short-term moving average where support is confirmed. This level of support is also consistent with a major, long-term trend line so it could produce a strong bounce with the right catalyst. The indicators are consistent with consolidation and potential for prices to fall so caution is still warranted. A move up from this level would be bullish and may test resistance at the long-term moving average.


The S&P 500 closed with a gain near 0.10% and created a small doji-like candle for today's session. The candle shows some uncertainty but also that support is present at the baseline of the Vee Bottom I talked about last week. So long as this support holds I am very optimistic a move higher will come, likely driven by earnings and possibly by trade news, an end to the shutdown, etc. Support is just above 2,600 and the short-term moving average, a break below which would be bearish. A move higher is likely to reach 2,700 in the very near-term and 2,775/2,800 in the near to short-term.


The Dow Jones Industrial Average closed with a gain of 0.70% after moving within a slightly wider range than its fellows. The blue-chip index created a medium sized doji candle sitting between the support of the short-term moving average and long-term moving average. The index is at a make-or-break moment where the long-term money gets back in the market or resumes selling so the next few trading days could be crucial. A move higher may find resistance at 24,735 and then near 25,500, a move lower may find support at 24,000 and the short-term moving average, a break of which would cancel the Vee Bottom reversal.


The market is indeed at a make-or-break moment; it has to decide if it is going to believe earnings and outlook for earnings or if it's going to succumb to fear.

The fears are not misplaced, there is some risk on all fronts, but so far the global recession is at still at bay.

The fears could become reality if the trade talks break down and tariffs burdens are intensified, until then I am cautiously optimistic they won't. Based on earnings, the reality that drives the market, the outlook is positive so I remain bullish for the long-term. Because there is still so much risk and fear in the market I am very cautiously bullish, at least until the next round of trade talks.

Until then, remember the trend!

Thomas Hughes

Quick note. My wife is due to deliver our second baby any day now. If there is no wrap on Thursday that is why. If there is no baby by Monday then we're going to induce so Monday's wrap may be brief.


New Option Plays

Buy Good News

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes stocks fall on good news if there is just a little negative in the picture. Stanley Black & Decker beat on earnings and shares fell $21 because of a minor decline in guidance related to a restructuring program.

 

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


NEW DIRECTIONAL CALL PLAYS

SWK - Stanley Black & Decker - Company Profile

Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Company description from FinViz.com.

Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.

Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.

Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.

Now is the time to buy the dip on SWK.

Buy Mar $125 Call, currently $2.45, stop loss $114.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Earnings Angst

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow rallied to 294 at the open then fell to -97 before recovering. The worries remain the same with China, global economics and slowing growth leading the list. However, as we move through the Q4 earnings cycle the outlook for Q1 earnings has fallen significantly. At the beginning of October analysts expected 8% earnings growth and that has fallen to only 3%. That is stressing fund managers because a continued government shutdown and no resolution to the China trade issue could lead to an earnings recession. Stocks are in profit taking mode from four weeks of gains and as long as we do not start setting new lows the rally will eventually return.



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

Comments:

No specific news. Shares gave back their gains when the Chinese trade story faded.

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

Comments:

No specific news. Shares holding over support.

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

Comments:

No specific news. Shares weak on a downgrade to Lowe's and weak guidance from Stanley Black & Decker.

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.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

Comments:

No specific news but the biotech sector is taking some profits this week. It did close well off the lows today.

Original Trade Description: Jan 19th

The investment seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents. It is non-diversified. Company description from FinViz.com.

The IBB has 226 stocks and follows the Nasdaq Biotech Index ($NBI). The IBB rebounded strongly from the Christmas bottom and then stalled for over a week in the $108 range as it consolidated its gains. Friday's minor gain set it up to test resistance at $111.50 and a breakout there would target the prior highs at $122.

The first quarter is normally strong for biotechs because of the multiple conferences and calendar of FDA drug approvals. I am recommending we enter a position to benefit from a break over resistance.

Position 1/22/19:
Long March $115 Call @ $1.79, see portfolio graphic for stop loss.


MDT - Medtronic - Company Profile

Comments:

No specific news. No decline. That is actually a positive when the sector was weak.

Original Trade Description: Jan 9th

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.

Position 1/17:
Long May $90 call @ $2.82, see portfolio graphic for stop loss.


MRK - Merck - Company Profile

Comments:

BMO Capital Markets downgraded Merck from outperform to market perform citing overdependence on Keytruda.

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.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The QQQ only moved fractionally because the Nasdaq only gained 5 points.

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

Previously closed:
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.
Expired 1/18: Adjusted cost for 6 = $.29 each. Expired, -.29 loss.


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

Comments:

No material movement with only a 5-point gain on the S&P. Resistance at 2,650 is back in play.

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

Comments:

Not a material move. The company said they will soon be able to accept Apple Pay, Google Pay and Samsung Pay.

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

QCOM - Qualcomm - Company Profile

Comments:

Noted short seller Sahm Adrangi and his Kerrisdale Capital hedge fund took aim at Qualcomm saying a loss to the FTC in the current trial would cut the stock price in half. If the company loses they would be forced to "license core patents to competitors and to renegotiate all of its existing licenses on fair terms." Kerrisdale argued that Judge Lucy Koh, currently presiding over the case, has already ruled against the company on several maters and may be inclined to rule in favor of the FTC.

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 had 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 Feb $52.50 put @ $1.39, see portfolio graphic for stop loss.

Previously closed: 1/22: Long Mar $60 Call @ $2.06, exit .60, -1.46 loss.




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