Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/6/2019

Table of Contents

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

Market Wrap

Optimistic Market Treads Water

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Equity indices barely budged as trade optimism grows. The top headline, among a host of big news, is word from Secretary of State Steve Mnuchin. Mnuchin says progress is being made on key issues between the US and China and that he is going to China next week. The trip is the third in a series of progressively important meetings leading up to the anticipated Trump/Xi face-off now scheduled for later this month. The face-off will not likely bring an end to trade disputes but it will likely lift sentiment and unleash global economic activity; assuming, of course, there is a positive conclusion to said meeting.


Mnuchin also went on the record saying the Trump economic agenda was working. His remarks were aimed at what he describes as a worrying socialist trend among lawmakers and come with the ultimatum we're not going back to socialism.

Market Statistics

The State of the Union Address was much as I had anticipated, a lot of Trump applauding himself ad some jabs at Congress intended to get them working. Trump says it's time for Congress to be great or be gridlocked, to put aside politics and get things done for the American people, but I don't think anyone heard him. The issues that have long plagued America are probably not going to get fixed by this mixed, divided, partisan Congress and that is too bad. Immigration, infrastructure, and trade are America issues, not just planks in Trump's platform.

Moving on to business news, earnings season continues to roll on and the results continue to be mixed if generally better than expected. Topping the list of reports released before the bell are GM and Spotify. GM reported revenue beat by $2 billion and EPS of $1.43 by nearly a quarter on strong sales, pricing, mix, and cost-controls. Shares of GM were up as much as 4.0% in the pre-market session but shed some of those gains after the open.


Spotify sank -7% in early trading but bargain hunters were there to scoop up the deal. Spotify barely missed on revenue and earnings while acquiring two new podcasts. Fourth quarter monthly active users grew more than expected and are projected to at least meet consensus in the coming year. Other metrics were positive as well, barely missing expectations in most cases, and point to sustained user growth and usage. The move to podcasts seems to be working, Spotify is planning on buying two more podcast producers this quarter.


Economic Calendar

The Economy

There were quite a few economic reports that could have come out today but most didn't, delayed by the government shutdown. Because the next shutdown could start as early as next week it may be a while before we get caught up on the affected data. The market will be flying blind.

Mortgage applications fell -2.5% in the last week. The drop in applications is unexpected because rates have been falling but may be due to the large numbers of applications submitted last month. Regardless, mortgage apps are -10% from this same time last year and point to a much cooler real estate market in 2019.

In trade news, economic news, US exports fell slightly in the last month but were outpaced by a much larger decline in imports. The decline in imports was enough to shrink the trade balance for the first time in five months but not enough to offset increases over the last year. On a YOY basis, the trade balance is up more than 10.0%. Because last year's run-up in trade imbalance, and this month's decline, is due in large part to tariffs the trade balance may continue to shrink this year. If the trade-talks result in renewed trade ties and Trump gets what he wants, the trade balance will shrink more and that will drive positive GDP growth for the US.


The Dollar Index

The Dollar Index moved higher as central bank outlook becomes entrenched. Both banks are expected to hold off on policy tightening for the foreseeable future although the FOMC is the only bank to confirm this view. The ECB is holding off in fear of setting a policy path ahead of this years change in leadership that will determine the new leader's actions.

Janet Yellen appeared in an interview today and delivered a very dovish statement. The former head of the FOMC and a still-influential person says the next move for the FOMC is a rate cut if global slowdown continues.

Other central banks have also indicated a shift in thinking, most notably the Reserve Bank of Australia, which just indicated a possible rate cut later this year. The DXY is likely to move up in the near-term and could reach $96.50 or $97.00 this week. The ECB's Economic Bulletin and Forecasts are due out tomorrow, weak updates and outlook from the EU would help send the dollar higher.


The Gold Index

Gold prices were able to hold relatively steady for most of today's session despite the stronger dollar. Later in the session, that changed, gold prices began to fall and wound up shedding about -0.60 by the end of the session. The move confirms resistance at the $1,320 level and may lead spot price down to retest support at the $1,300 level.


The Gold Miners ETF GDX looks like it is at resistance and may not move higher. The ETF is confirming resistance with today's candle and the indicators confirm the peak so some sideways to down movement is expected. A move lower would be bearish and could take the ETF down to $21.50 or lower. A move sideways could result in a continuation of the recent uptrend but it's too soon to bet on that.


The Oil Index

Oil prices were a little volatile in today's session as supply concerns begin to build up. Now, along with OPEC, the market is balancing sanction against Venezuela, and signs of tightening in the US. On the OPEC front, data from Platts shows OPEC production has fallen to a near 3-year low. This week's EIA inventory data was weaker than expected in almost all aspects due to tightening efforts; crude and gas supplies rose less than expected and distillates fell more than expected. WTI had been moving lower and testing support at $52.50 in early trading but bounced on the news and regained all of today's losses. It looks for now like the market is moving higher, oil may accelerate its move if more signs of tightening emerge.


The Oil Index was relatively steady in today's session, it posted a loss of -0.50% but created a very small spinning top doji in the process. The index is still consolidating beneath the 1,300 resistance and waiting on cues from oil. The indicators are bullish and suggest a move higher is possible, the indicators are also diverging from the recent high which suggest resistance at 1,300 may hold. Even if resistance at 1,300 is broken the long-term moving average would need to be broken before getting bullish on this sector.


In The News, Story Stocks and Earnings

Electronic Arts reported weaker than expected revenue and earnings this morning and had the entire gaming complex moving lower. The company says digital revenue was mostly in-line with consensus but other revenues, about 33% of the total, were far shy of estimates. The company was forced to lower guidance for bookings and adjusted profits. TakeTwo Interactive also reported a mixed quarter that missed expectations for many metrics. Both EA and TakeTwo were down more than -12.0% on the news and drug Activision down with them. Activision moved lower by -10.0%, it reports earnings next week.


Chipotle Mexican Grill served up a sizzling top and bottom line earnings beat. The company says that revenue grew by 10.8% over the last year and adjusted EPS of $1.72 beats consensus by $0.32. Comp-store sales increased by 6.1% versus the expected 4.9% and were driven by the successful use of online sales/marketing. The company says digital revenue grew 66% over the same time last year and accounts for 12% of total revenue this quarter. Restaurant level margins improved as well, decreasing the overall labor cost to 27.1%. The outlook for 2019 is favorable, sans food-bourne illnesses, and helped drive shares up more than 10% in after-hours trading.


GoPro reported revenue grew 12.7%. The strength sales delivered a solid beat on GAAP and non-GAAP earnings. In the release, Nick Woodman says efficient execution, improved margins, and a strong product line-up helped drive results. Shares surged 11% in after-hours trading.


iRobot reported earnings after the bell and swept past the estimates. The company, a consumer products/automation technology innovator, reports revenue grew nearly 18% over the last year and delivered EPS nearly double the expectations. Results were driven by strength in the US and International sales and, more importantly, show little impact of tariffs. The outlook for 2019 is for growth in the high teens, shares surged more than 17%.


The Indices

The index action was a bit weak despite growing trade optimism, not-as-bad-as-expected earnings, and a dovish Fed outlook. Today's moves were not large but they were largely negative and led by the NASDAQ Composite. The NASDAQ Composite shed about -0.50% in the session to create a small red candle to the side of, and equal to, the previous day's upward movement. The candle, the candles, look like a small consolidation move, a little market slip, within the uptrend and the indicators so far agree. Both stochastic and MACD are bullish and suggest upward movement in the index is to be expected. If so, a move up to 7,500 is likely, a move higher possible. If the index slips further my first target for support is the long-term moving average.


The S&P 500 closed with a loss near -0.30% after trading in a tight range all day. The index slipped from its fresh high but is still trending upward and may resume its rise over the next few trading days. The indicators are bullish and suggest a move higher is possible but there is a risk. The indicators are also diverging from the fresh highs which suggest a weakening market. Upward movement is expected, just don't expect too much of it if it comes, my target for resistance is near 2,775. Support is near 2,700 should the index move lower.


The Dow Jones Industrial Average posted a small loss, less than -0.10%, in a day of light trading. The index moved within a very tight range near the top of the previous candle and above a potential resistance target. This target is an uptrend line that has provided support/resistance numerous times in the past. The indicators are bullish and suggest a move up is possible, the caveat is that resistance exists near another uptrend line a few hundred points above today's close.


The Dow Jones Transportation Average also closed with a loss less than -0.10%. The transports created a tiny doji spinning top smack against the 150-day EMA where it may have reached a make-or-break moment. Momentum is waning so sell-side pressure at the 150-day EMA could stall the rally or cause reversal. A move above the EMA would be bullish, my targets would be 10,500 and 10,750, a fall from this level could be bearish but I'd wait a few days to see if a consolidation develops.


The market has been moving higher as FOMC, earnings, and trade-related headwinds subside. The lift provided by those factors is limited in that trade, arguably the single most important aspect of the equation is still in question. Janet Yellen says her dot plot today would should a wide range of possibility to the amount of risk in the market. She didn't say it outright but fixing trade with China means one outcome, an outcome with rising rates, and not fixing trade another, an outcome with declining rates and slackening economic growth. In either case, the outlook for growth is positive so I am firmly bullish because there is so much risk tied to the trade situation I am only cautiously bullish for the near term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Earnings Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

Buying earnings dips is a strategy but buying rebounds is better. Buying a dip without a rebound is a coin toss on the stock's direction.

 

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


NEW DIRECTIONAL CALL PLAYS

FFIV - F5 Networks - Company Profile

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. The company's primary application delivery technology is Traffic Management Operating System (TMOS) that enable company's products to intercept, inspect, and act on the contents of traffic from virtually each type of Internet Protocol-enabled application. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers, as well as Link Controller. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; BIG-IP Virtual Edition software platform; and management and orchestration software platform. The company sells its products to enterprise customers and service providers through distributors, value-added resellers, and systems integrators in the Americas, Europe, the Middle East, Africa, Japan, and the Asia Pacific Region. F5 Networks, Inc. was founded in 1996 and is headquartered in Seattle, Washington. Company description from FinViz.com.

On January 24th, F5 reported earnings of $2.70 that rose 19.5% and beat estimates for $2.54. Revenue of $544 million rose 4% but narrowly missed estimated for $547 million.

Software sales rose 21% and contributed 19% to total revenues. Services revenues rose 4.7% to $309.9 million and accounted for 57% of the total. EMEA revenues rose 7% and Asia Pacific/Japan rose 11%. Enterprise customers accounted for 65% of revenue, services providers 14% and governments 21%. Gross margins were a whopping 85.2% with operating margins of 37%. They ended the quarter with $1.13 billion in cash and long-term debt of $435 million.

They repurchased $101 million in shares in Q4 and authorized a new $1 billion buyback for 2019.

F5 is going through a product transition from providing a physical piece of hardware that acts as a firewall for customer servers, to a software as a service model where they supply a software firewall and eliminate the hardware expense. This impacts revenue because the hardware is expensive. As hardware is eliminated from the sales cycle it drags on total revenue but margins gain appreciably.

They are launching F5-as-a-Service and Cloud Native App Services in the first half of 2019 and should be key growth drivers.

They guided for software revenue growth of 30-35% in 2019-2020. Earnings guidance for Q1 was $2.53-$2.56 with revenue of $543-$553 million.

Shares dipped to $152 after earnings and then flatlined for a week. Over the last week shares have been rising. With most stocks already rebounding 15-20% since December, fund managers and investors should be looking for these fallen stars as a less risky investment.

Buy March $170 call, currently $2.75, stop loss $159.00.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Pause to Refresh

by Jim Brown

Click here to email Jim Brown

Editors Note:

Wednesday's minor decline was just a consolidation pause. There was a serious lack of market moving headlines and the indexes just chopped around in a holding pattern as some traders closed positions and others bought the dip. The minor 6 point drop on the S&P and 21 on the Dow was just noise. The trend remains higher until a real decline appears.



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


CRM - SalesForce.com
The long position was stopped out at $156.85.

HD - Home Depot
The long position was stopped out at $184.45.


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


BULLISH Play Updates

CRM - SalesForce.com - Company Profile

Comments:

No specific news. Shares closed $1 under the prior high on Tuesday and then dropped $4 at the open today in a weak market. We were stopped out of this profitable position. The stop was tight because it was a February option.

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:
Closed 2/6: Long Feb $135 Call @ $4.04, exit $22.10, +18.06 gain.



DELL - Dell Technologies - ETF Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: Jan 26th

Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.

Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.

Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.

Since the new Dell shares have only been around a month, they are definitely not over-owned.

Earnings March 14th.

Position 1/28/19P:
Long April $47.50 call @ $2.60, see portfolio graphic for stop loss.


HD - Home Depot - Company Profile

Comments:

No specific news. Shares declined in a weak market to hit our tight stop for a minor loss. The stop was tight because it was an expiring February option.

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:
Closed 2/6: Long Feb $185 call @ $2.66, exit $2.45, -.21 loss.


IBB - iShares Nasdaq Biotech ETF - ETF Profile

Comments:

No specific news. Short term support held, and we could try a breakout next week. The index is up strongly from December and it has held its gains.

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.


MRK - Merck - Company Profile

Comments:

Merck was named the number one pharma pick by Bank of America. GlaxoSmithKline (GSK) agreed to pay $4.2 billion for Merck's KGaA cancer immunotherapy. Shares are still $2.60 OTM.

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 February 1st. I am recommending we buy a cheap February call and hold over the earnings report.

Update 2/2: Merck reported earnings of $1.04 that beat estimates by a penny. Revenue rose 5% to $10.99 billion and beat estimates for $10.95 billion. Sales of Keytruda rose 66% to $2.15 billion. They guided for 2019 earnings of $4.57-$4.72 on revenue of $43.2-$44.7 billion. Analysts were expecting $4.69 and $44.2 billion. Shares spiked $2 but it was not enough to reflate the option. I am not dropping it because as positive market could do wonders with two weeks to go. We are only $3.50 OTM.

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


PAYX - Paychex Inc - Company Profile

Comments:

No specific news. Shares approaching the prior high at $75.

Original Trade Description: Feb 3rd

Paychex, Inc. provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Europe. The company offers payroll processing services; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. It also provides HR outsourcing services, including Paychex HR solutions comprising payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative; and retirement services administration, including plan implementation, ongoing compliance with government regulations, employee and employer reporting, participant and employer online access, electronic funds transfer, and other administrative services. In addition, the company offers insurance services for property and casualty coverage, such as workers' compensation, business-owner policies, and commercial auto, as well as health and benefits coverage, including health, dental, vision, and life; cloud-based HR administration software products for employee benefits management and administration, time and attendance, recruiting, and onboarding solutions; and other HR services and products, such as employee handbooks, management manuals, and personnel and required regulatory forms. Further, it provides various accounting and financial services to small to medium-sized businesses comprising payroll funding and outsourcing services, which include payroll processing, invoicing, and tax preparation; and various services, such as payment processing services, financial fitness programs, and a small-business loan resource center. The company markets its products and services through direct sales force. Paychex, Inc. was founded in 1979 and is headquartered in Rochester, New York. Company description from FinViz.com.

The company reported earnings of 65 cents that rose 20.4% and beat estimates for 63 cents. Revenue of $858.9 million rose 7% and beat estimates for $855 million. Free cash flow from operations was $223.5 million. They paid $201.3 million in dividends in the quarter. The annual dividend is $2.24 or a 3.12% yield.

For 2019 the company guided for 18% to 20% revenue growth in PEO and insurance services and 4% growth in management solutions. Interest on funds held for clients is expected to rise by 20-25%. Earnings are expected to rise 11-12%.

During the quarter they announced a deal to acquire Florida based Oasis Outsourcing for $1.2 billion in cash. That is expected to bolster the company's PEO strategy an expand PEO sales and the client base. PEO stands for professional employer organization. This is where they provide all types of HR solutions to small businesses.

Earnings March 20th.

Shares have moved up steadily from the December low and broke above December 3rd resistance high on Friday. The next target is $75 and the October high. With strong earnings, guidance and dividend, shares should continue to be in favor.

The March options cycle expires 5 days before earnings, so we have to reach out to June to prevent premium erosion ahead of earnings.

Position 2/4/19:
Long June $75 call @ $1.90, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

Minor decline and holding over light support at $170.

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:

New 2-month high close and only a minor pullback today. S&P 2800 is the current target.

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.


SWK - Stanley Black & Decker - ETF Profile

Comments:

No specific news. The rebound is continuing.

Original Trade Description: Jan 23rd

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.

Update 1/30: OpenGate Capital has agreed to buy lock maker Sargent and Greenleaf from SWK. The lock maker was founded in 1857 and sells products in more than 100 countries. No terms were disclosed and the transaction will be completed in March.

Position 1/24/19:
Long Mar $125 Call @ $2.40, see portfolio graphic for stop loss.


TGT - Target - Company Profile

Comments:

No specific news. Shares regained their Friday losses.

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.

Update 2/2: A researcher found that Target's mobile shopping app charged more for products if you were near a store than if you were far away. Researchers found that a 55-inch TV was $499 if you were some distance from a store but when you pulled into the parking lot it rose to $599. They found this on multiple products. Shares fell $2 on the news.

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


BEARISH Play Updates

No Current Puts