Option Investor
Newsletter

Daily Newsletter, Saturday, 2/9/2019

Table of Contents

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

Market Wrap

Lucky Seven

by Jim Brown

Click here to email Jim Brown

A nearly 100-point spike in the last three minutes of trading stretched the Dow's winning streak to seven weeks.

Weekly Statistics

Friday Statistics

The Dow gained 93 points in the last three minutes to reduce the loss for the day to only 63 points and give the index a 42-point gain for the week. The Dow's streak stretched to 7 weeks but only by a whisker. A similar 8-point spike on the S&P kept it barely positive with a 1+ point gain for the week.

We know what happened last Monday evening when there was a similar closing spike. The market gapped 185 points higher on Tuesday. While there is no guarantee we will see a continued spike on Monday, I would say the odds are good unless we are hit with a headline storm over the weekend. Last minute buy programs like we see below catch the shorts and technical traders off guard and they are forced to catch up at the next open.


Summarizing Friday's economic reports will be very easy this week. There were none.

One event of note was the surge in the dollar. The Dollar Index rose 1.48 since the January 31st lows. That is a major move and slowed the rise in commodities like gold. With the global economy slowing the US is the place to be and that leads to a strong dollar. It will also reduce S&P earnings in Q1 because 50% of S&P earnings come from overseas and the strong dollar will cause problems bringing those profits back home. It will also weaken sales overseas because local currencies are declining relative to the dollar. This makes goods more expensive.


For next week the NFIB small business sentiment survey will be on Tuesday. There was a sharp decline in Nov/Dec from the peak of 108.8 in August. Small business sentiment is impacted by the shutdown more than the tariffs. This is for January and the 35-day shutdown was in full swing so sentiment could have declined even further.

The consumer price index on Wednesday is the biggest report for the week because of the inflation component. Analysts are not expecting any rise so an unexpected rebound would be market negative if it appeared to be strong enough to wake the Fed and put them back in hike mode.


So far in this earnings cycle, 333 S&P companies have reported. Analysts are predicting 16.8% earnings growth for Q4 and 6.0% revenue growth. Some 71.5% of companies have beaten on earnings and 66.2% have beaten on revenue. There have been 42 negative preannouncements and only 15 positive guidance upgrades. The forward PE is 16.0 and 62 S&P companies will report this week.

Q1 earnings estimates have fallen to -0.1% earnings growth and 5.4% revenue growth. Seeing earnings decline on higher revenue means costs are rising.

Seeing the earnings forecast turn negative has not yet impacted the market materially. It was a factor in the Thr/Fri weakness but at only -0.1% it is not enough to force investors back to the sidelines. When we start seeing 2-3% decline forecasts, market sentiment will change.

We have two Dow components reporting this week with Cisco and Coke. There are multiple chip stocks reporting with Applied Materials and Nvidia leading the list. Nvidia has recovered nearly all the losses from the January 28th guidance warning but I would continue to avoid the stock until it moves back over $160.

Activision Blizzard needs to pull a rabbit out of their hat after announcing the breakup with Bunge. Shares are trading at a two year low after a four-year rally.


Arconic (ARNC) reported earnings of 33 cents that beat estimates for 30 cents. Revenue rose 6% to $3.5 billion to beat estimates for $3.4 billion. They guided for the full year for earnings of $1.55-$1.65 on revenue of $14.3-$14.6 billion. Analysts were expecting $1.59 on $14.4 billion.

Investors were not interested in the earnings. The company announced another restructuring plan to cut $200 million in annual expenses. They are considering the sale of other non-core businesses. However, most companies figured out a long time ago the more you cut the smaller you get and the less room for error. Arconic has been struggling since their creation. They did authorize a $500 million buyback program to be completed by the end of 2020 in addition to completing their prior $500 million program in the first half of 2019. Unfortunately, they cut their dividend from 6 cents to 2 cents. Shares fell 3% on the continued confusion.


Goodyear (GT) lost traction and skidded off the road on Friday. The company reported a drop in earnings from 99 cents to 51 cents that missed estimates for 60 cents. Revenue declined 5% to $3.88 billion and missed estimates for $3.94 billion. Tire volumes declined 3% to 40.7 million units. Tires for new cars declined 10% due to weakness in Brazil, India and China as annual car production slowed. Europe saw a minor gain. Tire replacement sales were nearly flat. Competition over the last 20 years has become fierce. Companies like Big-O and Discount Tire have taken over the tire replacement business and they have their own store brands at significant discounts. Shares fell 9% on Friday but that was just punctuation on a long line of declines.


Ventas (VTR) reported funds from operations (FFO) of 96 cents that beat estimates for 95 cents. This was down from $1.05 in the year ago quarter. Revenues of $923.26 million beat estimates by 1%. Investors were underwhelmed and shares fell 18 cents.


Coty Inc (COTY) reported earnings of 24 cents that beat estimates for 22 cents. Revenue of $2.51 billion declined $130 million but still beat reduced estimates for $2.47 billion. Coty has been so beaten up over the past year that expectations were very low. This is another restructuring story and the chart tells us nobody cared. They did talk up the outlook for the immediate future and that prompted some short covering. Shares spiked 32% on short covering.


ATM operator and money transfer firm Euronet Worldwide (EEFT) reported earnings of $1.37 that beat estimates for $1.27. Revenue rose 7% to $649.4 million but missed estimates for $664 million. However, the company said there was a $35 million charge for a change in accounting rules which means they actually posted a big beat. Transactions rose 15% to 1.08 billion. EFT processing revenue rose 10% to $161.3 million due to a 9% increase in the number of active ATMs. Money transfer revenue rose 15% to $274.1 million. Shares rose 10% on the news.

I see these numbers and can't stop thinking about the potential for Paypal to spoil their party. With the Venmo app consumers can send money to anyone. Venmo is up to about $20 billion a quarter in payments. Currently they can only process for US residents but they will eventually find a way to move overseas. US regulators worry about money laundering when dealing with cross border payments. That does not seem to stop consumers in Europe.


Hasbro (HAS) was hammered at the open after the company missed both earnings and revenue for the first holiday quarter without Toys-R-Us. Adjusted earnings of $1.33 missed estimates for $1.67. Revenue fell 13% to $1.39 billion also missing estimates for $1.52 billion. The company said they were not able to recapture the majority of the Toys-R-Us business during the holidays. Adding to the problem was the liquidation of the Toys-R-Us inventory that diluted the market and forced prices lower. Despite the bad news the company raised its dividend from 63 to 68 cents. I applaud them for that measure in the face of diversity.

Shares recovered by the end of the day on positive comments about new toys coming for "Star Wars: Episode IX," "Captain Marvel," "Avengers: Endgame" and "Frozen 2." They are also introducing a new line of Power Rangers toys this year.


Skechers (SKX) reported earnings of 31 cents that beat the year ago quarter loss of 43 cents and analyst estimates for 23 cents. Revenue of $1.08 billion rose 11.4% and narrowly missed estimates for $1.1 billion. Shares spiked significantly after they guided for Q1 earnings of 70-75 cents and analysts were only expecting 63 cents. Susquehanna raised their price target from $24 to $32.


"Hell hath no fury like a woman scorned." That quotation is from "The Mourning Bride" a play by William Congreve. I think we could change it today to "scorned and embarrassed." I am thinking about Mackenzie Bezos. Her husband was running around behind her back like a sex crazed 17yr old texting nude pictures to his new girlfriend. Now that the entire episode has blown up in Jeff's face and severely embarrassed Mackenzie, what could have been a calm private divorce between two ultra-rich professionals may turn into the biggest divorce disaster in US corporate history.

How does Mackenzie go to her next social party, charity fund raiser, etc without everyone talking behind her back or worse. Even though she did not have any part in the sexcapade she will now be tarnished forever. However, Jeff's lawyers now claim his phones were not hacked so maybe it was Mackenzie that texted those pictures to the National Enquirer. I seriously doubt it because of the embarrassment it would bring to her reputation.

The couple has not yet filed for divorce even though they have said they were divorcing. I would not be surprised if the quiet split of 16% of Amazon's stock is going to turn into a public war as her way of getting back at Jeff.

Normally a CEO divorce does not materially impact the stock price. However, in this case given the high-profile nature and Jeff's position as the undisputed leader of Amazon and Blue Origins, a bitter fight could distract him from company business. Amazon is not a normal business. They have hundreds of projects in the works worth tens of billions of dollars and multiple divisions that could be Fortune 500 companies if they were spun off on their own. There are a lot of management decisions required to run Amazon and fighting with your hostile wife on how to divide your $112 billion fortune could be a significant distraction.

You know the National Enquirer is not going to let this story pass. It will be on the front page in some form for months to come. Add in People, Us and the dozen other supermarket tabloids which are going to be milking this story for all it is worth. Before it is over Jeff will be signing up for one of the SpaceX trips to Mars just to escape the story.

Amazon shares closed at a five-week low on Friday as the story became front page on real newspapers and TV news channels. Obviously, the Amazon business is not going to crash because some nude pictures of Jeff made it out of captivity so any material dip is going to be a buying opportunity. Ideally a dip to $1,350 would be great but without some new headlines on this scandal, I doubt we will see that level.


Crude prices fell unexpectedly as legislation in the House took aim at preventing OPEC from controlling prices. This NOPEC legislation is nothing new. It has been discussed for decades but with Trump in office there is actually a chance it could be passed in 2019.

The current bill would prevent the 14-nation cartel from colluding to manage oil prices. Since that is the only reason the cartel exists, this would be a blow for OPEC. The bill in the House is called the No Oil Producing and Exporting Cartels Act or NOPEC. The bill would make it illegal for foreign nations to work together to limit oil supplies and set prices. The bill would authorize the Justice Department to sue oil producers for antitrust violations by stripping foreign actors of their sovereign immunity protections.

Presidents Bush and Obama both threatened to veto any NOPEC bill that made it to their desks. President Trump has constantly complained that oil prices should be a lot lower and OPEC was "ripping off the USA."

Recently OPEC has warned its members against mentioning oil prices when discussing production policy. The WSJ said OPEC was planning some ads to try and influence US perception of OPEC.

Barclays warned that passage of NOPEC legislation could see the oil market return to a period of instability as production surged and prices collapsed.

The challenge is that US producers need a minimum of $50 oil to remain profitable and maintain capex spending and employment of hundreds of thousands of workers. If OPEC production was allowed to run rampant, prices could fall back to $40 or even lower and a lot of smaller companies would go out of business. We actually need OPEC to manage production and keep prices in the $60 range.

US production is on the verge of 12.0 million bpd and could exceed 12.5 or even 13.0 mmbpd by the end of 2019 thanks to a handful of new pipelines coming online this year that will free up constrained production in the Permian.

Inventories should begin to rise more in the coming weeks as refiners shutdown processes for maintenance and to convert over to summer blend fuels. That should depress prices temporarily, but they always rise sharply ahead of Memorial Day through July as summer driving season shifts into high gear.



The Polar Vortex two weeks ago caused a major 237 Bcf decline in natural gas supplies and after last week's frigid return to the Midwest we should see a similar decline in the numbers reported this coming Thursday. Despite the major decline in supplies to a 52-week low, prices have fallen to a ten-month low. The problem for gas traders is that we have 8 weeks of supply at last week's demand levels but only five more weeks of winter of which several are guaranteed to be mild. If the vortex returned for another couple of weeks, gas supplies managers would begin to sweat.




Markets

Even though the major indexes finished with a weekly gain it was miniscule and no reason to get excited. If anything, having the Dow stretch its winning streak to 7-weeks is just one more reason for investors to be cautious because you know there is a real bout of profit taking at some point in our future. It would have been more bullish to give back 200-300 points for the week and have investors believe it was a great buying opportunity.

For weeks I warned that investors were pinning all their hopes on a trade deal with China and once Trump said there was no planned meeting with Xi and Kudlow said there was a long way to go to reach any agreement the wheels came off the rally. In the afternoon the White House reporters indicated the March 1st date for tariffs to increase from 10% to 25% could be extended, the market recovered but was still cautious. This sanctions threat will still exist next week.

In addition, the president is said to be signing an order to forbid any Chinese equipment in the 5G networks in the USA. That is a direct attack on ZTE and Huawei and against Chinese trade. Signing this order as US negotiators head to China this week for additional trade talks could be another carrot and stick tactic. If you agree to these trade rules everything will be ok. If you don't agree we are going to put your two largest networking companies out of business. You must give Trump credit. He is not afraid to ruffle feathers or go where no US president has gone before in negotiations with other countries. He is not your average milk toast president. He is not afraid to use Roosevelt's "big stick."

The S&P traded below 2,700 on both of the last two days but recovered to close over that level. The index is stuck below the confluence of multiple resistance levels with the 200-day at 2,742 the biggest threat. Assuming a lack of bad news over the weekend we could see that level retested next week.


The Dow broke through the cluster of moving averages and was on its way to 25,800 when the weakness began. Now the index is using that prior resistance as support. This is about the right level to rest after trading below 25,000 intraday on Friday. The close was 123 points above the intraday lows and back above resistance. This would be a good spot to launch a new move higher.

The A/D line was dead even on Friday with Goldman the biggest drag.



The Nasdaq fell back into correction territory intraday and closed exactly on that 7,298 level. Amazon was the big drag on the index with a couple biotech companies leading the winners list. The tech sector rebounded with the chip stocks, but that rally has given up ground the last two days. With the majority of the big tech stocks already reported we are headed into the post earnings depression period.



The Russell posted a minor 4-point gain for the week, but it was a fight. The index traded on both sides of the 100-day average multiple times but lost the battle on Friday. This week and next is small cap earnings and there are rarely any market movers. This is a herd mentality. If they majority do well the index will rise.


My emotion wants to say buy the dip, but my brain is telling me to be careful. We are heading into the February expiration cycle and many times this is a turning point for the market. Earnings are fading and investors are thinking about taking money out of the market to pay taxes. February is a weak month and normally it is the second half of the month that produces the losses.

With the potential fading for an end of February trade deal, the global economy slowing, Q1 earnings turning negative and a 10% rally since Christmas, there are plenty of reasons to be cautious in the weeks ahead.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

Alexis de Tocqueville 1835.


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Index Wrap

Still Overbought

by Jim Brown

Click here to email Jim Brown
Despite three days of weakness stocks are still overbought. I thought we were going to have some real profit taking when the Dow dipped at or below 25,000 for two consecutive days but each day it rebounded to close over that level.

The Nasdaq was down -2.5% from Tuesday's close when it hit the intraday lows on Friday. That is a decent decline for three days but there was no panic. Even with the bad news the market got on the China trade meeting there was no panic.

The S&P dipped under prior resistance at 2,700 for two consecutive days but buy programs at the close rescued the index from a sub 2,700 close.

Volatility has declined to levels we saw on October 4th and the start of the Q4 correction. Traders are afraid of nothing and the markets are climbing the wall of worry. The minor decline last week came on low volume with three days with volume in the 6.8 billion range. That is the lowest volume since mid-January when the market was in a strong uptrend.


Evidence of the overbought conditions come from the percentage of S&P stocks over their 50-day average. Earlier in the week more than 86% of stocks were over their 50-day. On the Nasdaq is was 75%. This is evidence of "short-term" overbought. Stocks fell hard in Q4 and have rebounded hard in Q1. You would expect stocks to cross back over the 50-day when they rebound but 86%?



On the longer term 200-day average only 54% of S&P stocks have rebounded above it and 37% of Nasdaq stocks. That means long term most stocks are still a bargain. It is just hard to buy something when the stock chart has been straight up for 5 weeks even if it is still a long way from its high.



Further evidence of overbought comes from the new high on the S&P A/D line. Since Christmas stocks have gone vertical at least in the big caps. We still need a decent bout of profit taking to kill some of the momentum and make it safer to add positions.


The Nasdaq got a lot of help from the chip sector. The $SOX has surged over the last two weeks despite the decline the last two days. It is well above the Nasdaq on the correlation chart and suggests tech stocks could move higher.


The FANG chart is a confusing picture with Facebook and Netflix jumping out of the crowd while Google and Amazon are declining. When these stocks move in opposite directions the Nasdaq has trouble posting gains.


The S&P came to a dead stop at the 200-day average. As you can see back in the spring this average played critical support. However, it was not relative in Q4 when the market was so volatile. If the index can get past the 200-day the next major resistance is the 2800-2815 level. The weakness over the last several days has not yet turned into a sell signal on the MACD. The decline was too small.


The Dow managed to push through moving average resistance and then used it as support when the selling appeared.


The short-term overbought conditions were eased somewhat last week, and traders could profit from buying the dips in some of the momentum stocks. However, February is a weak month and most of the weakness comes from post earnings depression in the second half of the month. February options expiration has been a turning point in the past. Be cautious on adding long positions.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Buying Expectations

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a big post earnings drop, this stock is in rebound mode. Constellation Brands is a great company with the worst behind them.

I considered reloading the Stanley Black & Decker position but decided to wait until later this week to see if a rebound appears.

 

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


NEW DIRECTIONAL CALL PLAYS

STZ - Constellation Brands - Company Profile

Constellation Brands, Inc., together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company sells wine across various categories, including table wine, sparkling wine, and dessert wine. It provides beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, Modelo Chelada, Pacifico, and Victoria brands, as well as Funky Buddha, Obregon Brewery, and Ballast Point brands. The company offers wine under the 7 Moons, Black Box, Clos du Bois, Estancia, Mount Veeder, The Dreaming Tree, Franciscan Estate, Nobilo, The Prisoner, Kim Crawford, Ravage, The Velvet Devil, Kung Fu Girl, Mark West, Meiomi, Robert Mondavi, Ruffino, and Simi brands, as well as Schrader Cellars and Charles Smith brands; and spirits under the Casa Noble, High West, SVEDKA Vodka, Black Velvet Canadian Whisky, Casa Noble Tequila, and High West Whiskey brands. It provides its products to wholesale distributors, retailers, on-premise locations, and state alcohol beverage control agencies. The company was founded in 1945 and is headquartered in Victor, New York. Company description from FinViz.com.

Constellation took a $4.1 billion stake in marijuana company Canopy Growth. Their plan is to market THC infused drinks, snacks, etc, wherever marijuana is legal. That includes all of Canada, multiple US states and more than likely the entire US by the end of this decade. There are multiple countries other than Canada where the plant is legal.

This has significant implications where medical marijuana is legal. Patients who would rather not smoke a joint can drink a beer or other THC infused beverage with the same results. Constellation took a major hit on the announcement because many funds cannot invest in "sin" stocks. Shares fell to a low of $160 in late December with the market crash but are starting to rebound now.

Constellation is a buy just on its regular beverages at this level and the THC drinks are going to add to that valuation in the next couple years.

The company reported earnings of $2.37 that beat estimates for $2.06. Sales rose 9% to $1.97 billion and beat estimates for $1.91 billion. Beer sales rose 16% to $1.21 billion to beat estimates for $1.16 billion. Wine and spirit sales rose 0.4% to $762.8 million and beat estimates for $747.8 million.

For 2019 the company cut guidance from $9.60-$9.75 to $9.20-$9.30. Analysts were expecting $9.43. They said beer sales would still rise 9% to 11% but wine and spirit sales were expected to decline in the low single digit range compared to prior guidance for 2% to 4% growth.

Sales of wine were down but the company said they were going to reduce their low margin products and products under $11 and concentrate on higher dollar wines with higher margins. Once they begin marketing cannabis infused products, the sales are going to explode. Getting those products through research and development is going to take months but investors should be able to anticipate the profits.

The CEO said Canopy was expected to produce $1 billion in revenue over the next 18 months and that was 56% more than analysts expected. As Canopy begins to report these numbers, Constellation will benefit.

Earnings April 10th.

Options are somewhat expensive, and I am recommending April so the earnings expectations will keep the premiums inflated.

If you want to offset some of the premium you can sell a corresponding put. I am recommending a 180/160 combination. If you do not want to sell the put then use the $185 call option.

Buy long Apr $180 call, currently $6.10, stop loss $169.75 .
Sell short Apr $160 put, currently $2.75, stop loss $169.75.
Net debit $3.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Weakness Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The early morning dip was bought and the Nasdaq closed positive. Friday wa a decent day with a sharp decline at the open as the remaining sellers exited the market. The dip was bought but not on high volume. It was just enough to put the S&P and Nasdaq back into positive territory but the Dow still lost 60 points. After Thursday's big drop and Friday's early weakness, the rebound ahead of weekend event risk suggests the sellers have left the building.



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

DELL - Dell Technologies - Company Profile

Comments:

Dell said it was exploring the sale of SecureWorks (SCWX) with 4,300 clients in more than 50 countries. Dell bought the company in 2011 for $612 million then spun it off in 2016. Dell still owns 85% if the stock. The company only has a market cap of $254 million but Dell thinks it could be worth $2 billion. Dell has more than $50 billion in debt.

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.


MRK - Merck - Company Profile

Comments:

Merck said the FDA had accepted and granted priority to applications for two anti-bacterial drug candidates. One is for pneumonia and the other for urinary tract and abdominal infections. Shares rallied 70 cents in a weak market.

Shares are still $2.48 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:

Early morning dip was bought, and the Nasdaq posted a minor gain. No sellers in sight.

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.


TGT - Target - Company Profile

Comments:

Target updated their app to note if the price was online or instore after researchers found that prices could vary greatly depending on how close they were to a store. Target said the lower prices indicated online price matching but the higher prices close to a store represented the shelf price in the store. Regardless of the reason for the app's programming, the publicity is pressuring the stock.

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