Option Investor
Newsletter

Daily Newsletter, Saturday, 4/13/2019

Table of Contents

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

Market Wrap

Short Squeeze

by Jim Brown

Click here to email Jim Brown

Never short a dull market and especially when Dow components are in the headlines.

Weekly Statistics

Friday Statistics

When only five Dow components added 269 Dow points and that was the total gain for the day you could assume it was a short squeeze. Disney added 98 points on its streaming announcement. Boeing added 69 points after the CEO said they had flown 96 test flights of the 737 Max with the new software. JP Morgan added 36 points after strong earnings and Goldman added 36 points because of their earnings on Monday and the strong guidance from JPM. 3M added 28 points because strong Chinese economic numbers make a global recession less likely.

So how do you really know a rally is a short squeeze? When the Dow gaps open nearly 300 points and then trades sideways the rest of the day. A real rally moves steadily from the lower left of the chart to the upper right, not gap up vertically.

The other indexes followed the Dow higher but with a lot less enthusiasm. The Nasdaq was up only 4 points at 11:15 when the Dow was up +165. Tech stocks only reluctantly rebounded when the Dow went back to +250 intraday. The Russell failed to participate and barely avoided going negative intraday.




Consumer sentiment fell unexpectedly in April from 98.4 to 96.9. That is not a big drop, but it was the first in three months and with employment picking up again analysts expected it to continue rising. The present conditions component rose from 113.3 to 114.2 but the expectations component declined from 88.8 to 85.8.

Analysts blamed the tax cycle and consumers facing the challenge of paying their taxes for depressing sentiment. Weather could have also been a problem with some serious snowstorms crossing the nation. That affects income because people don't go to work and those that do are fighting the bad roads. Everything impacts sentiment. Seventy-five percent of respondents said it was a good time to make a major purchase, an increase of 1%, and 60% said it was a good time to buy a vehicle, down -2% and 66% said it was a good time to buy a house, -2%. Despite the decline it is still high on a relative basis. Sentiment is only down 1.9 points from this time last year.


Import prices rose 0.6% in March after a 0.6% rise in February. The rise in oil prices was the major culprit in the increase. Excluding petroleum, prices rose only 0.2%. If you exclude fuels, prices actually declined -0.2%. Crude oil prices rose 4.8% in March after a 13.7% rise in February. Imported natural gas prices rose 42.3% in March although they declined sharply in April. Export prices rose +0.7% also due to the rise in energy prices. We exported the most oil and gas ever in March. This report was ignored.

The positive economic reports for the week combined to lift the Atlanta Fed real-time GDPNow GDP forecast to 2.3% for Q1. This is a significant improvement from the 0.2% forecast back in early March.


Interest rates rocketed higher after the economic news from China and the EU extended the deadline for Brexit until October 31st. Those two headlines cleared a couple of big clouds from the market.

Overnight headlines from China showed a 14.2% rise in exports that blew past expectations for a 7.3% rise. However, imports declined -7.6% and far more than the -1.3% expectations. The March trade surplus came in at $32.64 billion and well over the $7.05 billion Reuters expected. The trade surplus with the U.S. rose from $14.72 billion to $20.5 billion. That brought the total for the quarter to $62.66 billion and a number I am sure the White House is impressing on trade negotiators.

The positive export number, Brexit extension and positive economic comments from JP Morgan CEO Jamie Dimon all combined to cause a sell off in treasuries and rise in yields. The yield on the 10-year rose to 2.56% and a four-week high.


The calendar for next week is busy with the most important reports the Philly Fed Survey and the Fed Beige Book. The retail sales, wholesale trade, etc, are important to the overall picture but they are not market movers. The Beige book is not normally a market mover, but it does fill in the economic blanks for each of the Fed regions. If there are any developing areas of weakness, they will show up here first.


Friday kicked off the Q1 earnings cycle with the first of the big banks. That cycle continues next week with Citigroup and Goldman Sachs on Monday. The tech sector gets into the swing with IBM and Netflix on Tuesday. The pace slows as we near the Good Friday holiday and the long weekend but accelerates the following week.

Of the 29 S&P companies that have reported, 79.3% have beaten estimates for earnings and 48.3% have beaten on revenue. The current earnings projection is for an earnings decline of -2.3% on a 4.9% increase in revenue. For Q1 there have been 85 guidance warnings and 31 guidance upgrades. The current forward PE is 16.9. Next week there are 50 S&P companies reporting.


The big market driver on Friday was Disney (DIS) and the streaming announcement. The Mouse House announced a $6.99 monthly service or $70 annually with access to 7,500 TV shows and more than 500 movies. They are targeting 60-90 million subscribers and expect to be profitable in fiscal 2024. They are going to invest $1 billion into original programming in 2020 and that will rise to $2 billion by 2024. That pales compared to the $15 billion Netflix is expected to spend in 2019. What Disney has working for it is their studio movies that are released to theaters. That budget is not a part of the streaming project. That means they have Marvel, Pixar, Lucas Films, etc, all making feature length films for the box office that will eventually make their way to the streaming system for no net cost to Disney+. The cost will have already been covered by the revenue from the box office.

For instance, Avengers: Endgame, is expected to do $1 billion in its opening weekend and that will be a record for any film. There have been 21 movies in the Marvel universe, but you do not have to watch them all to enjoy Endgame to its fullest. This is expected to be the last film in the series. According to the ComicBook.com the movies you need to watch in this order to understand the relationships in Endgame are:

IronMan
Avengers
Captain America: Winter Soldier
Avengers: Age of Ultron
Captain America: Civil War
Avengers: Infinity War
Avengers: Endgame

The Marvel characters are just one segment of the highly profitable Disney enterprise. Star Wars would be another. These are going to be a staple of the Disney+ streaming portfolio but how many times can you watch these movies before you glaze over? Disney has 70 years of content available to stream but I Love Lucy and Gomer Pyle reruns are not going to be high on the list. As a viewing public we have become spoiled to the high dollar, high graphics, high dollar talent productions that we have today.

This is where Netflix can compete. Their $15 billion a year in original content is going to be producing 120-140 shows a year and Disney is producing a dozen.

Analysts and investors alike were impressed by the Disney+ announcement. They do believe families will add another subscription to their list and very few analysts think they will cancel Netflix or Amazon Prime. This is the cost of entertainment for the future and if you have been to the movies lately you realize how cheap this package will be. You can't go on a date to the movies for much less than $50 and taking your wife and kids to the movies is cost prohibitive. This is going to seriously damage brick and mortar movies over the long term. With 7 streaming services battling it out for control of your TV the prices are going to remain low.

The streamers can afford to keep prices low because only a couple million viewers will go see a movie in theaters but tens of millions will stream it and those streaming fees are monthly, every month.

Disney also owns Hulu and they expect to reach 40-60 million subscribers there as well by 2024. They currently have 25 million subscribers. Add in ESPN+ and Disney is going to appeal to almost every type of viewer.

Netflix has 139 million subscribers and is expected to double over the next five years. There will be a streaming war as Disney, AT&T Warner Media, Verizon, Apple, Amazon Prime, Hulu and others all compete for the same eyeballs. Fortunately, none of them are exclusive and you can have as many subscriptions as you can afford.

Disney shares spiked $13.50 (11.5%) to an all time high at $130 on six times average volume. This added 98 Dow points and helped to power the short squeeze. Netflix (NFLX) shares declined -$16 (-4%) to $351 on the news. Netflix reports earnings on Tuesday.



JP Morgan (JPM) reported earnings on Friday of $2.37 that beat estimates for $2.35. Revenue of $29.85 billion was a new record and easily beat estimates for $28.44 billion. Net interest income rose 8% to $14.6 billion and also beat estimates for $14.4 billion. The retail loan portfolio rose by 4% and deposits rose 3%. Credit card sales volume rose 10%. There was a 12% spike in advisory revenue and 21% rise in debt underwriting. Investment banking revenue rose 44%. Everything was not rosy. Fixed income revenue fell -8% and equity market revenue fell 13%. Shares spiked $5 after CEO Jamie Dimon said, "Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong." He also said he did not expect a recession in 2019, 2020 or 2021. They bought back $4.7 billion in stock.


Wells Fargo (WFC) shares went the opposite direction after reporting adjusted earnings of $1.03 that missed estimates for $1.09. Revenue declined to $21.6 billion but beat estimates for $20.9 billion. Net interest income was nearly flat at 12.3 billion, up only slightly from $12.2 billion. Non-interest income declined from $9.696 billion to $9.298 billion. Wells is a big mortgage lender and mortgage banking income rose from $467 million to $708 million.

The challenge came from weak guidance. The CFO said net interest income would decline 2-5% in 2019 compared to prior forecasts for a 2% rise to 2% decline. For Q1 net interest income was down -3% from the prior quarter. They also cancelled their expense targets for 2020 after the departure of the CEO. The bank raised its loan loss provision from $654 million to $845 million based on less favorable economic conditions.


PNC Financial (PNC) reported earnings of $2.61 that beat estimates for $2.59. That was a 7.4% increase from the year ago quarter. Revenues of $4.29 billion beat estimates for $4.24 billion. Net interest income rose 5% to $2.48 billion. Non-interest income rose 3% to $1.81 billion. Loans rose 3% to $232.3 billion and deposits rose 1% to $271.2 billion. However, income from corporate and institutional banking declined 11% and asset management income declined 17%. Shares rallied $4 on the earnings beat.


Uber finally filed to for a $10 billion IPO that could value the company at $120 billion. They have raised $24 billion in private capital. Unlike Lyft, Uber is an integrated company that functions in 700 cities in dozens of countries. In addition to 12 different types of rides you can order from the App, they have Uber Eats where you can order food from more than 220,000 restaurants in more than 500 cities and have it delivered to your door. More than 15 million people ordered meals in Q4. There is also Uber freight, which had revenue of $125 million in Q4. They have ride share bikes and ride share scooters. They are currently buying competitors in multiple countries. They had 22,263 full time employees at the end of 2018 with 11,488 outside the USA. They have 3.9 million drivers on the platform serving 91 million "monthly active platform customers."

In 2018 it generated $11.4 billion in revenue and lost $1.8 billion. In the S1 they say Uber may never reach profitability and that should be a red flag. They are using the Amazon model of if you build it, they will come. In doing so they are trying to branch out into every conceivable mode of transportation including developing their own self driving operating system. They are the Amazon of the transportation sector. While Uber is vastly larger and more complex than Lyft, they must eventually make a profit to stay in business. They are hoping one of their offshoot efforts will become viable and lift them out of the loss column.

Meanwhile LYFT shares continue to move lower. Once UBER prices and opens for trading, I expect LYFT shares to trade under $50 on their way to significantly lower levels.

Hedgeye: Are unicorns worth buying?


Apple (AAPL) is suffering from iPhone fatigue. For the second time in a week an analyst has cut their rating to "sell." New Street Research said demand trends are fading and the consensus view of earnings is too optimistic for Q2. He based this analysis on the sales trends from 2016 when sales hit an air pocket following the iPhone 6S launch. He is expecting sales to increase in Q4 when the new models are announced.

He said the services revenue forecast is too aggressive because it requires new iPhone users to sell new services. Existing users already have the services they want and there is very little services growth in the installed user base. He is also less than optimistic about the recent announcement for new subscription services. Apple was vague on details and costs and until the services are actually launched, he is not applying much value. Apple TV is an example since it was launched long ago and never contributed meaningfully.

HSBC also cut shares from hold to sell. China's smartphone shipments declined 6% in Q1 and the number of new handsets activated in March declined 35%. Q4 was the fifth consecutive decline in global smartphone shipments with a year over year decline of 7%. The survey showed demand for premium phones with high prices declined significantly. In Q4 IDC said iPhone sales in China fell 20%. Google is set to roll out the new models of the Pixel phone in May and Samsung will debut new models later in the summer ahead of the iPhone announcement.


GE agreed to pay a $1.5 billion fine over problems with sub-prime mortgages in its WMC Mortgage unit prior to 2008. The fine is due to the unit concealing the poor credit quality of the loans and for lax fraud controls when packaging the loans into securities sold to investors. WMC was acquired by GE Capital Corp in 2004 and originated more than $65 billion in loans over the next three years. GE sold WMC in 2007. The Dept of the Treasury ranked WMC as the fourth "worst subprime originator." Earlier in the week JP Morgan cut GE from neutral to sell with a price target of $5.


How is that Medicare for all working out for you? If you are a shareholder in the health care sector it has been painful. UnitedHealth (UNH) has declined almost $30 over the last three days since the democratic hopefuls have adopted that as one of their main platform issues. For people bad at math the Bernie Sanders plan would cost about $3.3 trillion and eliminate private health insurance as we know it. It has no chance of passing even if he was elected simply because of the cost. While young people like the sound of FREE healthcare, they would not like the 35% tax hike it would take to provide that free care. This is a major buying opportunity for these companies.


Anadarko Petroleum (APC) announced it had agreed to be acquired by Chevron (CVX) for $33 billion in cash and stock. They will also assume about $5 billion in Anadarko debt. This will create the second largest publicly traded energy company. Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each APC share they own. The deal is slated to close in the second half of 2019. Chevron also said it would increase their current stock buyback program from $4 billion to $5 billion. Chevron said the deal would produce about $2 billion in annual synergies and be accretive to free cash flow after one year. Chevron shares declined $6 on the announcement to erase about 42 Dow points.

I personally think it is a great deal. I have always liked Anadarko and Chevron as my two favorite energy companies. Chevron and Anadarko are both large landholders in the Permian with many adjoining leases. This will give Chevron an almost continuous 75 mile wide property position in the best areas of the Permian. Chevron has 2.2 million acres in the Permian and Anadarko has more than 589,000 acres. Anadarko also has world class deepwater properties in the Gulf of Mexico and a monster gas/LNG development in Mozambique.

Permian Map: Yellow is Anadarko, Blue is Chevron

Occidental Petroleum (OXY) had bid MORE than $70 per share in cash and stock and had more cash than the Chevron bid. However, OXY is not as powerful as Chevron on the world stage and they would have required a shareholder vote for approval. Reportedly, there were also some structural issues with the OXY bid. According to reports, OXY is considering its options for a higher bid. The Chevron/Anadarko breakup fee is 3% or roughly $1 billion.



The combination of these two companies could start another land rush in the Permian. Companies that have developed significant acreage positions and could be acquisition targets include Apache (APA), Pioneer Natural Resources (PXD) and EOG Resources (EOG). Concho (CXO) and Noble Energy (NBL) were also mentioned but their positions are significantly smaller. If another major like Exxon, BP, Shell or Total decide to ramp up in the Permian they are likely to go for the big companies where they can actually benefit from the increased scale rather than a smaller company that would not provide the big increase in reserves.

Exxon bought XTO back at the height of the oil boom a decade ago just before prices crashed over the next ten years. Exxon had a case of severe indigestion since XTO was primarily natural gas and one of the largest producers in North America. Gas prices collapsed from $12 to less than $2. Exxon has evolved XTO and they are now the most active operator in the Permian, according to XTO and Exxon with more than 50 active rigs. Exxon is planning to increase their output in the Permian by 80% to more than one million Bpd by 2024. They are building 30 oil and gas processing centers in the Permian to handle their future production. Exxon has the most to gain by increasing its 1.6 million acre position and consolidating by filling in the lease gaps with a large acquisition. They have been actively buying 20,000-30,000 acre leases in recent months. EOG has more than 850,000 Permian acres. Pioneer has more than 750,000 acres. Don't forget Occidental is still an active acquirer at this time.



Crude prices have plateaued at $65 despite conflict in Libya and economic collapse in Venezuela. The Russian comments about ending their production cuts in June has the market worried. Since oil prices normally peak around Memorial Day, I still expect them to rise from here. Inventories rose the last three weeks because refiners are still in their maintenance period and they are still trying to deplete supplies of winter blend fuels ahead of summer fuel production. This inventory build is going to reverse into declines very soon as refinery utilization increases over 90% into the spring driving season.

We only added two oil rigs last week after the 19 rig spike the prior week. Gas rigs declined by five. There is still a lack of transport capacity for Permian crude so wells drilled now will go into the massive backlog of uncompleted wells. There were 8,576 drilled and uncompleted wells at the end of February and rising.






Markets

With the S&P only 23 points from a new high, I would really be surprised if we did not reach it. As I have said all along, the prior highs act like a tractor beam in a bullish market. The Dow is still 416 points below its prior high at 26,828 but that is just one good week with a couple Dow components posting large gains each day. The Nasdaq is about 125 points from a new high. All of these indexes could easily see those levels reached this week if we have some positive earnings guidance.

On the headline front, the comments from the White House suggest all the hard points have been agreed on the China trade talks and they are just finishing up on the punctuation and presentation. Once President Xi approves the final draft, they will schedule a Florida summit and that announcement will be the equivalent of a done deal. Whether that has any upward lift left is unknown. We have been trading on expectations of a deal for so long, there is a serious risk of a sell the news event. It might not be on the day it is announced or concluded but shortly thereafter because that goal will no longer be present.

The earnings are the wild card. If they continue to be positive and the forecast creeps back into positive territory and guidance is decent, we could actually see some further market gains. However, after rising 20% in 2019, the decline into the summer doldrums could be especially frustrating. We all would like to see the market skip the normal summer slowdown and I would also like to find a winning Powerball ticket in my mailbox. It is possible we will not see a market pause over the summer but highly unlikely.

Because it is unlikely there will be a lot of investors betting on that to happen. A funny thing happens when the herd moves in the same direction. The market has a tendency to move in the opposite direction. Time will tell what summer will bring and there is nothing we can do but watch and wait.

There is no resistance between Friday's close and the prior highs. The only thing holding us back is a reluctance to buy a market top.


The Dow closed at 26,412 on Friday and 12 points below the close on April 5th. Normally that would be resistance, but I doubt it will be this week. The market is too close to the prior high at 26,828. However, the January high at 26,616 could be light resistance. That would be the head and shoulders level in a perfect chart, but I doubt that will occur this close to the high. I could foresee a double top, so we need to watch for that in the days ahead.



The Nasdaq is easing slowly higher and now only 125 points from a new high. There is no visible resistance in the way but there is congestion from September. It may not be a straight shot unless Netflix posts blowout numbers on Tuesday. Facebook is now leading the FANG pack with a 7-month high close on Friday while Amazon has stalled at $1,850.



The Russell remains the laggard, but it is slowly easing up to that magic number resistance at 1,600. If positive earnings were to suddenly lift the Russell over that level a breakout could be powerful.


I believe we will see new highs in the coming days. Positive earnings guidance will be the key. Moving materially over the prior highs could be a significant challenge but one I would like to see. It is hard not to be bullish at new highs but as we saw from the three lowest volume days of the year last week, there are a lot of investors waiting patiently on the sidelines rather than chasing prices higher. Be patient. There is always another day to trade.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The way to get started is to quit talking and begin doing."

Walt Disney


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


Index Wrap

One Chart

by Jim Brown

Click here to email Jim Brown
I could post only one chart this week and it would completely explain the market. The big caps are leading the market higher despite some high-profile declines in the Dow components. Chevron erased 42 points on Friday and UnitedHealth erased 89 on Friday and nearly 210 for the last three days. Fortunately, the short squeeze in Disney erased the impact from UnitedHealth. Without several of these major component declines over the last two weeks the Dow would already be at new highs.

Fortunately, these individual declines rarely continue, and investors will buy the dip. This will provide a lift in the days ahead.

The S&P has pulled to within 23 points of a new high. The S&P is enjoying strong market breadth that is offsetting the declines in a few big names. Hopefully that holds up through the earnings cycle since 81 companies have already warned. Normally shares dip when they warn and then rally when they report better than expected results. That could give the index a lift in the days ahead.

The only chart I need to post is the A/D chart for the S&P. If the majority of the big caps are rising, then the overall market is going to rise. On Friday the A/D was almost 4:1 in favor of advancers on the S&P. If that ratio holds for a few more days, we will be well over the prior highs. I am not confident that will happen but would be thrilled if it did.


Offsetting the bullishness in the S&P is the weakness in the small caps. Specifically, the Russell 2000 and the S&P-600. The A/D line is positive and at a new high but the A/D on Friday was only about 1.75:1 advancers over decliners. It was much weaker than the S&P ratio.

The S&P Small Cap 600 has major resistance at 980 and 990 and it will take a broader ratio of advancers to push through those levels.



The Biotech Index ($BTK) had a really bad week with a decline of -4.3% and this weighed on both the Nasdaq and the Russell. This is a political decline prompted by fears of cuts to reimbursements in a Medicare for all environment. This decline should fade as common sense prevails.


The chip sector is continuing to lead the Nasdaq higher with the $SOX breaking out to a new high on Friday. The chip rally offset the weakness from the biotech decline. Unfortunately, the vertical ramp since Christmas is very overextended and should not last much longer. The 5G hoopla is providing lift.



The FANG stocks were starting to move back into correlation until Netflix crashed on Friday after the Disney+ launch. This chart has actually turned positive with a higher trend despite the volatility.


The broadest representation of the market is the Russell 3000 and it is only 23 points from a new high. This is not big caps, mid caps or small caps. This is ALL caps, and this IS the market. We are very close to what could be a break out or a double top.


Volatility is rapidly fading and right at a 6-month low. We are back at the levels we saw in October when the market made new highs. I would love to see it hold under 12 for several weeks because that would mean the market had broken out and was making new highs. Investors would be very complacent until the market ran out of steam. I expect to see 20 on the VIX again this summer.


I believe we will see new highs. I am not expecting much more than that unless earnings turn significantly positive and the China trade deal is better than expected. I believe we should be cautious once the news highs are made and avoid buying a market top.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Finally

by Jim Brown

Click here to email Jim Brown

Editors Note:

Market makers have granted my wish. Lyft now has options and we can profit from the decline with minimal risk.

 

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


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

LYFT - Lyft Inc - Company Profile

Lyft, Inc. operates a peer-to-peer marketplace for on-demand ridesharing in the United States and Canada. It provides Ridesharing Marketplace, which facilitates lead generation, billing and settlement, support, and related activities to enable drivers to provide their transportation services to riders. The company also offers a network of shared bikes and scooters in various cities to address the needs of riders for shorter routes; Express Drive program, a flexible car rentals program which connects drivers who need access to a car with third-party rental car companies; and concierge for organizations to manage the transportation needs of their customers and employees. In addition, it integrates third-party public transit data into the Lyft app to offer various enterprise programs, including monthly ride credits for daily commutes, supplementing public transit by providing rides for the first and last leg of commute trips, late-night rides home, and shuttle replacement rides. The company was formerly known as Zimride, Inc. and changed its name to Lyft, Inc. in 2013. Lyft, Inc. was incorporated in 2007 and is headquartered in San Francisco, California. Company description from FinViz.com.

Analysts are perplexed at the valuations for rid sharing companies. The drivers are free agents and the customer is a free agent. As one analyst said, "there is no stickiness in the business." Lyft managed to pump up its revenue over the last quarter because they were giving huge discounts to lure customers away from Uber ahead of the Lyft IPO. Offers like "50% off your next ten rides" were common. Lyft said it took market share from Uber in Q1 but they did not tell you it was because they were giving away highly discounted rides.

This is going to be a cutthroat business. I know several drivers that drive for both Uber and Lyft and several have said they have picked up the same people on both services. It is whoever is closest and which ride will be the cheapest. With multiple competitors gearing up to enter the space the cost per ride is going to decline along with the payments to the drivers.

This space is going to be a cat fight for the next couple of years while each of these companies tries to claw their way to profitability.

With the Uber IPO now announced and Uber being a much larger and much more integrated company, they are going to be the assumed winner in the months ahead. Anyone investing in this space is going to want to be in Uber and not Lyft. You want to go with the winner and not the underdog that is losing money on every ride.

In the Uber S1 they warned that they may never reach profitability. Lyft lost $900 million in 2019 and the cash burn is continuing. If Uber cannot be profitable with their multifaceted global business, how is Lyft going to be profitable offering only the cheapest rides available?

I believe Lyft shares are going to trade well under $50 in the coming months. I could be sorely mistaken but that is what I expect. When Uber begins trading, I expect Lyft to decline even further.

Wide stops because of expected volatility.

Buy June $55 put, currently $4.30, stop loss $76.25.
Sell short June $45 put, currently $1.20, stop loss $76.25.
Net debit $3.10.



In Play Updates and Reviews

Great End to the Week

by Jim Brown

Click here to email Jim Brown

Editors Note:

A combination of headlines caused a strong short squeeze on the Dow and lifted the overall market. Never short a dull market. With Thursday the lowest volume day of the year right behind Monday and Wednesday as the prior lowest, the market was really dull. On Thursday I recommended remaining in cash until we saw what was going to happen to the obviously cautious market. Friday's rally was the result of a short squeeze in Disney, JP Morgan, Boeing and Goldman that added 250 points to the Dow, and it was only up 269 points. Thanks guys! What are we going to see for an encore next week?



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

FIVE - Five Below - Company Profile

Comments:

Wednesday was not the right day to recommend FIVE. On Thursday morning JP Morgan upgraded the stock from hold to buy with a $150 price target and it gapped open $4 to fill the position at the high of the day. Fortunately, it continued to gain on Friday.

Original Trade Description: April 10th

Five Below, Inc. operates as a specialty value retailer in the United States. It offers accessories, including novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, and T-shirts, as well as nail polishes, lip glosses, fragrances, and branded cosmetics; and items used to complete and personalize living space, including glitter lamps, posters, frames, fleece blankets, plush items, pillows, candles, incense, lighting, novelty decor, and related items, as well as provides storage options for the customers room. The company also provides sport balls; team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls; games, including name brand board games, puzzles, collectibles, and toys covering remote control; and pool, beach, and outdoor toys, games, and accessories. In addition, it offers accessories, such as cases, chargers, headphones, and other related items for cell phones, tablets, audio, and computers; books, video games, and DVDs; craft activity kits; arts and crafts supplies that consist of crayons, markers, and stickers; and trend-right items for school comprising backpacks, fashion notebooks and journals, novelty pens and pencils, locker accessories, and everyday name brand items. Further, the company provides party goods, decorations, gag gifts, and greeting cards, as well as every day and special occasion merchandise products; assortment of classic and novelty candy bars, movie-size box candy, seasonal-related candy, and gum and snack food; chilled drinks through coolers; and seasonally-specific items used to celebrate and decorate for events. It primarily serves tween and teen customers. As of February 2, 2019, Five Below, Inc. operated 750 stores. The company was formerly known as Cheap Holdings, Inc. and changed its name to Five Below, Inc. in August 2002. Five Below, Inc. was founded in 2002 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Five Below has 750 stores and is targeting 2,500. Their rapid expansion is the key to their surging 22% rise in revenue. They are not planning on 2,500 in 2019 but that is their goal over the next several years. They opened 125 stores in 2018. Average store volume is $2 million. Same store sales on those open more than a year was +4.4%. This rapid expansion should keep investors attention.

They are projecting 2019 revenue to rise 19.6%-20.9% to $1.865-$1.885 billion with a goal of 145-150 new stores. They are adding three new states and will be operational in 36 states plus DC by year-end.

Their Q4 earnings of $1.59 beat estimates for $1.57. Revenue of $602.7 million narrowly beat estimates for $601.0 million.

Shares spiked $10 after earnings but gave it all back before beginning the current rally. Shares are very close to a breakout over $130.

Earnings June 26th.

Position 4/11/19:
Long May $135 call @ $6.00, see portfolio graphic for stop loss.


INTC - Intel - Company Profile

Comments:

No specific news. Only 68 cents from a new high.

Original Trade Description: Feb 16th

Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

In November Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago, Intel had 6.5 billion shares outstanding. If they complete this buyback program, they will have just over 4 billion shares outstanding.

Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.

Intel reported Q4 earnings of $1.28 that beat estimates for $1.22. However, revenue of $18.66 billion missed estimates for $19.02. Their biggest problem was guidance for Q1 of 87 cents on $16 billion in revenue. Analysts were expecting $1 on $17.29 billion.

Intel is poised to benefit from a trade agreement with China. They currently get 24% of their revenue from China. With the advent of 5G, Intel is poised to be a leading player. They bill themselves as an "end to end" provider. The 5G revolution is not only going to replace nearly every piece of networking gear on the planet, every cellphone owner will be upgrading to a new 5G phone, many with an Intel modem. Remember the old commercials from the 2000's, "Intel Inside?" With Intel's new push into the internet of things (IoT), smartphone communications and self-driving vehicles, they really will be inside most electronic products.

Intel is expected to grow revenue by 5% in 2019. That is better than the sector forecast for 2% growth.

Earnings April 25th.

We have to reach out to the June option cycle to get a strike that comes after earnings and will keep the premiums inflated. We can buy time, but we do not have to use it.

Position 2/19:
Long June $55 call @ $1.53, see portfolio graphic for stop loss.


LOW - Lowes Companies - Company Profile

Comments:

No specific news. Only 58 cents from a new high.

Original Trade Description: March 30th

Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. It offers a line of products for maintenance, repair, remodeling, and decorating. The company provides home improvement products in various categories, such as lumber and building materials, tools and hardware, appliances, fashion fixtures, rough plumbing and electrical, seasonal and outdoor living, lawn and garden, paint, millwork, flooring, and kitchens, as well as outdoor power equipment. It also offers installation services through independent contractors in various product categories; extended protection plans; and in-warranty and out-of-warranty repair services. The company sells its national brand-name merchandise and private branded products to homeowners, renters, and professional customers. As of November 5, 2018, it operated 2,390 home improvement and hardware stores. The company also sells its products through online sites comprising Lowes.com and Lowesforpros.com; and through mobile applications. Lowe's Companies, Inc. was founded in 1946 and is based in Mooresville, North Carolina. Company description from FinViz.com.

Earnings May 29th.

Lowes is in the midst of a restructuring and the new CEO, Marvin Ellison took over in July. Since then he has closed stores all across the country and hired thousands of IT workers to improve online sales. As a result, Lowes is closing the gap with Home Depot.

In the last quarter the company posted earnings of 80 cents that beat estimates by a penny. Overall revenue rose 1% to $15.65 billion. The slower revenue growth was due to the store closures.

The CEO said the hard work has now been done over the last six months and they are fully prepared for a strong spring and summer selling season. In January alone, same store sales rose 5.8%.

Shares closed at a 6-month high on Friday and appear poised to retest the peak of $117 from September. I am using the June option to retain premium ahead of the May earnings. We will exit before the earnings.

Position 4/1/19:
Long June $115 call @ $2.51, see portfolio graphic for stop loss.


MSFT - Microsoft - Company Profile

Comments:

No specific news. New high at $121.

Original Trade Description: March 23rd

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. Its company's Productivity and Business Processes segment offers Office 365 commercial products and services, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises. The company's Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as provides training and certification to developers and IT professionals. Its More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising. The company markets its products through original equipment manufacturers, distributors, and resellers; and online and Microsoft retail stores. Microsoft Corporation has collaboration with E.ON; strategic alliance with Nielsen Holdings plc and PAREXEL International Corp.; collaboration with NIIT Technologies Ltd.; and a strategic collaboration with Mastercard Incorporated. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

Microsoft is closing in on one billion Windows 10 installations. This is a money printing machine. Their server software, Office 365, SQL Server, Azure cloud service, are all money printers. They are very close to killing the video game market and putting Gamestop out of business by releasing a download only video game console. They are going to put the Xbox in the cloud. This is called Project XCloud. The idea is to be able to play any game on any device at any time without a controller or software CD. This took some of the excitement out of the Google Stadia announcement.

This is a simple recommendation. Shares closed at a new high on Thursday and pulled back to short-term support on Friday. "IF" the market recovers, Microsoft should make new highs again.

Earnings May 1st.

Position 3/25/19:
Long May $120 call @ $2.99, see portfolio graphic for stop loss.


NTNX - Nutanix - Company Profile

Comments:

No specific news. After a false start the prior week, shares are moving up again.

Original Trade Description: March 13th

Nutanix, Inc., together with its subsidiaries, develops and provides an enterprise cloud platform in North America, Europe, the Asia Pacific, the Middle East, Latin America, and Africa. Its solution addresses a range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications, and big data analytics. The company offers Acropolis, an open platform comprising hyperconvergence, native virtualization, enterprise storage, virtual networking, and platform services; and Prism, an end-to-end consumer-grade management plane providing management and analytics across its software products and services. It also provides Nutanix Calm that offers native application orchestration, automation, and lifecycle management to its enterprise cloud platform. In addition, the company offers Beam, a multi-cloud optimization service; and Frame, a desktop-as-a-service. It serves customers in a range of industries, including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology, and telecommunications, as well as service providers. The company was founded in 2009 and is headquartered in San Jose, California. Company description from FinViz.com.

Nutanix shares were crushed on March 1st after they posted an adjusted loss of 14 cents. Analysts were expecting 25 cents, so this was a beat. Revenue of $335.4 million beat estimates for $331 million. However, billings rose from $355.9 million to $413.4 million. Analysts were expecting $416.5 million and not a big miss.

The problem came from guidance. They guided for the current quarter for a loss of 60 cents on revenue of $290-$300 million and billings of $360-$370 million. Analysts were expecting 28 cents on revenue of $348 million and billings of $430.2 million. That was a major miss.

The CFO said, "The guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring." "We took a critical look at these areas and have taken actions to address them."

Shares fell $17 to $33 on the news. After a week of sideways consolidation shares have started to move higher. The CFO said they corrected the problem. That may not mean there will be a recovery in the current quarter but there will be a recovery. I am recommending we buy the dip.

The first option cycle out of the 30-day premium depreciation window is July. We can buy time, but we do not have to use it.

Position 3/14/19:
Long July $42.50 call @ $3.25, see portfolio graphic for stop loss.


SWKS - Skyworks - Company Profile

Comments:

No specific news. New 5-month high close.

Original Trade Description: April 6th

Skyworks Solutions, Inc., together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, antenna tuners, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase locked loops, phase shifters, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators. The company provides its products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets. It sells its products through direct sales force, electronic component distributors, and independent sales representatives. Skyworks Solutions, Inc. has a collaboration agreement with MediaTek Incorporated to deliver standards-based 5G solution. The company was founded in 1962 and is headquartered in Woburn, Massachusetts. Company description from FinViz.com.

The chip sector has rallied 38% in 2019 compared to 23% for the S&P. However, some chip stocks have not participated. Skyworks spiked to $85 after its earnings in February then traded sideways until last week. Friday's close was a 5-month high and a breakout of the recent range.

They reported earnings of $1.83 that missed estimates for $1.84. Revenue of $972 million missed estimates for $973 million. The generated a record $549 million in free cash flow from operations and ended the quarter with more than $1 billion in cash. Obviously, those misses were minor, and shares spiked on their strong guidance. They guided for Q2 for earnings of $1.43 and revenue of $800-$820 million. Q1/Q2 are normally light quarters for chip stocks because the surge in smartphone building occurs in Q3/Q4.

They also announced a $2 billion stock buyback program that replaced their expiring $1 billion program that had $129 million left to spend. They also announced a quarterly dividend of 38 cents that was paid on March 19th.

Skyworks will be a major beneficiary of the 5G rollout. They have already installed 5G base stations all across Europe and have secured contracts with multiple vendors for 5G chips. They are also a major supplier for Apple and Samsung and those new phones will begin hitting the market in August.

Earnings May 7th.

I am using a short-term May option because we will exit before the May earnings.

Position 4/8/19:
Long May $90 call @ $2.60, see portfolio graphic for stop loss.


XRAY - Dentsply Sirona - Company Profile

Comments:

No specific news. New 12-month high close.

Original Trade Description: April 3rd

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. The company operates in two segments, Technologies & Equipment; and Consumables. Its dental supplies include endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprise dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. The company also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. In addition, it provides dental technology products, including dental implants and related scanning equipment, treatment software, and orthodontic appliances for dental practitioners and specialist, and dental laboratories; and dental equipment, such as treatment centers, imaging equipment, and computer aided design and machining systems for dental practitioners and laboratories. Further, the company offers healthcare consumable products, such as urology catheters, medical drills, and other non-medical products. It markets and sells dental products through distributors, dealers, and importers to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools; and urology products directly to patients, as well as through distributors to urologists, urology nurses, and general practitioners. The company was formerly known as DENTSPLY International Inc. and changed its name to DENTSPLY SIRONA Inc. in February 2016. DENTSPLY SIRONA Inc. was founded in 1899 and is headquartered in York, Pennsylvania. Company description from FinViz.com.

XRAY was one of the three worst performing healthcare stocks in 2018. Things are looking up now that they are well into their restructuring program. The company reported earnings of 58 cents that beat estimates for 54 cents. Revenues of $1.06 billion beat estimates for $1.03 billion. Both metrics were down from the year ago quarter.

However, the company projected for earnings to rise 15.5% in 2019 with revenue of $3.95-$4.05 billion, which beat estimates for $3.94 billion. They guided for 2019 earnings of $2.25-$2.40 with a midpoint of $2.32 that easily beat estimates for $2.15.

Shares spiked sharply after the report and have traded sideways for the last month. There is an uptick in progress and Today's close was a 12-month high.

Earnings May 31st.

If XRAY can move over current resistance they have room to run.

Position 4/4/19:
Long July $55 call @ $1.40, see portfolio graphic for stop loss.


BEARISH Play Updates

No Current Puts