Option Investor
Newsletter

Daily Newsletter, Saturday, 4/20/2019

Table of Contents

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

Market Wrap

Hurry Up and Wait

by Jim Brown

Click here to email Jim Brown

The major indexes rocketed higher from the December low only to stagnate the closer they get to the record highs.

Weekly Statistics

Friday Statistics


Please read the important announcement
at the bottom of this commentary.


The S&P remains locked in a range from 2895-2910 with the record high close at 2,930. We are very close but every attempt to move higher is sold. There is no excitement about the new highs or the better than expected earnings.


The small cap sector which should be leading the market, is weakening after failing for five consecutive days at 1,585. This is bearish for sentiment.


The Nasdaq 100 ($NDX) has closed at record highs for the last two days but that also failed to generate any excitement. The normal "breakout" when a new high is made, turned into a slow crawl higher. That is still positive, but it failed to ignite the breakout rocket.


There was a ton of economic reports on Thr/Fri. The weekly jobless claims came in at 192,000 and the lowest level since September 6th, 1969. Claims have declined for five consecutive weeks suggesting the payroll report for April is going to be a blowout. The four-week moving average fell to 201,250 and the lowest level since November 1st, 1969. The insured unemployment rate was 1.2% and the lowest rate on record is 1.1% so we are close to a record low. Employers are reluctant to layoff workers because they know they will not be able to find replacements.

The Philly Fed Manufacturing Survey for April declined from 13.7 to 8.5. That comes after a 17.8-point jump in the March reading. New orders exploded higher to 15.7, up from 1.9. Inventories declined sharply from 17.2 to 2.6 suggesting a pickup in manufacturing in the coming weeks. Backorders declined slightly from 3.1 to 0.4. Employment also rose sharply from 9.6 to 14.7.

Prices paid and received went in opposite directions and not in a good way. Prices paid rose from 19.7 to 21.6 and prices received declined from 24.7 to 20.0. There is a margin squeeze in progress and inflation is declining rather than rising. New orders rose for 39.4% of manufacturers and declined for 23.8%. Some 26.8% of manufacturers reported increased hiring, which suggests stronger metrics ahead.


Retail sales for March rebounded sharply from -0.2% to 1.6%. While that sounds good on the surface, the majority of the gains were driven by rising gasoline prices. Gas prices have been rising for nearly two months. If you exclude autos, sales rose 1.2%. If you exclude autos and gasoline, sales rose 0.9%. Motor vehicles and parts rose 3.1% and gasoline stations rose 3.5%. Furniture and fixtures rose 1.7%, electronics 0.5%, food and beverages 1.0%, clothing 2.0%, general merchandise 0.7%, food service and drinking 0.8% and non-store retailers 1.2%.

The headline gain was the largest since September 2017. Year over year sales were up 3.6% overall. Analysts claim tax refunds may have boosted spending. As more people go to work, spending will increase.

Conference board leading indicators rose 0.4% after a downwardly revised 0.1% in February. Employment was credited with supplying the biggest boost. The report suggests the economy is poised to accelerate in the months ahead. The leading indicator report takes numbers from all the other reports to predict future economic growth.

Business inventories rose 0.28% in February and less than the 0.5% analysts expected. This was the lowest level in three months after a 0.86% rise in January. Motor vehicle parts rose 0.3% and auto parts dealers saw inventories rise 0.4%. In theory the slowing of the inventory build cycle suggests either sales are increasing, or manufacturers are letting inventories deplete after the weak retail sales in February. Fortunately, low inventories mean higher manufacturing activity at some point in the near future.

New residential construction for March declined slightly from a 1.142 million annualized pace to 1.139 million. Single family starts declined slightly from 788,000 to 785,000. Multifamily starts were flat at 354,000. Starts in the Northeast declined -4.4%, Midwest -16.6% due to weather, South -7.2%. Starts in the West rose 31.4% as the spring building season arrived. Permits, a leading indicator for future starts, declined from 1.291 million to 1.269 million.


The Atlanta Fed real time GDPNow forecast for Q1 GDP rose sharply from 2.3% at the beginning of the week to 2.8% thanks to the housing starts, retail sales and inventories. The first quarter is normally a blackhole for GDP but this one is shaping up nicely. We get the first official look at the GDP from the BEA on April 26th.

This is far from the outlook at the end of 2018 when the S&P was down 19% and analysts were worried about a recession. This suggests Q2 will be even stronger, especially if there is a China trade deal.


The calendar for next week is led by home sales and the Richmond Fed Manufacturing Survey. The survey is not a market mover, but strong home sales numbers could lift the economic outlook.


We have a big week of earnings ahead with a lot of big names on Wednesday and Thursday. Earnings have been coming in better than expected with many companies beating estimates by 5-7%. The average beat in prior quarters is about 3.5%. However, there are still a few companies every day that stink up the place. There have been 77 S&P companies that have reported and 77.9% have beaten on earnings with 48.1% beating revenue estimates. The current earnings forecast for Q1 is -1.7% and a 5.0% increase in revenue. It is very unusual to see earnings decline when revenue is increasing. The forward PE is 16.8. There have been 85 earnings warnings for Q1, and 31 companies issued positive guidance. During the coming week 155 S&P companies report earnings.


In earnings on Thursday Union Pacific (UNP) was a big winner. The company reported earnings of $1.93 that beat estimates for $1.89. Revenue declined 2% to $5.38 billion and that missed estimates for $5.48 billion. However, expenses declined -3% to $3.42 billion allowing them to increase profits on less freight. The company said severe cold weather flooding along the Missouri river impacted schedules for more than three weeks and led to the lower overall volume. They guided for volume to grow at a low single digit rate in 2019 but they also projected another $500 million decline in expenses. Shares gained $7 to a new high on the news.


Honeywell (HON) reported earnings of $1.92 that beat estimates for $1.83. Revenue declined sharply from $10.39 billion to $8.88 billion but beat estimates for $8.63 billion. Aerospace revenue fell 16% to $3.34 billion but still beat estimates for $3.24 billion. For the full year they raised their guidance from $7.80-$8.10 to $7.90-$8.15. Revenue guidance rose from $36.0-$36.9 billion to $36.5-$37.2 billion. Shares rallied $6 to a new high.


Travelers (TRV) reported earnings of $2.83 that beat estimates for $2.72. Revenue rose to $7.671 billion and beat estimates for $7.113 billion. Net premiums written rose 3% to $7.057 billion. They increased their dividend by 6.5% to 82 cents payable June 28th to holders on June 10th. Earnings came from lower catastrophe losses, which offset a decline in net investment income. Shares spiked to a 52-week high at the open.


Dover Corporation (DOV) reported a 37.7% rise in earnings to $1.24 that beat estimates for $1.12. Revenues rose 5.3% to $1.725 billion and beat estimates for $1.687 billion. Organic growth rose 8.3% and results were impacted by a 3.4% revenue hit from the strong dollar. Bookings at the end of Q1 were $1.78 billion and order backlogs increased 6% to $1.42 billion. Shares closed at a new high.


Checkpoint Software (CHKP) did not have a good day. The company reported earnings of $1.32 that narrowly beat estimates for $1.31 and only 2 cents over the year ago quarter. Revenue rose 4% to $472 million and barely beat estimates for $471 million. For the current quarter they guided for $474-$500 million and earnings of $1.31-$1.40. The revenue was in line, but the earnings guidance was 2 cents below analyst estimates. Shares fell nearly $10 on the weak guidance.


Genuine Parts (GPC) reported earnings of $1.28 that missed estimates for $1.31. Revenue of $4.74 billion also missed estimates of $4.8 billion by 1%. Net sales rose 3.3% but 2% was due to acquisitions. They also suffered a 2% headwind due to the strong dollar. Revenue from the automotive segment rose only slightly from $2.56 billion to $2.62 billion. Industrial parts revenue rose from $1.55 billion to $1.64 billion. For the full year they guided for revenue to rise 3-4% and earnings of $5.81-$5.96. Shares fell $7 on the missed earnings.


Phillip Morris (PM) reported earnings of $1.09 that beat estimates for 98 cents. Revenue declined -2.1% to $6.75 billion and narrowly beat estimates for $6.74 billion. Cigarette volume was flat at 164.3 billion units. Marlboro shipments rose 3.4% to 60.0 billion units. For the full year the company guided for earnings to rise from $4.84 to $5.09 but missed estimates for $5.18. The tobacco sector also took a big hit from a new bill introduced to raise the age for purchasing tobacco from 18 to 21.



Intuitive Surgical (ISRG) reported earnings of $2.61 that missed estimates for $2.70. Revenue rose from $847.5 million to $973.7 million. Analysts expected $975 million. Shares fell $35 in afterhours to cap a monster decline impacting the sector from the Medicare for All proposal Bernie Sanders announced earlier in the week. The biotech and drug stocks were crushed. ISRG said the number of procedures rose 18% and they delivered 235 Davinci systems in the quarter. These are great numbers and ISRG should recover once the sector rout is over.


Energy services giant Schlumberger (SLB) reported earnings of 30 cents that matched estimates. Revenue rose only slightly to $7.879 billion but it was enough to beat estimates for $7.810 billion. Both numbers were lower than the prior quarter. The company projected lower activity in land rigs in North America and seasonal slowness in international markets. North American revenue was down -3% because of pricing weakness. They do expect the overall market to improve as production cuts overseas take effect. They also warned that four years of slowing investment in the sector would result to lower services activity in the years ahead.


Multiple analysts have warned that higher long-term oil prices are coming because of this significantly lower investment. If the market turned sharply higher today it would take 5-7 years for investment and production to catch up. Currently there is a massive number of drilled but uncompleted (DUC) wells in North America. There is no reason for producers to continue punching holes until pipeline capacity catches up and these 8,500 DUCs are completed.


Crude inventories declined slightly last week despite this being the season for refinery utilization to rocket higher. There have been several unplanned outages and that is impacting the numbers. Utilization should be over 90% by now with the summer driving season just ahead.

Crude prices are stuck just under $65 and have been for more than a week. While there are multiple levels of instability as in Libya and Venezuela, we are in that low demand period before summer driving accelerates. We are also seeing a spike in gasoline prices as a result of the refinery outages and the normal price ramp that peaks around Memorial Day. Gasoline prices have been up sharply since mid-February. This will impact summer demand.

Active rigs declined by another 10 rigs last week with 8 oil and 2 gas rigs dropping out of service.

Natural gas prices fell to two year low on warner than normal late winter weather. Demand has declined and we have seen injections into storage for the last three weeks.






Zoom Technologies (ZOOM) saw a huge bump in their stock price over the last month as investors confused them with Zoom Video (ZM), which IPOed on Friday. Investors who had been holding ZOOM shares at 25 cents since late 2014 were rewarded with a surge to $6 over the last week. Anyone paying attention could have received a monster windfall. Even after the difference in tickers was widely discussed in the news the shares closed at $2.70 on Friday.


Zoom Video (ZM) surged $26 on the first day of trading for a 72% pop after the IPO. Underwriters left a lot of money on the table on this one. The CEO immigrated from China 22 years ago at the age of 27. He spoke only a little English and learned while he helped build WebEx, which Cisco bought in 2011 for $3.2 billion. Eric Yuan is a much-respected CEO with a 99% approval from his employees. He was named Glassdoor's big company CEO in 2018. Today he is worth roughly $3 billion. This is why everyone wants into the USA because we are the land of opportunity. Zoom posted 118% revenue growth in 2018 and actually made a profit.


Pinterest (PINS) shares opened at $23.75 and well over the IPO price of $19. After spiking over $25 intraday they closed at $24.50 and a 28% gain. Pinterest lost $63 million in 2018 on revenue of $756 million. They had 291 million monthly active users on March 31st, up 22% from the year ago period. Pinterest shares may struggle some in the months ahead until the company can turn a profit.


Sears Holdings (SHLDQ) creditors are suing former Chairman Eddie Lampert, his hedge fund ESL investments and other members of the board including Treasury Secretary Steven Mnuchin. The suit alleges that Lampert stripped Sears of its most important assets in order to repay ESL investors for their initial investment in Sears when Lampert took over in 2005. The complaint seeks billions of dollars in value "looted" from Sears over his term.

For instance, Lampert spun off 266 of Sears best stores into an entity known as Seritage Growth Properties. This benefitted investors linked to Lampert and forced Sears to begin paying large rents on these 266 stores that they had previously owned outright. This guaranteed income to Seritage and saddled Sears with billions in lease obligations. Lampert also sold Lands End and Sears Hometown Outlets in spinoffs/sales of more than $2 billion. Lampert rejected a bid for Lands End for $1.6 billion and instead spun it off to himself, ESL and others. Sears received only $500 million in the form of a dividend. Lampert won a bid to buy the remaining Sears assets through a bankruptcy auction and will reduce the store count to 425, down from the 3,500 at the time of the merger he orchestrated in 2005. I always wondered how he was getting away with the self-dealing as Chairman of Sears. Maybe he has not escaped after all.



Markets

We are so close to new highs but there is very little momentum. The S&P has been trapped in a very narrow range for over a week. The Dow has been struggling with plunging prices on shares of UnitedHealth and volatility in the tariff sensitive stocks. However, the index is still moving slowly higher.

The Nasdaq Composite has been posting minimal gains while the Nasdaq 100 has quietly made new highs. The Russell 2000 is struggling to hold on to recent gains and appears to be losing the battle.

This is a perfect example of a few mega cap tech stocks leading the market higher while the broader market flounders around looking for direction.

All the major indexes were positive on Friday with the Dow adding 110 points. However, the overall market saw 3,774 advancers and 3,773 decliners. You could not make that up. The market was exactly even and the individual indexes showed similar ratios but not dead even.

The market needs a catalyst to produce a real directional move. Earnings have been better than expected but the forecast is still negative for Q1 and every post earnings spike is sold.

Reportedly, all the major details have been worked out on the Chinese trade agreement and everyone is just waiting for President's Trump and Xi to announce the date for a meeting in Florida. Chines economics have improved, and the announcement of a deal could provide a significant boost in their market. This has already been priced into the US markets although we could see a short-term bounce when the meeting is announced.

Brexit was put off indefinitely since October 31st is years away in market time. This hurdle is no longer a factor in the current market.

So, what are investors waiting for as a signal to buy stocks? As I have warned for weeks, we could be facing a sell the news event when the major indexes reach the prior highs. The markets are up 20% in 2019, more if you count from the December lows, and with earnings negative, there is little excitement about buying a market top. Everyone appears to be waiting for a dip to buy. With the summer doldrums ahead, we could see a sell the news event and a slide into summer given the weak earnings.

With the Nasdaq 100 at new highs and the other indexes only 1% or so below their highs you would expect investor sentiment to be strong. However, 62% of investors are either neutral or bearish. Bullish sentiment actually declined despite the Nasdaq 100 highs. On a contrarian basis this could provide a big boost if there was an unexpected catalyst because so many investors would have to cover shorts and chase prices. Unfortunately, I do not see a large catalyst on the horizon. The summer is shaping up to be boring with months of additional collusion/obstruction headlines overpowering economic news.

AAII Investor Sentiment

While we are close to new highs, sentiment is lackluster at best. That could be predicting a coming decline. Granted, sentiment can change very quickly but normally it requires a sudden change in outlook for either economics or earnings. The challenge here is that the main earnings push will be over in two weeks and the stocks with the weaker earnings will begin to report and the overall earnings growth forecast will begin to decline.


Thank you, UnitedHealth! After two weeks of volatility and erasing roughly 275 Dow points at the lows, the stock rebounded on Friday to return 31 of those Dow points. Once investors feel the bad news is priced in, we should see the stock rebound sharply and drag the Dow higher.

Merck and Pfizer accounted for -117 points of negativity on the Dow over the last two weeks as the Medicare for All proposal tanked their shares. Now that the fiscal stupidity of that proposal has been disseminated, we should see those stocks begin to recover.

Clearly, if it were not for those three stocks erasing nearly 400 Dow points, we would already be at a new high on the Dow. That does not mean there will not be some more surprises as other Dow components report but the worst should be over.

The Dow is only 269 points below a new high. We could do that in one day with the right catalyst. The key is whether the index surges over that level or remains pinned to that level.

There is always the potential for a head and shoulders pattern on the Dow. We are right at the right shoulder and a material decline from this level could trigger significant technical selling.




Like the S&P, the Nasdaq has stalled in a tight range just below 8,000 for the last five days. The prior high was 8,109 so the index is only 109 points below its high. So why can't it gain 100 points in five days? The A/D line on the broader Nasdaq composite is almost dead even and that includes the big cap stocks in the graphic below. Advancers beat decliners 18:12 but the amount of the gains was minimal with the exception of the top four, which almost perfectly overcame the bottom four. The index was up 2 points for the day. The overall AD was 1,449 advancers to 1,535 decliners.

As I have said for the last week there is no conviction by either the buyers or the sellers.



The small cap index remains the weakest link and the Russell typically leads the broader market. With the major indexes stalled and the Russell weakening, there is no incentive for investors to leave the safety of cash. If the Russell suddenly pushed over 1,600, I think it would trigger a broad market rally. If it falls back below the 50-day average at 1,556, it could trigger a broad market decline. Investors are waiting for the Russell to commit to a direction.


I recommend we continue to be cautious until the S&P and Dow move to new highs on decent volume. I don't mean just a few points over the prior highs but a real breakout that triggers some short covering and price chasing. The Blackrock CEO, Larry Fink, said investors were sitting on near record amounts of cash that could be put to work on a breakout. I hope he is right. Personally, I would rather use that cash to buy a summer dip than a market top, but a true breakout could be powerful.

IMPORTANT ANNOUNCEMENT

It is with a heavy heart that I make this announcement this weekend. For nearly 22 years I have published this newsletter on a daily basis. We have written through market highs and market lows. I wrote back in early January that I had some health issues that were causing me to rethink sitting in my chair seven days a week cranking out research. At age 72 I need to get out of my chair and spend what time I have left with my family. I always joked that someday my wife would find me dead, slumped over my keyboard. As that possibility becomes more real, it is no longer a joking matter.

I have looked for months for someone to take over the management of the newsletters and give me some time off. I still want to write because I love what I do. I love the market and writing about it. I have been unsuccessful in my quest. I have found numerous people who would write five paragraphs and three ads and call it a market wrap. I have higher standards than that for the newsletter. As I wrote earlier, I have found many people who would pay good money just to get access to the subscriber database. That is not going to happen. I have never sold access to the names and never will.

I have decided to convert the newsletter to a weekly publication starting this week. The Option Investor and Premier Investor newsletters will be published on the weekend along with the LEAPS Investor newsletter. I will include more plays in the weekend editions to compensate for the lack of daily play updates. The Option Writer newsletter will be published on Wednesday. I will continue to search for a quality person to manage the newsletters and return to a daily publication.

I am in talks with one individual regarding starting an ETF newsletter and possible a Crowd Funding newsletter. I am not going away.

I appreciate your continued support. Some of our readers have literally been with us since we started on Thanksgiving weekend in 1997. I hope I can continue to count on your support for years to come.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A good plan violently executed now is better than a perfect plan executed next week."

George Patton


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

Low Volatility Churn

by Jim Brown

Click here to email Jim Brown
The VIX is holding around 12 as investors consolidate their holdings at market highs. Nearly every day recently the market posted early morning highs and then faded into the afternoon. The Nasdaq and Russell were both negative on Thursday afternoon until the tech sector added a couple points at the close. There is not enough volatility to spike the VIX because the overall market bias is slightly positive.

The VIX is based on calls and puts on the S&P. The lack of a volatility bounce suggests large investors are not worried enough about market direction to buy puts to protect their positions. This is called complacency.


Those biotech investors who grew complacent with the slow trend higher were met with a rude awakening last week. The Medicare for All proposal crashed the already declining sector and probably prevented the Nasdaq Composite from reaching a new high.

There are a large number of biotech stocks in the Nasdaq and the Russell and this could had been a significant drag on those indexes.


The chip sector continued to fly with another new high. This helped to offset the biotech drag on the Nasdaq. The resolution of the Apple/Qualcomm patent suits was a big relief for Qualcomm shares and for other Apple suppliers.


The semiconductor stocks have extended their lead over the Nasdaq because of the drag from biotechs and drug stocks. This could cause a problem in the future. The chip stocks need to rest and even this far away from the Nasdaq their weakness could be transmitted into the tech index. When the chips rest that is 25-30 stocks all resting at the same time. Eventually the chip and Nasdaq will move back into correlation and that could be painful.


The FANG stocks also contributed to offsetting the biotech plunge. Netflix was down early in the week but recovered to help the sector on Thursday. Facebook has traded sideways in a tight range between $176-$180 for the last two weeks. While it has not helped the Nasdaq at least it was not a drag.



Here is the challenge for the Nasdaq Composite. The index is up 29% since the December lows. That is more of a gain than we post in most years. It has been nearly vertical with only a handful of temporary pauses. We need a material dip to equalize the pressures. This is likely to happen during the summer doldrums. April is normally weak and we have not seen any material weakness other than late March. This means we are even more overdue than normal and increases the chance for a sell the news event at 8,109.


I wrote last week that we wanted to be careful and watch for the A/D line on the S&P to flatten out or to roll over and begin to decline. This is exactly what we saw. The A/D flattened. It can still go either way but after a long period in ascent mode, the most likely path is lower.


The small cap A/D has definitely stalled for the last two weeks and appears to be on the edge of a decline. The Russell chart looks the same. It is right on the verge of turning bearish. The small caps lead the market, and should they suddenly turn south the Nasdaq is likely to follow.


Even though the S&P is holding just over 2,900 the percentage of S&P stocks over their 50-day average has fallen 15% over the last two weeks from 85% to 70%. This is stealth weakness since the actual index is still holding its gains. This means the breadth is shrinking and fewer stocks are leading the market higher.


On the positive side the correlation between the High Yield ETF (HYG) and the S&P has returned to almost 100%. Note in 2018 how the two diverged but in 2019, once the Fed said they were going to hold off on rate hikes, the correlation has been nearly 100%. This means as long as the HYG is rising, the S&P is likely to follow.


The most visible resistance of any chart is the potential H&S on the Dow. The index needs to blow through that prior high at 26,828 in order to negate the current resistance. On a weekly basis the indicators are all strongly positive, but we are not in a weekly world today. We are living day to day with the headlines and earnings.


I recommend caution until we see a solid breakout on decent volume with short covering and price chasing. The market is too calm today and the bears are able to blunt every spike with relative ease. We need a catalyst to appear to break through that resistance. Be patient until a breakout appears.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Short Term Plays

by Jim Brown

Click here to email Jim Brown

Editors Note:

Heading into the earnings cycle, there are plenty of short-term positions. Cisco is only $1 away from the strike and pulled back nearly $1.50 last week.



NEW DIRECTIONAL CALL PLAYS

CSCO - Cisco Systems - Company Profile

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology industry worldwide. The company offers switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points, and servers; and next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice, and video applications. It also provides collaboration products comprising unified communications products, conferencing products, collaboration endpoints, and business messaging products; data center products, such as blade and rack servers, series, fabric interconnects, and management software solutions; wireless products consisting of wireless access points, WLAN controllers, cloud and appliances based services, and integrated software services. In addition, the company offers security products, including network and data center security, advanced threat protection, Web and email security, access and policy, unified threat management, and advisory, integration, and managed services; and other products, such as emerging technologies and other networking products. Further, the company offers a distributed file system for hyperconvergence that enables server-based storage systems; service provider video software and solutions; and technical support services and advanced services. It serves businesses of various sizes, public institutions, governments, and service providers. The company sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California. Company description from FinViz.com.

It appears that everyone is moving to the subscription model for software after the success of companies like Adobe in moving from a sales to a license subscription model. Microsoft Office, Autodesk, even BlackBerry is moving to a subscription model.

Cisco is moving to a subscription model on their highest capacity routers and switches. These devices cost from tens of thousands of dollar to hundreds of thousands. These are Cisco's highest capacity and smartest devices. However you need a masters in device programming to make them work correctly. With cyber security threats growing daily, enterprise users want to be able to stop the majority of the threats at the router level.

Cisco now sells multiyear software as a service (SaS) subscriptions for these top of the line devices. The CEO said the unbilled revenue for SaS subscriptions was their fastest growing revenue line item even though it is not on their books. If someone signs a 3-year service contract, Cisco can only recognize the revenue from the current quarter, and then defers revenue for the rest of the fiscal year. The revenue in future years is not disclosed. Deferred and unbilled revenue was up 28% for the quarter and she said unbilled portion was the largest component.

In late March the company reported earnings of 73 cents that beat estimates for 72 cents. Revenue of $12.45 billion beat estimates for $12.42 billion. They guided for the current quarter for earnings of 76-78 cents on revenue of $12.96-$13.21 billion, a 4-6% increase. Analysts were expecting 76 cents and $12.84 billion. They also raised their dividend 6% to 35 cents and added $15 billion to their stock repurchase program.

Because of the 4.7 billion outstanding shares, the options are inexpensive and we can reach out to 2020 and capture all of the 2019 gains.

Earnings May 15th.

Because of my concerns about a potential decline after new market highs, I want to use a short-term May option that expires just after earnings. When we get to the May 15th earnings we will decide if we want to hold over. The option is cheap enough it might be worth the risk, depending on what the stock does between now and then.

Buy May $57.50 call, currently $1.11, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

No Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The new high on the Nasdaq 100 by 9 points did not produce a breakout. However, the Dow and S&P did post gains. The S&P remains 25 points from a new high and has been stuck at that level for over a week. There are plenty of investors waiting at those new high levels to sell stock. There is no excitement in the market despite the new high on the Nasdaq big caps.



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


XRAY - Dentsply Sirona
The long position was stopped at $48.50 at the open.

INTC - Intel
Close the position at the open on Monday.

MSFT - Microsoft
Close the position at the open on Tuesday.


BULLISH Play Updates

FIVE - Five Below - Company Profile

Comments:

No specific news. New closing high.

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.

Update 4/17: Bank of America initiated coverage with a buy rating and $150 price target. It costs $300,000 to open a Five Below store and they generate about $450,000 in operating income in the first 12 months. The cash payback period is just seven months.

Earnings June 26th.

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


INTC - Intel - Company Profile

Comments:

Intel shares have stalled at their post 5G high. Earnings are Thursday and I am recommending we close it at the open on Monday.

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. Big drop. Hopefully it is temporary.

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:

Microsoft was upgraded by Wedbush from a price target of $140 to $150 and they reiterated an outperform. The analyst said the cloud business is growing rapidly and the entire software business is turning into a subscription model.

Microsoft said it was acquiring Express Logic a company whose operating system powers more than 6 billion IoT devices. No dollar amount was given. They are expanding the IoT cloud where devices are managed remotely through the cloud. Express now ha 38 very rich employees.

Earnings are Wednesday. I am recommending we close this position at the open on Tuesday.

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:

Still no specific news. Shares are moving nicely higher again with a 2 month high close.

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:

The Macquarie downgrade continues to weight on Skyworks. I tightened the stop loss.

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.

Update 4/17: Macquarie downgraded Skyworks from buy to hold because of the Apple deal with Qualcomm. The analyst said Qualcomm has some chips they could supply to apple that could produce price pressures for Skyworks, which gets 50% of its revenue from Apple.

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


XRAY - Dentsply Sirona - Company Profile

Comments:

No continued to decline at the open and triggered our stop loss to exit the position.

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:
Closed 4/18: Long July $55 call @ $1.40, exit .53, -.87 loss.


BEARISH Play Updates

LYFT - Lyft Inc - Company Profile

Comments:

Investor suits are appearing everywhere as investors sue Lyft for overpricing and over hyping their IPO. Shares gave back Wednesday's closing bounce.

Original Trade Description: April 13th

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.

Position 4/15/19:
Long June $55 put @ $4.21, see portfolio graphic for stop loss.
Short June $45 put @ $1.30, see portfolio graphic for stop loss.
Net debit $3.10.