Option Investor
Newsletter

Daily Newsletter, Saturday, 4/27/2019

Table of Contents

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

Market Wrap

Reluctant Records

by Jim Brown

Click here to email Jim Brown

After a week of low volume gains and losses the S&P and Nasdaq managed to close at record highs.

Weekly Statistics

Friday Statistics

Most of the gains came on Tuesday and the next three days were sideways to down until 2:PM on Friday. A low volume uptick in buying, possibly short covering ahead of the weekend, lifted the indexes back into record territory. The +105 point gain on the Nasdaq on Tuesday and the +27 point gain on Friday, was the majority of the gains for the week. The other three days only added a total of 16 points.

The S&P clawed its way to a new high by 3 points on Tuesday and then added another 6 points to that record on Friday after a 15-point rebound from the morning lows.

The Nasdaq rebounded 85 points from the morning low to close at a record high.



Powering the market rally was the first look at the Q1 GDP. The headline number showed a 3.2% rise in Q1 and that was the equivalent of a blowout. The average of the prior eight Q1 readings before the tax cut was 0.87%. The first quarter GDP is always low due to factors nobody understands. It has been studied and there is no accepted answer other than they blame it on the weather and post-holiday depression. In Q1-2018 the GDP rose 2.2% as a result of the surge in activity following the tax cut.

To illustrate how much of a blowout this quarter actually was, the entire month of January was lost because of the government shutdown. For the entire quarter international trade was handicapped by tariffs and trade battles. The fear of a hard Brexit in April pressured businesses doing business in Europe in Q1. Without those problems the GDP could have been significantly higher. This is setting the stage for a very strong year if the China trade agreement happens in May as expected. The president said on Friday he also expects a major trade agreement with Japan in May. Prime Minister Abe met with Trump at the White House on Friday.

There are so many pieces of the puzzle coming together that investors may soon become bullish again.

The components of the GDP were negative. Consumption (consumer spending) declined from 1.66% in Q4 to contribute only 0.82% in Q1. Analysts blamed that on the shutdown delay in getting tax refunds mailed. Fixed investment declined from 0.54% to 0.27%. On the positive side inventories rose from 0.11% to 0.65%, which will come back to bite us in future quarters when inventories decline. Exports surged from a -0.08% drag in Q4 to a +1.03% contribution in Q1. Given all the tariff worries, analysts were wondering where those exports went. The contribution from government rose from a -0.07% drag to a +0.41% contribution.

The naysayers were out in force claiming the spike in GDP was just a fluke and we will have to wait another six months for the revisions to know if they were right.


The Atlanta Fed Q1 forecast had improved from just a 0.2% rise in early March to 2.7% and was much closer than the analyst consensus of 1.5%. Normally the Atlanta GDPNow forecast is hotter than the actual number but this quarter it lagged. They continue to hone the forecast methods to get as close as possible.


The last reading of Consumer Sentiment for April rose only slightly from the initial reading of 96.9 to 97.2. That was down from the 98.4 in March. The present conditions component declined from 113.3 to 112.3 and he expectations component declined from 88.8 to 87.4. With the Q4 stock market dip and the January government shutdown behind us we should see sentiment begin to rise. The Mueller report is also behind us, but lawmakers seem obsessed with keeping it alive and this is also a weight on sentiment. The spike in GDP should help. If oil prices and fuel prices begin to decline that would be a big plus.


We have a huge calendar for next week with the two jobs reports, two ISM reports and the FOMC meeting announcement and press conference on Wednesday. Jobs are expected to be in the 180,000 range but the potential is good for a higher than expected number. With weekly jobless claims at a 50-year low two weeks ago, new jobs should be strong.


We have another busy week for earnings, but it is front loaded with the big names. After this coming week, 75% of the S&P will have reported. Of the 229 companies that have reported 77% have beaten earnings estimates and 58% have beaten revenue estimates. The current Q1 earnings projection is for a -0.3% decline and much better than the -1.8% to -2.1% projections several weeks ago depending on who you were following. A year ago, the forecast was for a 10.6% rise. Revenue projections are for a +5.0% rise. There have been 85 earnings warnings and 32 guidance upgrades.

Sectors with negative earnings are consumer staples -1.2%, technology -3.3%, communication services -8.8%, materials -14.8% and energy -29.4%.

The big dogs for the week are Google, Amgen and Mastercard along with the four Dow components on Tuesday including Apple, McDonalds, Merck and Pfizer. After Tuesday there are hundreds of reporters, but you probably would not recognize 90% of the symbols.


Last week was very active with a lot of big names. I am not going to review them all for obvious space reasons. However, there were some critical events.

Dow component Exxon (XOM) fell -2% after reporting an earnings drop from $1.09 to 55 cents that missed the estimates for 70 cents. Revenue declined from $68.2 billion to $63.6 billion. You may remember that oil prices hit $42 back on Dec 26th and despite the rebound it was a slow process.

They blamed the refining and chemical business for the earnings miss. They said a heavier than normal maintenance cycle caused the first quarterly loss in refining for more than ten years.

Production in the Permian rose 140% to 226,000 Boepd. Exxon said they were on track to increase that to one million Boepd by 2024. Overall upstream liquids production rose by 5%. Production rose to 4.0 million Boepd, up 3% excluding divestments.

We should not worry about Exxon since they produced $2.4 billion in earnings for the quarter. I doubt any paychecks are going to bounce.

Shares fell 2% to support at $80.


The biggest earnings surprise came from Intel (INTC) after they reported earnings of 89 cents that missed estimates for $1.01. Revenue of $15.6 billion missed estimates for $16.86 billion. The company guided for the full year for earnings of $4.35 on revenue of $69 billion. Analysts were expecting $4.50 on $71.04 billion.

The CEO warned that the decline in memory pricing had intensified. The consolidation of a large capital expenditure spending spree for computer equipment over the last year has not run its course. Enterprise environments still have unused hardware that they bought in 2018 as a result of the new changes to the tax law. The CEO said this consolidation was more pronounced than they expected. He said we were headed into a more cautious IT spending environment. However, conversations with customers suggest demand will return in the second half of 2019.

As a result of these headwinds datacenter revenue declined -6% to $4.9 billion. Analysts were expecting a -2.5% decline to $5.1 billion. Traditional PC revenue rose 4% to $8.6 billion and analysts were expecting 1.9% and $8.38 billion. Memory revenue declined 12% to $915 million and more than the 9.4% decline analysts expected.

The CEO said they had decided over the "last couple weeks" to exit the 5G smartphone business because they did not see a path to profits. They do plan on being a leader in 5G for the networking sector and for IoT devices. They are planning on selling their 5G phone business and estimates are $2 billion. There are rumors that Apple could buy it. However, there are also rumors that talks have already ended. This could have been a big factor in the settlement with Qualcomm.

Intel shares fell -9% on Friday and erased 34 points off the Dow. The rest of the chip sector declined on Intel's commentary about weak IT spending.


Amazon (AMZN) reported blowout earnings of $7.09 per share compared to $4.61 analysts expected. That more than doubled the $3.27 they earned in the year ago quarter. Amazon Web services (AWS) saw revenue rise 41% despite the rise of the me-too cloud services companies. Advertising revenue in the "other" category rose 34%. They guided for current quarter revenue of $59.5-$63.5 billion and analysts were expecting $62.53 billion.

The earnings were not the big news. Amazon said it was going to spend $800 million to shake up delivery times for Prime members. Instead of 2-days, they are going to 1-day delivery on 100 million items. They did not give a date but said they had been growing their warehouses and distribution network in order to make it happen. They said the company would spend $800 million on this project in 2019.

This is a major competitive advantage for Amazon. Shares of Target and Walmart crashed on the news. Knowing that an item you buy today will be here tomorrow is a major sales tool. Target and Walmart have free shipping if you order a certain dollar amount, but it is not two day. You can get in your car and drive to a store and pick it up but why would you want to do that. Next day is going to be an ecommerce killer for the other retailers.

Amazon sells more than 606 million different products in the USA and more than 3 billion skus worldwide in 11 different marketplaces. How can Target and Walmart compete with this monster? All they can attempt to do is deal with several thousand common products in the USA and try to make a few pennies using their referral marketing on the website. If you need a T-shirt maybe you need socks too. They are never going to be able to compete heads up with Amazon.

Can you imagine the tone of the meetings at Target headquarters when this was announced? Amazon is approaching $1 trillion in market cap again and nearly four times that of Walmart and 25 times that of Target.

Netflix and Disney had better not underestimate Amazon's streaming platform. It is not mentioned in the press, but every Prime member has access to the Amazon Prime streaming video service for free. With more than 100 million Prime members in the USA that is a lot of eyeballs that will not be looking to sign up for paid subscriptions elsewhere.



On Thursday 3M (MMM) crashed the Dow at the open after falling $29 on a major earnings miss. That is the equivalent of about 200 Dow points. Earnings declined from $2.50 to $2.23 and missed estimates for $2.49. Revenue declined -5% to $7.86 billion and missed estimates for $8.03 billion. Industrial sales declined -6.6%, graphics sales fell -4.2% and healthcare sales rose only 0.3%. The company said it was slashing 2,000 workers in an effort to save $225-$250 million a year. They guided for the full year for earnings of $9.25-$9.75, down from prior guidance of $10.45-$10.90. They warned of slowing conditions in key end markets that impacted both organic growth and margins. The $29 drop was the biggest one-day decline since the 1987 market crash.

My question here is why did sales decline. 3M operates in a full spectrum of retail and industrial businesses and a 5% decline in revenue in an economy growing at 3.2% suggests there were some serious internal problems. Clearly, everyone else felt the same and that is why the stock was trashed.


United Parcel Service (UPS) reported earnings of $1.39 that missed estimates for $1.42. Revenue of $17.16 billion was flat and missed estimated for $17.77 billion. The company said weather reduced earnings by 7 cents per share. They guided for the full year for earnings of $7.45-$7.75 and analysts were expecting $7.52. UPS shares fell $10 on the results.


The UPS earnings led UBS to cut competitor FedEx (FDX) to a sell with a $161 price target. UBS said the slowing global economy is weighing on results and will result in several quarters of growth below expectations. FedEx lowered its own guidance in March citing "weaker global growth trends" leading to a decline in revenue. The CEO specifically cited "significant deceleration in airfreight activity in Asia over the last six months and a sharp decline in German manufacturing." They are also having problems digesting the TNT acquisition in Europe.


Caterpillar (CAT) reported earnings of $3.25 that beat estimates for $2.83 but the CAT number had a 31-cent tax windfall, which translates into real earnings of $2.94 and still a beat. Revenue rose from $12.9 billion to $13.5 billion and beat estimates for $13.3 billion. Construction equipment sales rose 3% to $5.677 billion. Resource sales rose 18% to $2.309 billion. Energy and transportation sales were flat. The company raised full year guidance from $11.75-$12.75 to $12.06-$13.06.

Shares fell 4% on worries about the sales slowdown in China with a 4% decline in construction equipment. If you read the details sales were actually flat after accounting for the strong dollar but that was still a disappointment since Asia-Pacific and China is normally their fastest growing region. The good news was a 7% rise in revenue in North America.


Facebook (FB) dodged another bullet with better than expected earnings that led investors to ignore the various regulatory issues they are facing. They set aside $3 billion as a potential loss in their feud with the FTC and said the loss could be as much as $5 billion for violations relating to a 2011 consent decree. Legal costs of the FTC investigation declined to 85 cents per share. Since Facebook has $45 billion in cash, even a $5 billion fine would be painful but not detrimental. Investors ignored it because of the earnings metrics.

They reported revenue of $15.1 billion that beat estimates for $14.7 billion. They reported earnings of $1.89 that beat estimates for $1.62. Their monthly active user count rose to 2.7 billion with 1.56 billion daily active users. Shares spiked $16 on the earnings but faded to only a $9 gain by Friday's close.

UBS upgraded from neutral to buy with a $240 price target and Monness Crespi & Hardt raised the price target from $225 to $250. Ten analysts upgraded their targets after the earnings.


What we learned from all those earnings above is that domestic focused businesses did ok in Q1, but international companies of all types did poorly. The slowdown in the global economy is real and is not yet improving. China implemented 72 different stimulus changes in Q1, but the economy has not yet recovered. Stimulus takes months to filter through the system and it will eventually be beneficial.

Germany continues to post weak economics and that is weighing on Europe. Kicking the Brexit can down the road until October has eliminated any current economic event but done nothing about solving the problem. Companies doing business in Europe are in a holding pattern. They do not want to commit large amounts of capital to any expansion if the final Brexit deal is going to be a disaster. The longer they wait the worse the European economy will be.

The China trade agreement is starting to be a problem again. Talks will restart next week with Lighthizer and Mnuchin traveling to China and a Chinese trade group will return to the USA the following week. For a deal that had reportedly been agreed several weeks ago, the new negotiations suggest there are still problems. The expectations for a deal helped lift the markets over the last three months. Now we have a never-ending negotiation with no details.

My view is that the longer it takes to conclude a deal the more likely the deal will be weak. Chinese leaders know the 2020 election cycle has begun and President Trump needs a deal as a campaign point. The longer they can drag their feet the more likely US negotiators will be to relax their demands. The Chinese government plays the long game as in years to decades. They are willing to endure some pain now rather than endure long term pain later.

If we get a weak deal, it will be picked apart unmercifully within hours of the release and the market could collapse. Any decline could be short-lived since the uncertainty will be over, but expectations are currently high and the Pied piper must be paid if those expectations are not met.

Tesla CEO, Elon Musk, settled his current battle with the SEC on Friday afternoon. The new agreement contains a list of things Musk cannot tweet about without approval from a securities lawyer. This list includes things like production targets, acquisitions, delivery timeframes, new products, nonpublic filings, earnings or losses, etc.

Musk and his attorneys succeeded in escaping the wrath of the SEC by arguing that the original agreement was unclear as to what things Musk had to avoid in his tweeting. In theory future tweets will be far less entertaining. The deal was announced about 6:30 on Friday evening.

Tesla shares fell -14% for the week to a two year low on worries they will have to raise capital with another public offering very soon. Musk has repeatedly said there would not be a capital raise, but the company needs money to build Gigafactory 3 in China and start an entirely new production facility. They also need money to build a new production line at the existing Gigafactory 1 in Nevada for the new SUV and eventually they must build big trucks since they have taken hundreds of deposits from corporations.

On Wednesday Tesla posted a quarterly loss of $702 million. Musk said the company would return to a profit in Q3 and there was "some merit" to raising capital. That immediately negated his prior statements about no capital raise. The company ended the quarter with $2.2 billion in cash, down from $3.7 billion in Q4. Short seller, Andrew Left, had previously switched positions from short to long, has now gone flat again saying, "I believe Tesla needs to raise money" and "I am disappointed with the way the company is communicating with shareholders." We could be very close to a new short position by Left given the collapse in the stock.

If Tesla is going to do a capital raise, they need to do it soon before the stock is in complete free fall. Even now, it would be difficult to manage without a big drop on the announcement.


On a side note, Musk went to China in early January for the groundbreaking of Gigafactory 3. Today, only four months later there is a massive factory taking shape thanks to the 24/7 pace of construction. There are estimates for the first car to be produced by the end of September, only five months from now. Managers claim this will be the fastest plant build ever done in China. In America this would be a three-year project. In China they are going from dirt to producing cars in nine months.


The backlog of crude deliveries through the Houston Ship Channel appears to be easing. Imports rose 1.16 million bpd last week and that boosted inventories by 5.5 million barrels. We saw refining utilization rise over 90% for the first time this year and it should move up to 95% in the weeks ahead. That will force inventories lower.

Crude prices fell 4% intraday on Friday after President Trump said he had asked OPEC to produce more oil and reduce fuel prices in order to stimulate the global economy. The mainstream media immediately rebutted that with calls to various officials in OPEC and Saudi Arabia. None reported talking to the president. The White House had to follow up with the list of Saudi energy officials and OPEC members that had visited the White House in the prior week to discuss increasing production to offset the loss of Iran's oil when sanctions waivers were removed.

Despite oil prices trading over $66 during the week, there was a huge decline of -21 active rigs. There was a drop of 20 oil rigs and 1 gas rig. With more than 8,000 drilled but uncompleted wells, there is no reason to continue spending money to drill new wells.





Markets

The S&P has succeeded in climbing the wall of worry and has dodged quite a few potholes during the earnings parade. For every ugly earnings report there has been someone reporting a blowout and the index has refused to decline materially. The majority of the gains came on Tuesday and Friday but the intraday declines on the other days were also bought and prevented any material losses.

On the surface it would seem that the indexes should continue higher. However, in that prior paragraph I pointed out that somebody was reporting blowout earnings to offset the decliners. As the frequency of earnings declines, starting late next week, we are not going to have those big positive surprises. If the beats and misses level out and fade in number at the same time, we could see investors lose their enthusiasm again.

Sentiment remains lackluster despite the new highs on the S&P and Nasdaq. Volume on Friday was only 6.4 billion shares and definitely not what you would expect with new highs. On the positive side 5,392 advancers more than doubled the 2,202 decliners. Out of those 7,600 stocks only 360 made new highs.

The S&P closed just slightly over the 2,933 high close on Tuesday and there was no breakout. This is what I would call solid meltup buying. The opening dips on Thursday and Friday were immediately bought. Not later that day but immediately after the initial dip ended.

It would be great if we had another positive catalyst to catapult us higher and force the shorts to cover. Tuesday before a FOMC meeting is normally positive. There are also four Dow components reporting but Apple does not report until after the close. Worry over Apple's earnings could restrain anxious buyers of other stocks during the day on Tuesday.

We are close to an inflection point for the market. If we do move up sharply from here, there is a lot of money on the sidelines that could immediately jump in on a fear of missing out rally (FOMO). Conversely, this decision point is where long term investors must decide if they are going to continue holding or move to cash. We have reached the "Sell in May and go away, come back again on Labor Day" period on the calendar. While that strategy has not worked well in the last several years, it does tend to work after the market has had a big gain. The S&P is up 18% for the year, Dow 14%, Nasdaq 23% and Russell 18%. For most years that would be a killer gain for the entire year. Portfolio managers could go to cash now and still collect their end of year bonuses.

Support is now 2,895 but that would be a 45-point decline. At this stage in the market investors would be in a panic with that large of a drop.


The Dow has been hammered with multiple large losses from individual components. UNH, BA, MMM, HD, XOM and INTC to name a few. Without these large individual losses, the Dow would be more than 600 points higher today and possibly over 27,000. That is the problem with a 30-stock index. One rotten apple can ruin the entire basket.

I sincerely hope that Apple does not do that on Wednesday. With every smartphone manufacturer and contributor warning of slowing sales, a positive surprise by Apple would be a major market mover. Shares have declined $4 over the last week on worries over a potential earnings challenge. Many analysts believe Apple will try to cover over any lowered guidance with a larger dividend and bigger stock buyback in hopes of limiting any stock drop.

If the Dow can avoid any large losses from earnings reporters this week, we could see it retest the 26,828 high. Whether it can break out with some many damaged components is another question.



The Nasdaq big caps have been leading the market higher. The Nasdaq 100 broke out to a new high on Wednesday the 17th and has continued to make new highs. Amazon, Facebook and Google have led the FANG stocks with Netflix a laggard due to the Disney streaming announcement.

FYI, a survey last week showed that Netflix was in danger of losing 8.7 million subscribers as they switch to the Disney $6.99 plan. CEO Reed Hastings said he was not worried because Netflix had so much more current content and breadth of offerings that Disney+ subscribers would probably remain Netflix subscribers. "I doubt Disney will be material because there's already so many competitors for entertainment time."

The good thing about the Nasdaq is its breadth. With it so positive (2,029 advancers to 971 decliners) on Friday, the other stocks are erasing the losses from the few that are not performing.

With the big caps leading and the troops following, the tech sector could continue to lead the markets higher.




The Russell 2000 is on the verge of a breakout over critical resistance. The 1,600 level is crucial and a break out there could power short covering to 1,707 and the last resistance before a new high. The A/D ratio on the small cap sector was a whopping 4:1 in favor of advancers on Friday. On Tuesday it was 7:1 in favor of advancers. If the small caps continue this performance, we could have a real broad market rally on our hands.


For the last couple weeks, I have warned about the potential for a sell the news top when the major indexes made new highs on weak earnings ahead of the sell in May period and the eventual summer doldrums. While I was concerned about that possibility, I reiterated that I was not predicting it. My job is to warn about the potential pitfalls in the road ahead, so everyone is aware and not be blindsided if they occur. After seeing the S&P and the Nasdaq Composite finally move to new highs on strong market breadth, I am not as concerned about an imminent failure at the highs. Remember, Blackrock's Larry Fink, said there was record amounts of cash on the sidelines that would come into the market once new highs were made.

My only concern is the low volume. We have not yet seen the typical breakout volume from the FOMO buyers chasing prices. Investors are still cautious, but sentiment is improving. If volume were to pick up, I believe it would be the final confirming indicator.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"No matter how many goals you have achieved, you must always set your sights on a higher one."

Jessica Savitch


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

About Time

by Jim Brown

Click here to email Jim Brown
It has only taken four months for the markets to recover from their Q4 slump, but it seems like forever. After weeks of inchworm progress of two steps forward, one step back, the S&P and Nasdaq both closed at new record highs. If you blinked you missed it because the gains were minimal. The S&P only closed 9 points over the September high and volume was light. The index had an out of character spike on Tuesday to close 3 points in record territory then held those gains for the rest of the week.

The most favorable technical to support a positive change in sentiment is still the A/D line. The S&P saw a 3:1 ratio of advancers to decliners on Friday even though volume was a lackluster 6.4 billion shares.

I know readers are getting tired of looking at this chart but as long as this vertical ramp continues the market is going higher. Unfortunately, nothing continues on the same path forever. This is already the longest ramp in years, and it will eventually end.

Note that the MACD has flattened and is beginning to decline. I am not trying to call a top here, but this is the chart that will determine a top. When market breadth reverses it could be an ugly few weeks.


Ironically, the Nasdaq has been leading the market higher but the same chart on the Nasdaq is far less bullish. That is because it is the big caps in the lead and a some of the troops are not following. Twice last week the A/D was strongly positive but the other days the decliners won. There is still a lot of uncertainty regarding this rally.

In theory there is room for the Nasdaq breadth to improve now that both Nasdaq indexes are at record highs. Retail investors normally flock to new market highs like ants to a picnic.


The A/D for the small caps actually improved last week and closed at a new high. This marks a significant change for the sector and suggests portfolio managers are not as worried about a decline as they were in the prior weeks. If the Russell can break through that resistance at 1,600 this small cap breadth could improve rapidly.


The Semiconductor Index is up 34% for the year and that is after a significant drop last week. The $SOX declined 79 points or 5% in only two days. The chips lead the Nasdaq and after setting new highs they had a rocky couple of days.

Xilinx (XLNX) fell more than 30 points in two days and that coupled with the Intel decline was a big hit for the $SOX. It is amazing that the tech index shook off the chip-wreck and closed at a new high.



We have plenty of room for the Nasdaq and the $SOX to come back into convergence. The 2019 chip rally widened the gap when Facebook and Google were sagging on regulatory concerns and holding the Nasdaq back.

The FANG rebound last week lifted the Nasdaq despite the chip collapse. All the FANG stocks are back into almost perfect correlation. Netflix is the laggard.



The Dow has been struggling with the near daily implosion of one or more of its components. The Russell 2000 has been improving. This has allowed the Russell to move back into convergence with the Dow. The small caps are supposed to lead but have been laggards since mid-March. We have the potential for that to change if the Russell can break over 1,600.


The Russell is approaching that critical resistance but once through the next test resistance is well above at 1,707. That could be a nice move if investors suddenly turned bullish. I am not expecting it but this is always possible.


The Dow has been severely handicapped by a large number of earnings disappointments that have erased about 500 Dow points. Without those earnings losses the index could be retesting that 27,000 level once again. The high close is 26,828 and the intraday high 26,951.


Despite the new highs, the market has shown some daily instability. The VIX set a 6-month intraday low two weeks ago but the market uncertainty has kept it elevated over the last week. You rarely see an elevated VIX when the market is closing t new highs.


The broader market is overextended but there is plenty of cash on the sidelines. The intraday volatility has been bought but it still exists. The market breadth is positive and that is the biggest technical indicator suggesting we could see higher highs. When that breadth begins to fade, we should move to the sidelines and look to buy a decent dip.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Two for the Money

by Jim Brown

Click here to email Jim Brown

Editors Note:

Two new tech positions to capture the strength in the Nasdaq. Autodesk and Netgear are both great companies but on opposite ends of the chart.

 

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


NEW DIRECTIONAL CALL PLAYS

ADSK - Autodesk - Company Profile

Autodesk, Inc. operates as a design software and services company worldwide. The company offers AutoCAD, a professional design, drafting, detailing, and visualization software; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution for civil engineering, including land development, transportation, and environmental projects; AutoCAD LT, a professional drafting and detailing software; BIM 360, a construction management cloud-based software; computer-aided manufacturing (CAM) software for computer numeric control machining, inspection, and modelling for manufacturing; Fusion 360, a 3D CAD, CAM, and computer-aided engineering tool; and Industry Collections software products for professionals in architecture, engineering and construction, product design and manufacturing, and media and entertainment industries. It also provides Inventor tools for 3D mechanical design, simulation, analysis, tooling, visualization, and documentation; Maya and 3ds Max software products that offer 3D modeling, animation, effects, rendering, and compositing solutions; and PlanGrid, a cloud-based field collaboration software, which provides general contractors, subcontractors, owners, and architects access to construction information in real-time. In addition, the company offers Revit software for building information modeling; and Shotgun, a cloud-based software for review and production tracking in the media and entertainment industry. Autodesk, Inc. sells its products and services to customers directly, as well as through distributors and resellers. The company was founded in 1982 and is headquartered in San Rafael, California. Company description from FinViz.com.

Analysts are positive on Autodesk saying they are well positioned in the growing sector and bookings are strong. Autodesk has around two million legacy users and about 12 million "noncompliant" users, which should be relatively easy to monetize. Noncompliant means they are on previously purchased software that has expired. In order to upgrade they will need to subscribe to the new subscription-based software, which provides ongoing revenue for Autodesk.

Keybanc just gave Autodesk a buy rating and $196 price target.

Earnings May 30th.

Shares have overcome a mid-April market related dip and closed at a new high on Friday but not yet a breakout.

Buy June $185 call, currently $6.45, stop loss $168.85.
Optional: Sell short June $200 call, currently $2.29, stop loss $168.85.


NTGR - Netgear Inc - Company Profile

NETGEAR, Inc. designs, develops, and markets networking and Internet connected products for consumers, businesses, and service providers. It operates in two segments, Connected Home, and Small and Medium Business. The company offers smart home/connected home/broadband access products, such as broadband modems, WiFi gateways, WiFi hotspots, WiFi routers and home WiFi systems, WiFi range extenders, Powerline adapters and bridges, WiFi network adapters, and digital canvasses; and value added service offerings, including technical support, parental controls, and cybersecurity protection. It also provides Ethernet switches, wireless controllers and access points, unified storage products, and Internet security appliances for small and medium-sized businesses. The company markets and sells its products through traditional retailers, online retailers, wholesale distributors, direct market resellers, value-added resellers, and broadband service providers in the Americas, Europe, the Middle-East, Africa, and the Asia Pacific. NETGEAR, Inc. was founded in 1996 and is headquartered in San Jose, California. Company description from FinViz.com.

Netgear reported adjusted earnings of 60 cents that more than doubled the 26 cents in the year ago quarter and beat estimates. Revenue rose only slightly from $245 to $249 million. However, they guided lower for Q2 because of a slight decline in shipments to "service-provider" customers. Gross margins will decline from 9% to 4.5% in Q2.

While that is negative there are positives. They have been very successful in rolling out their Orbi WiFi mesh systems and Nighthawk Gaming products to end users. Their paid subscription services offering now has more than 10.4 million subscribers.

They are also rolling out their new WiFi 6 routers in May to coincide with the launch of smartphones and laptops with the WiFi 6 protocols. Part of their lowered gross margin is additional marketing spend on these new products.

Shares fell nearly $6 on the earnings but I believe the drop was overdone and a rebound will appear to capture the new product cycle.

Earnings July 24th.

Buy June $32 call, currently $1.10, stop loss $29.35.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Record Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P and Nasdaq both closed at new record highs on very light volume. The meltup continues despite declines in Intel and Exxon erasing 45 Dow points on earnings disappointments on Friday. There is still no excitement and the mix of good and bad earnings is keeping the market in check. However, slow and steady wins the race and we cannot complain as long as the new highs continue.



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


CSCO - Cisco Systems
The long position was entered at the open on Monday.

INTC - Intel
The long position was closed at the open on Monday.

MSFT - Microsoft
The long position was closed at the open on Tuesday.

SWKS - Skyworks Solutions
The long position was stopped at $88.85 on Monday.


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


BULLISH Play Updates

CSCO - Cisco Systems - Company Profile

Comments:

No specific news on Cisco and shares were negative for the week after Intel lowered guidance. The original play was to hold over earnings on May 15th so I did not put a stop loss on it. There is decent support at $55 even though the uptrend did break.

Original Trade Description: April 19th

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.

Position 4/22:
Long May $57.50 call @ $1.02, see portfolio graphic for stop loss.


FIVE - Five Below - Company Profile

Comments:

No specific news. Starting to look toppy at $146.50 so I tightened up the stop loss.

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 reported earnings that disappointed the street and shares fell $5 on Friday. Fortunately, we close this position on Monday for a nice gain before the earnings.

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:
Closed 4/22: Long June $55 call @ $1.53, exit $4.25, +2.72 gain.


LOW - Lowes Companies - Company Profile

Comments:

No specific news. The decline is continuing. The stop is very tight.

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:

We closed the Microsoft position ahead of earnings to avoid the potential for an Intel like event. Unfortunately, Microsoft shares spiked higher instead of declining. We still exited with a nice $2.21 gain.

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.

Position 3/25/19:
Closed 4/23: Long May $120 call @ $2.99, exit $5.20, +$2.21 gain.


NTNX - Nutanix - Company Profile

Comments:

Still no specific news. Shares stalled the last two days because of some weak earnings in the sector and large market share gains by Microsoft and Amazon.

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 but the Macquarie downgrade from last week continued to depress the stock. We were stopped out on Monday.

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:
Closed 4/22: Long May $90 call @ $2.60, exit $3.44, +.84 gain.


BEARISH Play Updates

LYFT - Lyft Inc - Company Profile

Comments:

With the Uber IPO price coming in well below expectations, the future looks grim for LYFT shares.

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.