Option Investor
Newsletter

Daily Newsletter, Saturday, 5/4/2019

Table of Contents

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

Market Wrap

Sentiment Improving

by Jim Brown

Click here to email Jim Brown

The markets closed at the highs once again as sentiment spiked on the payroll numbers.

Weekly Statistics

Friday Statistics

It was a rough week for the major indexes with multiple triple digit declines on the Dow. They did manage to overcome the early week negativity and rebound back to the highs. The S&P came within a quarter of a point of a record close. The Nasdaq closed at a record by only three points. The Dow has been a victim of multiple earnings disappointments and remains -324 points from its prior record high.

The strong payroll numbers triggered short covering on the Russell, which had been the laggard index for weeks. After spending time over long-term resistance at 1,600 on Monday the index fell back below 1,570 on Thursday. The payroll numbers triggered a sharp 31-point gain of 2% that outperformed the other indexes and closed well above 1,600.



Meanwhile the Dow remains stuck in a head and shoulders pattern with no material progress over the last three weeks. Since the small caps are supposed to lead the market, traders are hoping the Russell rebound continues and lifts the Dow out of its doldrums.


The boost to small cap sentiment with 10:1 advancers to decliners came after the nonfarm employment showed a gain of 263,000 jobs for April. This was well above the 180,000 analysts expected. This should not have been a surprise after the ADP report on Wednesday showed a gain of 275,000 jobs with estimates at 180,000.

The unemployment rate fell to 3.6% and the lowest level since 1969. Black, Hispanic, Asian and female unemployment are at record lows. The March payrolls were revised down from 196,000 to 189,000 but the February number was revised up from 33,000 to 56,000 for a net gain from the revisions of 16,000 jobs.

Healthcare added 53,000 jobs, professional/business services 76,000, leisure and hospitality 34,000 and construction 33,000. Retailers continue to lag with a decline of 12,000 jobs.

Earnings rose 0.2% for the month and up 3.2% for the trailing 12 months. It may have been higher, but the survey week did not include the 15th and the semimonthly pay period.

Household employment declined for the second month and the labor force contracted by 490,000. The labor force participation rate dropped to 62.8% and the employment to population ratio was unchanged at 60.6%.

Analysts credited the lack of any extraneous events like storms, floods or shutdowns for strong headline number. There was nothing to impact the data during the survey week. There were some soft spots in the survey. More people took part time jobs instead of full time for economic reasons. That means they had to pay the bills while they are looking for full time work.


The nonmanufacturing ISM Index for April posted another decline with the lack of available workers given as the primary excuse. The headline number declined from 56.1 to 55.5 and missed expectations for 57. A reading above 50 indicates continued expansion but is well below the cycle peak reading of nearly 61 back in September.

New orders declined from 59.0 to 58.1 and backorders fell from 56.5 to 55.0. New export orders picked up from 52.5 to 57.0. Business activity rose from 57.4 to 59.5.


The Atlanta Fed real time GDPNow forecast for Q2 is just getting started with the current estimates at 1.7%. It should be noted that the Q1 GDP result of 3.2% started out with a GDPNow projection of only +0.3%. Anything is possible and we have two months for this projection to firm.


The FOMC meeting squashed hopes for a Fed rate cut in the near future but the long-term outlook is still for the next Fed move to be a cut. This is a chart of the FedWatch Tool at the CME and there is only a 47.7% chance that the rate will remain at the current level through next January. That means there is a 52.3% chance the next move will be a cut. The difference in projections is minimal and January is a long way off. If Q2 GDP were to come in at the 3.0% level, the Fed's anxiety level would rise even if inflation remained stable. The Fed is always worried that they will wait too long to hike rates and inflation will spike. It takes about six months for a Fed rate hike to be felt in the financial system, so they are always trying to project conditions 6-9 months into the future.


We have a skinny calendar for next week. The two price indexes are the main points on the schedule. If these indexes remain stable and show no signs of inflation the Fed will remain on hold. At least that is the theory.

Fed Chairman Powell will speak next Thursday but this soon after the FOMC press conference he is not likely to say anything different.


Some 388 S&P companies have reported Q1 earnings. Of those, 76% have beaten estimates and 18% have disappointed. Current earnings projections for Q1 have risen to +0.8% growth with a 5.1% rise in revenue. The guidance warnings have pushed the forecast for Q2 down to +1.6% growth and +1.9% for Q3. The Q4 projection rebounds to +8.2% due to lower comps from 2018. For Q2 there have been 36 guidance warnings compared to 9 guidance upgrades. That is the worst ratio in several years. In Q2 2018 the ratio was 30 negative to 25 positive. When 70.6% of Q2 guidance is negative, it does not build a lot of investor confidence.

The number of high-profile companies reporting next week has diminished significantly. I included Lyft as a highlight since it will be their first quarterly earnings as a public company and Uber is expected to price this week.


There were some high-profile events last week and none higher than Apple's earnings on Tuesday after the bell. The company reported $2.42 compared to estimates for $2.36. Revenue of $58.02 billion beat estimates for $57.37 billion. iPhone revenue of $31.05 billion missed estimates slightly of $31.10 billion. Services revenue of $11.45 billion beat estimates for $11.37 billion. They guided for the current quarter for revenue of $52.5-$54.5 billion compared to estimates for $51.94 billion.

iPhone revenue was down -17.33% year over year. As a percentage of total revenue at 53.4% it was a record low. Tim Cook said the drop in iPhone sales in China was abating and they saw some strength returning at the end of the quarter. The company had $10.22 billion in revenue in the Greater China category.

The company authorized a $75 billion stock buyback and approved a 77-cent dividend. The buyback was less than the $100 billion authorized in the same period in 2018. Apple returned $27.5 billion to shareholders in Q1. By the end of 2019, Apple will have revenue from Apple Arcade, Apple TV+ and the Apple Card. Cook said Apple had a record installed base across all categories but did not elaborate. Previously they had said they had 1.4 billion users. Saying a record base across all categories suggests that an iPhone user with a Mac, a watch and iPod could be considered 4 users rather than one user with four devices. Apple has always played games with semantics.

Shares spiked $10 on the earnings and have held those gains for three days. Bank America reiterated a buy and raised the price target from $220 to $230. Maxim Group reiterated a hold but raised the target from $197 to $217.


Former Apple foe, Qualcomm (QCOM), reported earnings of 77 cents that beat estimates for 71 cents. Revenue of $4.98 billion beat estimates for $4.8 billion. The company guided for the current quarter for earnings of 70-80 cents and revenue of $4.7-$5.5 billion. Analysts were expecting $5.08 billion. They guided for revenue from patent licensing in the current quarter from $1.23-$1.33 billion and analysts were expecting $1.01 billion.

The company said it expects to receive $4.5-$4.7 billion in revenue from Apple in the current quarter as a resolution of the various legal issues. Qualcomm gave some cautionary guidance about the weak smartphone market but suggested it was just a pause before the flood of 5G phones begin hitting the market later in the year. They predicted chip set sales of only 50 million units for the rest of 2019 due to smartphone weakness. Shares closed at a new high on Friday.

Canaccord raised their target from $89 to $105. Cowen raised from $91 to $100. Bank of America upgraded from neutral to buy. Raymond James upgraded from outperform to strong buy and raised the price target from $85 to $115.


Arista Networks (ANET) had a bad day on Friday. The company reported earnings of $2.31 that beat estimates for $2.07. Revenue of $595.4 million rose a whopping 26% but narrowly beat estimates for $595.0 million. The challenge came from the guidance. They guided for $600-$610 million in revenue and analysts were expecting $640 million.

The stock was crushed after they said a "cloud titan" had paused spending. Analysts believe that customer was Microsoft since Arista had recent disclosed Microsoft was 10% of their total business. An analyst asked on the call if they expected the same 10% from Microsoft and the CEO said they would know more in the second half of the year, which was clearly a "NO we don't" answer. Later an investor relations spokesperson said they intentionally did not disclose the customer's name. When he got continued pressure from analysts he said, "We are not commenting on which customer saw softness in Q2." A Piper Jaffray analyst said orders slowed in Q1 and specifically from Microsoft. The Arista CEO said the sudden halt in orders came in mid-March and other large cloud companies also slowed orders in March. As the CEO pressure continued, she said two providers slowed orders, two were doing well and one particular cloud titan put most of their orders on hold. The term "cloud titan" was repeated nearly 20 times on the call as they tried to deflect their order weakness towards this mystery titan.

Arista said the early 2019 build in inventory by cloud providers had slowed demand as they digested those purchases. Arista is only one of several hardware providers that warned of slowing demand by cloud providers. If the cloud boom is fading that would be a major problem for the hardware companies that have ramped up production to accommodate the rapid growth. Arista predicted a "speed bump" in Q2. That bump turned into a $32 drop or -10%.


Activision Blizzard (ATVI) reported earnings of 78 cents compared to estimates for 23 cents. There were numerous charges and additions even though this was the adjusted number. The comparison is not apples to apples. Revenue declined from $1.97 billion to $1.83 billion but beat estimates for $1.22 billion. The company guided for current quarter earnings of 35 cents and revenue of $1.32 billion. Analysts were expecting 37 cents and $1.27 billion.

The company said it had sold the first five franchises in the Call of Duty esports league. They did not give a price, but analysts said they were shopping them at $25 million each several weeks ago. The cities that won a franchise already had an existing franchise for the Overwatch league. Shares fell 5% post earnings.


Shoe maker Adidas (ADDYY) reported a 17% rise in profits to $638 million. Revenue rose 4% to $6.57 billion. Analysts were expecting $5.8 billion and $567 million. They warned that supply chain issues would curb growth in North America where it has doubled business in the last three years. The company is taking market share from Nike in all geographies. The CEO said investors should get used to high single-digit growth rates because 4% was only a temporary position while they worked on the supply chain. He said their biggest challenge was lack of supply. They could sell far more shoes than they can make.

They just announced a marketing deal with Beyonce. On the day of the announcement they saw more than one billion clicks on the news. That could turn into one of the best marketing deals ever if they can produce enough shoes to fill that billion-fan demand. Shares spiked $12 to a new high.


Monster Beverage (MNST) reported earnings of 48 cents that rose 26.7% and beat estimates for 42 cents. Revenue rose 11% to $946 million and easily beat estimates for $914 million. Gross profit was 60.6%. International sales rose 17.4% to $284.1 million. During the quarter they bought back $139 million in shares. There is $520.6 million in outstanding buyback authorizations. Shares spiked 9% on the news.


Dentsply Sirona (XRAY) reported earnings of 49 cents that beat estimates for 38 cents. Revenue of $946.2 million beat estimates for $917.1 million. They raised 2019 earnings guidance from $2.25-$2.40 to $2.30-$2.40 and revenues of $3.95-$4.05 billion. Shares spiked 7%. XRAY was a position in Option Investor a couple weeks ago but was stopped on that big red candle only to see the shares rebound sharply.


Latin American internet retailer MercadoLibre (MELI) reported a 48% jump in revenue to $473.8 million. The dollar was a problem. On a currency neutral basis that would have been a 93% spike in revenue. The Argentine peso subtracted $3.7 million from earnings. Earnings of 13 cents easily beat estimates for a 13-cent loss.

The sharp jump in fortunes came from their payment service MercadoPago. Total payment volume rose 35% in dollar terms and 82% in local currency terms to a record $5.6 billion. Total payment transactions rose 94% to 143.9 million. Payments outside the MercadoLibre platform totaled 88.2 million and more than $2.5 billion in dollar volume. The number of items sold rose 3% to 82.8 million. Unique buyers rose 11% and listings are now over 200 million, a 58% increase. Items shipped rose 19% to 62.9 million. Shares spiked $96 on the news.


Berkshire Hathaway (BRK.B) reported earnings on Saturday of $21.66 billion. That is a monster amount of money for a single quarter. The company is sitting on $114 billion in cash. Buffett said he has been unsuccessful in his "elephant" hunt and will hold the cash until an opportunity arises. Warren bought back $1.7 billion in Berkshire shares when the price declined in Q1.

Operating earnings rose 5% to $5.56 billion or $3,388 per Class A share. That is up from $3,215 in the year ago quarter. Analysts were expecting $3,399. However, results did not include Kraft Heinz because the company has not released audited Q1 results. He said there is something going on at Kraft, so their earnings were not included. That would have easily lifted Berkshire earnings over estimates. Berkshire took a $3 billion write-down on Kraft Heinz in Q4 saying we paid too much.

Geico profits rose 14% as rising rates easily offset higher accident claims. BNSF saw profits rise 9% to $1.25 billion.


Berkshire committed $10 billion to Occidental Petroleum (OXY) to help with their hostile offer for Anadarko Petroleum (APC). The deal is contingent on OXY completing the APC purchase. Reportedly he was willing to invest $20 billion in the transaction if needed. For the $10 billion Berkshire will receive warrants for 80 million shares of Occidental at $62.50 each plus some preferred stock that will accrue dividends at 8% per year. OXY shareholders are against the deal because the loan is expensive and it will dilute their positions. Occidental will have to increase total debt by $40 billion to complete the deal.


Warren Buffett said Berkshire finally bought shares of Amazon (AMZN). He stressed that he personally did not buy the shares for Berkshire but one of his investment managers made the purchase. He is famous for not buying technology. He has developed a 5% stake in Apple but was killed when he took a big position in IBM several years ago. He does not understand technology.

Jefferies said it was a good purchase because the stock is going a lot higher. They have a $2,300 short term price target and $3,000 sum of the parts target for 2022.

Shares of Amazon soared on the Buffett comments.


The best IPO performer of the year goes to Beyond Meat (BYND). Shares rocketed 135% above its IPO price on Thursday to close at $66. Shares spiked to $74 on Friday but fell back to $67 at the close. The company is not trying to take market share from other meat substitutes but is taking on meat products directly. That is a $1.4 trillion dollar market. The products have no soy, no gluten an no GMO. Products are flying off grocery shelves and based on the demand for the shares in the IPO, it has a good future ahead.


Crude prices took a dive for the week after inventories rose by 9.9 million barrels in Wednesday's EIA report. Refiners are still struggling with some unplanned outages and utilization fell under 90% last week when it should be rising to 95% ahead of Memorial Day.

Prices should rise next week on news that Russia will have to curtail one million bpd because oil for export through the Transneft pipeline was contaminated with corrosive organic chloride. The contamination was on purpose. A week ago, the Druzhba pipeline was also contaminated and had to be shutdown. Belarus said it could take months to fix the Druzhba pipeline. It should take a couple weeks to eliminate the contaminated oil in the Transneft pipeline and repair damaged refineries. Poland, the Czech Republic and Hungary were forced to release 8 million barrels of reserves to offset the decline in exports.

The chloride is used to enhance production but must be removed from the oil before shipment because it is extremely corrosive. About 36.7 million barrels of oil have been contaminated. Russian oil sellers claim there are no buyers for the contaminated oil because they do not know what would be required to cover purification costs. The contaminated oil is clogging up export terminals and preventing clean oil from being exported. Some 15 tankers with contaminated oil had already sailed before the problem was discovered. Refiners taking delivery of the oil will be forced to down blend it with millions of barrels of clean oil in order to limit the corrosion when it is processed. That requirement means that those who took delivery now have bad oil clogging up their facilities while they decide how to handle the problem.

Oil prices tend to peak around Memorial Day and then linger at those levels until after July 4th before beginning a decline into fall.

There was no material change in rigs last week with a decline of only 1 rig compared to a drop of 21 rigs the prior week. With oil prices weak, there is even less interest in drilling new wells.




Thought for the week: There are more than three million people over the age of 60 with student loan debt of more than $86 billion.


Markets

I went into this weekend with a cautious outlook until I saw the 10:1 advancers over decliners in the small cap stocks. Most investors do not realize but we are very close to a record in small cap earnings and not a good record. We are very close to a record number of small cap companies with no earnings. The positive internals mean investors are ignoring the lack of earnings in hopes of a brighter future in the months ahead. The 3.2% GDP growth in Q1 must have been the encouragement they needed to buy small cap stocks in anticipation of further economic growth.

Don't get me wrong. I am very happy to see the Russell breakout over 1,600. We should buy stocks when others are fearful, and the Russell has been a laggard for weeks. I just hope the unexpected breakout continues and lifts the broader market.


The S&P is fighting a two week long battle to breakout to new highs. The index has closed over prior resistance multiple times but immediately pulled back again. Friday's move was a fight to close a quarter of a point below a new high. The morning move was a short squeeze on the payroll numbers and the big decline on Thursday, which setup the shorts for pain. The squeeze ended at 1:PM and the index limped into the close.

We need a convincing breakout to trigger the bigger short squeeze at 2,950. That is where the rally stalled on Wednesday. A 20-point breakout would do wonders for market sentiment.



The Dow continues to struggle as individual components post large losses. Friday was a good day for the Dow with only two decliners, but it was only one day. The index is still fighting right shoulder resistance at 26,616 with support at 26,191. There is one Dow component reporting this week and given its gains from the streaming announcement the odds are not good that Disney will shoot up another $5 on the earnings. Comments about the record $1.2 billion weekend for Avengers Endgame could be support but they are also going to talk about losing money in streaming for the next 3-5 years. That could kill the streaming bubble.



Both Nasdaq indexes closed at new highs but only barely. The Nasdaq Composite squeezed out a record by 3 points and the Nasdaq 100 by 6 points. We will take whatever the market gives us, but I would like it to be a little more convincing. The A/D on the Nasdaq Composite was 2,361 to 633 or almost 4:1 advancers to decliners. That is a good ratio, but it did have a lot to do with the morning short squeeze. I would love to see a 4:1 ratio on a day when there was no news powering it higher.

Both indexes are poised for a breakout with the potential for a new leg higher. I really hope it comes soon before the smoke cloud increases from the China negotiations.




Last week the president said the Chinese trade talks would be over "either way" within two weeks. That suggests there could still be a disaster. Then White House chief of staff Mick Mulvaney said the administration would know if there was going to be a trade deal within two weeks. The keyword there was "if." He said at some point, if you are not making any progress, you have to just quit."

Both of those statements were meant to send a message to China. Time is growing short. We are done negotiating. Make a decision or we are going to start playing hardball again. This is also a warning for investors. The long-awaited trade deal may not happen, and it could turn ugly again. While I have no clue which way this will evolve, we should not be overly long until it is resolved. Even if an agreement is reached the press is going to dissect it immediately and point out all the bad parts. I have said for weeks there is always the potential for a sell the news event in the days after a trade announcement.

I want to believe the strong internals on the Russell are suggesting a real breakout to new highs is just ahead. I just suggest we be careful until we see how the trade deal plays out. The Q1 earnings cycle will be over this week and that sets us up for the sell in May and go away cycle if it is going to happen this year. The trend happens more frequently when the first four months of the year have been bullish.

Volume was 5.8 billion shares on Monday and rose to 7.3 billion (avg) on Tue/Wed/Thr before shrinking back to 6.4 billion shares on Friday as the market closed at new highs. Be concerned when volume increases on down days.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

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H.L.Hunt


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Index Wrap

Try, Try Again

by Jim Brown

Click here to email Jim Brown
If at first you don't succeed, try, try again. While the S&P and Nasdaq have made hew highs, they have failed at producing a real breakout. Every minor peek above the prior high is met with heavy selling. Volume on down days is 1.5 billion shares more than the average on the up days. Investors do not seem to be too worried about the lack of progress because they are buying the dips with strong internals.

The A/D ratio on the S&P was 412:82 in favor of decliners on Wednesday. The ratio on Friday was 410:81 in favor of advancers. I am not making this up. The almost exact reversal of market breadth is showing the investor uncertainty in the current market. Investors are standing aside when a downdraft appears. When it fails to continue, they are jumping into the dip and the index rebounds to the prior level.

As I have said in past weeks there is no conviction on either side. The Dow lost 38 points for the week after losing 16 points the prior week. The index has failed to make any real gains for two weeks despite the new highs on the S&P and Nasdaq.

The S&P gained 6 points for the week and missed a new high by a quarter of a point. That is hardly bullish since there is a serious lack of excitement at the highs. However, given the strongly positive A/D ratio it is not bearish either. There is just no conviction.

The S&P A/D line made a new high bit note the MACD which turned negative two weeks ago. The pace of advancers has slowed overall despite the strong showing on Friday. Note the strong moves in the A/D line back in Jan/Feb and late April and the small jerky movements over the last two weeks. The market is struggling to hold on to the current highs.


The small caps managed a sharp move on Friday with a 10:1 A/D ratio to a new A/D high. The small cap stocks have been laggards and they should be leading. However, summer is not kind to these stocks and any gains in May are likely to be erased in July.


The A/D line on the Nasdaq has also been choppy. A couple strong days are followed by a couple weak days then then the pattern repeats. Amazon was a strong motive force to the upside but Google was a huge anchor after earnings. It was amazing that the Nasdaq indexes both closed at record highs on Friday.



The Nasdaq Composite has moved above the prior high at 8,109 multiple times over the last two weeks but every time it was knocked back. Note the length of the intraday moved compared to the two weeks prior when the index was moving forward. This is a picture of investor uncertainty. The Friday close at a new high even if only by a couple points, is positive. If we could get the Nasdaq and S&P to bust out on Monday and add 20-30 points and hold it, market sentiment would receive a huge boost.


The S&P has the same long bars at the top over the last two weeks. There is not enough conviction on either side to make a directional move. However, at this point the bulls would appear to have the advantage because of the strong close on Friday.


The Dow remains trapped in the H&S formation at 26,616 and could be the anchor for any future gains. Note the indicators on the bottom. All three are bearish.


The market volatility is relatively stable in the 12-14 range although there was a spike to 15+ last week. The -138 point downdraft in Google upset the entire market and tech stocks all took a temporary dive, which provided the volatility boost.


While the markets are stalled at the highs there are some positives. All the major earnings are over, and we are not likely to have another Google type event. The rest of the earnings disappointments are not going to move the market with the same force. If we can move over the current levels on the S&P and Nasdaq and do it with any conviction, we could see a new leg higher very quickly. However, if those indexes are continually knocked back on every attempt, it will not take long before investor get the message and begin moving to the sidelines. The China trade talks are the wild card for this week.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Energy and Medical

by Jim Brown

Click here to email Jim Brown

Editors Note:

Time for oil prices to rise and medical visits to decline. Oil prices rise into Memorial Day. Doctors visits are going virtual.



NEW DIRECTIONAL CALL PLAYS

USO - US Oil Fund - ETF Profile

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

The USO rallied to nearly $14 in mid-April as WTI prices moved to $65. Oil prices tend to peak around Memorial Day and hold that level or slightly higher into the July 4th weekend.

We found out this weekend that one million bpd of Russian oil will be offline for the next couple weeks and that will squeeze global supply. We are also only two weeks past the elimination of waivers on Iranian oil and that removed another million barrels from the market. Turkey and China are the only two countries to defy the sanctions and continue purchases.

The stage is set for a potential oil rally back over $65. That would put the USO back near $14 or higher depending on what kind of ramp we get into Memorial Day and the beginning of the driving season.

I am recommending we buy an inexpensive July call option and target a 100% return over the next couple weeks.

Buy July $13.50 call, currently 38 cents, no initial stop loss. Target 85-cents to exit.


TDOC - Teledoc Health - Company Profile

Teladoc Health, Inc. provides telehealth services. It offers a portfolio of services and solutions covering 450 medical subspecialties, such as flu and upper respiratory infections, cancer, and congestive heart failure. The company provides its services through mobile devices, the Internet, video, and phone. It serves employers, health plans, health systems, and other entities in approximately 100 countries worldwide. Teladoc Health, Inc. has a collaboration with Cincinnati Children's Hospital Medical Center to develop a consumer pediatric telehealth platform. The company was formerly known as Teladoc, Inc. and changed its name to Teladoc Health, Inc. in August 2018. Teladoc Health, Inc. was founded in 2002 and is headquartered in Purchase, New York. Company description from FinViz.com.

Teladoc is a subscription medical service where you can access a live doctor almost at will for $49 a month. Business is booming.

Q1 revenue rose 43% from $89.6 million to $128.6 million. They still posted an earnings loss because they are in customer acquisition mode. Long-term the subscription model will be a money maker. US paid memberships rose 28% to 26.7 million.

Subscription revenue in the US grew 33% to $81 million. International revenue more than doubled to $30 million. Gross margins were 65.3%. The cash on hand at the end of the quarter was $480 million.

Some insurance companies cover the Teledoc fees. An individual pays $49 a month for a suite of services that includes unlimited doctor consultations. US visit-fee-only access, which are users not covered by insurance, rose 7% to 10.2 million. Total global visits rose 75% to 1.06 million.

When you consider all the hassle of making an appointment with your regular doctor, driving to the appointment and back and waiting an hour in the office to see the doctor for 5 minutes, this seems like a bargain. A patient can pick up their phone and be talking to a doctor in minutes. If they have a video camera on their phone or computer, they can talk face to face, which is handy if you have some external affliction.

What does a normal doctor visit consist of other than blood pressure, pulse, sometimes temperature and a lot of waiting for the doctor to walk in for 5 minutes and write a prescription and leave.

The company affirmed full year guidance of $535-$545 million, a 29% boost in revenue. Adjusted EBITDA of $25-$35 million.

Buy July $65 Call, currently $3.70, stop loss $53.50.
Sell short July $75 Call, currently $1.05, stop loss $53.50.
Net debit $2.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Flirtatious

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes continue to flirt with record highs but lack any momentum. It was a choppy week with multiple sessions of triple digit declines on the Dow. The index recovered to only lose 38 points for the week but it cannot get past critical H&S resistance levels. The S&P closed within a quarter point of a new high but it was a battle with only a 5 point gain for the week.

We lost several positions after I raised the stops last week. The failure to move to new highs is troubling and I did not want to get caught long if the market rolled over.



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


ADSK - Autodesk
The long position was entered at the open on Monday.

NTGR - Netgear
The long position was entered at the open on Monday.

FIVE - Five Below
The long position was stopped at $143.50.

LOW - Lowes Companies
The long position was stopped at $111.65.

NTNX - Nutanix
The long position was stopped at $40.85.

LYFT - Luft Inc
The short position was stopped at $62.35.


BULLISH Play Updates

ADSK - Autodesk - Company Profile

Comments:

No specific news. Shares fell with the market on Wednesday but recovered on Friday.

Original Trade Description: April 27th

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.

Position 4/29:
Long June $185 call @ $6.50, see portfolio graphic for stop loss.
Optional: Short June $200 call @ $2.35, see portfolio graphic for stop loss. Net debit $4.15.


CSCO - Cisco Systems - Company Profile

Comments:

The bloom is off the Cisco rose. The stock continued to fall after Arista Networks (ANET) warned in their earnings that enterprise spending was slowing, and a large cloud provider had put spending on hold. I added a stop loss, but the May option lost most of its value when Cisco declined for the entire week.

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. Intra week market volatility stopped us out on Wednesday. It was a May call. We needed to exit.

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:
Closed 5/1: Long May $135 call @ $6.00, exit $14.10, +8.10 gain.


LOW - Lowes Companies - Company Profile

Comments:

No specific news. Our tight stop was hit on Monday after the prior week decline continued. Home Depot is also declining.

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:
Closed 4/29: Long June $115 call @ $2.51, exit $2.88, +.37 gain.


NTGR - Netgear Inc - Company Profile

Comments:

No specific news. Shares down slightly on weakness in Arista earnings guidance.

Original Trade Description: April 27th

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.

Position 4/29:
Long June $32 call @ $1.10, see portfolio graphic for stop loss.


NTNX - Nutanix - Company Profile

Comments:

The Arista comments that a large cloud provider put its spending on hold, rippled through the cloud sector and Nutanix was hit hard. We were stopped out for a minor $6 loss.

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:
Closed 5/2: Long July $42.50 call @ $3.25, exit $3.19, -.06 loss.


BEARISH Play Updates

LYFT - Lyft Inc - Company Profile

Comments:

After hitting a new intraday low the prior Friday, shares rebounded $7 to stop us out this Friday. I find this stranger ahead of the Uber IPO in the coming week but you never know what institutional investors are thinking. We may get another chance to short this in a week or two.

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:
Closed 5/3: Long June $55 put @ $4.21, exit $2.53, -1.68 loss.
Closed 5/3: Short June $45 put @ $1.30, exit .50, +.80 gain.
Net loss 88 cents.