Option Investor

Daily Newsletter, Sunday, 2/7/2016

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Night and Day

by Jim Brown

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The difference in the market from the prior Friday to this Friday was night and day. The prior Friday saw the Dow rally +397 points. This Friday was the Nasdaq collapse with a -146 point drop.

The crash in Linkedin and Tableau Software killed sentiment for anything in the technology sector with investors hitting the sell button and dumping their portfolios. The selling crossed sector lines with retail, biotech, healthcare, semiconductors, etc, all getting crushed.

There was no basis in fact for the decline across all sectors. Sometimes when confronted by an astounding move in some part of the market, like the $84 drop in Linkedin, you quickly sell everything until you figure out what to do. Interactive Brokers even has a button on their trading platform that closes all outstanding positions in one click. That is what happened on Friday. Enough traders panicked to knock dozens of stocks down by double digit losses. That triggered ETF selling and the market crash.

The charts are negative. I can quote potential support points and rebound hopes but the charts are still negative. In theory, the irrational selling late last week that sent the Nasdaq to the lowest close since October 2014, could be erased by dip buyers on Monday. Portfolio managers have had all weekend to reevaluate their positions and some are probably wondering why they dumped stocks on Friday.

They could come to work on Monday with a calmer frame of mind and start shopping for bargains. With the Chinese markets closed for the week that eliminates one of the weights on the market. There are very few economic reports and none are major. The only real hindrance will be the Janet Yellen testimony to the House on Wednesday and the Senate on Thursday. Given the recent market volatility and the miniscule 0.7% GDP for Q4, she should try to calm the markets with some dovish commentary.

Resurrecting the Nasdaq from the 52-week closing lows may be a challenge. I could easily see an oversold rebound on Monday but that kind of damage has a lingering quality. A short term bounce could attract additional sellers that missed their opportunity on Friday. A return to support at 4,292 is very likely next week. If it does not occur, I would be very surprised but happy.

Earnings are not going to be a big factor. There are a lot of companies reporting but the number of market movers are slim. Disney on Tuesday and Cisco on Wednesday will be the most important with Tesla providing headlines but not much market movement on Wednesday evening. The rest of the reporters are informational but not normally market moving events.

The S&P futures are up +7.50 at 8:30 ET on Sunday evening. That suggests we could see a bounce at the open on Monday but there is still a lot of darkness before morning.

We were stopped out on Starbucks and I am recommending we reopen it on Monday. I also cancelled the existing Watch List entry on Disney until after their earnings on Tuesday. I will recommend new strikes and entry points next week.

The newsletter will be out on Monday evening next week. My son is getting married on Sunday and I will be out of town for the wedding.

Jim Brown

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Manic Markets

by Jim Brown

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The market threw a temper tantrum on Friday with the Nasdaq dropping -3.2%. Let's hope sanity returns next week.

Current Portfolio

Current Position Changes

JPM and NKE became active plays.

NFLX, SBUX and STZ were stopped out.

I am reloading the Starbucks position at the open on Monday.

Stop Loss Updates

Check the portfolio graphic for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

New Plays

Contrarian Breakout

by Jim Brown

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When a stock trades opposite the market with decent relative strength despite resistance, the odds are good a breakout is coming.

WMT - Walmart - Company Profile

Walmart has been in a downtrend since trading at a high of $91 in January 2015. Same store sales were declining, stores were not being maintained, shelves were not stocked and investors fled the shares. Something happened in November 2015.

Q3 profits came in higher than expected and the company provided upbeat guidance. That was a huge change in direction for the company.

The CEO pointed out that Walmart has $485 billion in sales but only $15 billion is online. They hired about 2,000 people to work on improving the online business and competing with Amazon. At the same time Amazon announced it was going to open some retail brick and mortar locations. That suggests that you cannot do everything online. With revenue of $115 billion, Amazon is going to spend billions opening 300-400 retail locations. Walmart already has 11,500 locations. It is a lot easier to manage adding an online shopping website than open hundreds of locations.

Walmart has figured out that they need to have a big online presence and they are moving in that direction. They already have the backend distribution and warehouse network so the task ahead is a lot easier. They have plenty of cash to throw at the effort and they will get it done.

Walmart announced a wage hike for all their employees and improved benefits. The hikes will cost more than $1 billion a year. The stock was hammered on the news until analysts did the math. With $485 billion in revenue, they can raise the price of everything by only 0.22% or roughly 22 cents per $100 in sales and the entire wage hike is paid for and you still have the lowest prices. When you have that kind of scale, the numbers are mind boggling.

Walmart sales are improving as management got control of the internal problems. They hired more people and shelves are now stocked. Walmart is also adding significant numbers of organic products from produce to their private brands. They are significantly cheaper than Whole Foods and Fresh Market.

They recently announced a restructuring program to close 154 stores. The vast majority are the smaller Walmart Express stores and the smaller Neighborhood Market stores. Those never did well for Walmart. When customers shopped there, they were frustrated by the lack of all the merchandise in a Supercenter.

At the same time they are adding Walmart gas stations to their stores. Previously some stores had stations operated by Murphy USA (MUSA). The company announced last week they were adding their own branded stations in order to create another revenue stream. This is a good idea since having cheap gasoline is yet another draw to get people to shop at Walmart. Gas stations and their attached convenience stores are very high profit businesses. Those fountain drinks, jerky, candy and chips are very high profit items.

Walmart has its own credit cards. If they can hook consumers into paying at the pump with those cards then they win again from the interest collected.

Walmart is turning itself around and the low gasoline prices are putting extra money in consumer pockets. Walmart is doing its best to get those consumers to spend it in their stores.

Shares rebounded from a four-year low at $56 and have been accelerating higher. The high last week at just over $67 was a six-month high. At $67 Walmart only has a PE of 14. That is less than Target at 16 and Costco at 28. Walmart paid total dividends of $1.96 in 2015 and it has increased its dividend annually since 1974. They recently announced a $20 billion share buyback program over the next three years starting in 2016. That is almost 10% of its stock at today's prices.

I am recommending the Jan $70 LEAP call, currently $3.85. In order to prevent being stopped out in market volatility I am recommending we add the March $62.50 put at $1.09 and not have a stop loss until Walmart shares are significantly higher and we can remain profitable. I am only adding the put position if WMT shares dip to $64.50. If Walmart shares move higher as expected the $1 spent for the put will be easily recovered.

With a WMT trade at $67.65

Buy Jan $70 LEAP Call, currently $3.85, no stop loss

With a WMT trade at $64.50

Buy Mar $62.50 Put, currently $1.09, no stop loss.

Play Updates

LEAP Investors Nightmare

by Jim Brown

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Editors Note:

We were stopped out of Starbucks, Constellation Brands and the call position on Netflix when the market imploded on Friday. Constellation declined -$8.69 on no news. Starbucks fell -7% and Netflix nearly -8%. This was purely market related and none of those three had any news.

When Linkedin gave up -$84 or $12 billion in market cap on weak guidance and Tableau Software also lost -50% on weak guidance suggesting enterprise spending was slowing, investors hit the sell button on everything and ran for the exits.

It did not appear to make any difference what sector but technology and retail were the hardest hit. Nike, UnderArmour, Starbucks, Panera Bread, etc, were all crushed in the rotation out of retail on the weak payroll numbers. Tech investors took their clues from LNKD and DATA.

The market drop was a LEAP investor's nightmare with major declines in individual stocks that erase weeks of gains in only a few hours. If you have stop losses they are hit. If you don't have a stop loss this could be the dip that keeps on dropping. There is no easy answer.

In theory this could be a good buying opportunity but the market is behaving irrationally. There may be some portfolio managers that were caught off guard on Friday and will try to catch up on Monday and reduce their holdings in those sectors.

I am reloading the Starbucks position with a new strike price but I am holding off on the Constellation position until it is back over the 50-day average.

Original Play Recommendations (Alpha by Symbol)

BAC - Bank of America - Company Profile


Banks are not going in the right direction. The prior week the sector saw an uptick that suggested the worst was over. That died on Tuesday and the sector has not recovered. BAC may hit our stop loss this week if the market does not reverse higher soon.

Original Trade Description: January 31st:

It has been a rough few years but finally the worst is over for this sector and stock. You cannot ignore a company that earns $15 billion a year.

Bank of America has been ignored since late December and their earnings report in early January did not generate a lot of excitement. The bank said it earned 28 cents that beat estimates for 27 cents. That equates to a profit of $3.3 billion. They ended the full year with a $15.9 billion profit. From where I am sitting that is outstanding since it was up from only $3.38 billion in 2014.

The bank did not get a bounce from earnings because the CFO said increasing revenue was difficult in this market because the bank is more heavily exposed to low interest rates because it has a large retail banking business and very little profit centers like stock and bond trading that support Goldman and JP Morgan. The earned their profits the old-fashioned way one retail customer at a time and by slashing costs wherever possible. They eliminated 10,000 of its 223,715 employees and closed 129 branches. That leaves them with 4,726 locations.

BAC has $21.3 billion in energy loans and had $75 million in energy charge-offs in the quarter. The bank had $19.53 billion in revenue for the quarter and ended the year with $1.2 trillion in deposits. Once interest rates begin to rise the profits are going to explode higher.

BAC returned $4.5 billion to shareholders in 2015, $1.3 billion in Q4, through stock buybacks and dividends.

The last nine analyst ratings changes have been upgrades. On Friday, Credit Agricole upgraded them from sell to buy and skipping the hold level in the middle. Sandler ONeil, Wells fargo, Nomura, Bernstein and Robert W Baird have all upgraded BAC to buy.

Multiple analysts published notes last week recommending Bank of America at the current three-year low. Their legal troubles are about over with the vast majority of the financial crisis problems behind them. They are well away from any level that could be worrisome in the Fed's stress test scenarios. They are making money and staying out of trouble and they are paying nearly a 2% dividend.

To summarize, I believe the worst is over for the large banks and Bank America is in the sweet spot for when interest rates do rise.

Note: This same position was recommended in the Premier Investor Newsletter as a long stock play. I thought the timing was perfect to make it a LEAP play as well.

Position 2/1/16: Long 2017 $15 LEAP @ $1.22, see portfolio graphic for stop loss.

GE - General Electric - Company Info


GE was volatile for the week but ended with a small improvement from the prior week. As a Dow stock it is impacted by the Dow's movement as people buy and sell the DIA ETF after big moves in individual stocks on headlines like earnings reports. GE is holding over support at $28. No change in the position.

Original Trade Description: December 20, 2015:

GE has been slowly drifting higher since the 2009 market lows. Most of 2014 and 2015 the stock was stuck churning sideways. The situation changed in early October this year after a big activist investor got more involved. It's making a difference. The S&P 500 is down -2.6% year to date. Yet GE is up +20% in 2015 and should continue to outperform in 2016.

GE is in the industrial goods sector. According to the company, "GE is the world's Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the 'GE Store,' through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. www.ge.com"

One of the biggest changes at GE has been the company's long-term transformation to get rid of its financial assets that have been an albatross around its neck for so long. Management is focusing on the company's roots, which is industrial products and innovation.

The company recently held their annual meeting with analysts. The year ahead brings a lot of challenges. The global market is still struggling. The U.S. economy is limping along at +2% growth. Plus the strong dollar hurts sales outside the U.S. In spite of these headwinds GE's CEO Jeffery Immelt is bullish on 2016.

Management is forecasting 2016 earnings to rise +15% on revenue growth of +2% to +4%. That is impressive for such a massive company like GE who does so much business overseas. They also foresee paying investors $8 billion in dividends and spending $18 billion on stock buybacks in 2016. GE provided a long-term 2018 earnings forecast of more than $2.00 per share compared to $1.30-1.20 a share in 2015. They expect to return $55 billion to shareholders in dividends and buybacks between now and 2018. That sort of investor-friendly action could help GE weather any market volatility in 2016.

The stock has been showing relative strength the last few months. The stock held up pretty last week too during the market's volatile moves. GE tagged multi-year highs on Wednesday. The point & figure chart is bearish and forecasting a long-term target at $53.00.

The action in GE's stock over the last few weeks is either a new top or it's a new base. We are betting it is the latter. Tonight I am suggesting investors wait for GE to close above $31.35 and then buy calls the next morning.

Recommendation: Buy-the-dip @ $28.00 (intraday trigger) start with a stop at $25.85.

Position 1/20/16:

Long Jan 2017 $30 call, entry $1.30, initial stop loss $25.85

JPM - JP Morgan - Company Info


JPM dropped on Tuesday to trigger the position at $57.88 at the open. The late week rebound failed to produce a gain for the week but it was stronger than Bank America. No change in the position.

Original Trade Description: January 31st

JP Morgan is the largest U.S. bank with assets in excess of $2.3 trillion. It calls itself a financial services firm that operates in four segments. Those are consumer & community banking, corporate & investment banking, commercial banking and asset management. The bank earned $22.41 billion in 2015 on revenue of $89.72 billion.

For Q4 the bank reported earnings of $1.32 that beat estimates for $1.30. Revenues were $22.89 billion. Earnings were held back because of a 21% decline in profits in commercial banking because of energy loans. The CFO said we are ready to increase loan loss reserves as needed if the energy sector remains weak for a long period.

Legal expenses declined from $1.1 billion to $606 million in Q4 as they wind down all the remaining problems left over from the financial crisis. JP Morgan would have been rock solid but they were pressured by the Fed into taking over Bear Stearns and Washington Mutual at the height of the financial crisis. Most of their legal settlements over the last five years came from loans sold by those two firms and JP Morgan inherited those problems when they agreed to acquire them.

The bank is so strong they were able to digest more than $6 billion in losses caused by a rogue trader nicknamed the London Whale. That turned out to be just a blip in their financials where it could have caused serious harm to a lesser firm. They still produced record profits in that year despite the loss.

On January 26th the bank entered into an agreement with Ambac Financial Group to pay $995 million to resolve the last of their claims from the financial crisis. With this agreement, Ambac will drop objections to the $4.5 billion agreement between Blackrock and Pimco for faulty home loans in 2008.

JP Morgan continues to confound the experts and grow despite the long list of legal problems they inherited in 2008. Now that those problems are mostly behind them the bank is free to concentrate on increasing profitability. As interest rates rise their massive loan and deposit base will make them even more profitable.

JPM has an investor day on February 23rd. Earnings are April 13th.

JPM shares found support in the January sell off around $56 although they dipped to $54 on the January 25th market crash. The influx of acquisition cash on the 29th caused a +$2.22 gain to $59. I expect that gain to fade and give us a better price on the LEAP call when we are finally triggered. I am putting an entry point over $60 just to make sure we do not get trapped in any post Friday decline. My ideal entry target would be a dip back to $58.

I am recommending a breakout trigger and a buy the dip trigger. Use the one that is hit first but not both.

Position 2/2/16 with JPM trade at $58.00

Long Jan $62.50 call @ $3.15, see portfolio graphic for stop loss.

KMB - Kimberly Clark - Company Info


KMB is showing great relative strength with a close just $1 off its recent high. Consumer staple stocks are outperforming and with a positive market we could see a new high next week.

Original Trade Description: December 6, 2015:

There are not many public companies that have been around as long as KMB. The company has a history going back more than 140 years. It looks like investors are still bullish on it with KMB trading near all-time highs.

KMB is in the consumer goods sector. According to the company, "Kimberly-Clark (KMB) and its well-known global brands are an indispensable part of life for people in more than 175 countries. Every day, nearly a quarter of the world's population trust K-C's brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in 80 countries."

The company has beaten Wall Street's earnings estimates the last three quarters in a row. A stronger labor market in the U.S. combined with lower gasoline prices should be a tailwind for consumer spending in the globe's biggest economy. Meanwhile KMB is pursuing high-growth opportunities in emerging markets.

Technically the stock has been trading sideways in the $117.00-123.00 zone the last seven weeks. The recent bounce near the bottom of its trading range might suggest a bullish breakout soon. The point & figure chart is bullish and forecasting at $163 target. Tonight I am suggesting investors wait for KMB to close above $123.00 and then buy calls the next morning with an initial stop loss at $116.95.

Position 12/16/15:

Long Jan 2017 $130 Call, entry $7.50, see portfolio graphic for stop loss.

01/31/16 new stop @ 121.65
12/27/15 new stop @ 119.40
12/16/15 Trade begins. KMB opens at $124.75
12/15/15 Triggered with KMB @ $124.44, above our $123.00 trigger

M - Macy's - Company Info


Another week and no material movement. Macy's is struggling with resistance at $41.50. Shares only declined -12 cents for the week despite some volatility in both directions. The trend is still slightly higher but that resistance is a problem.

Original Trade Description: January 17th, 2016:

Leading up to the 2008 financial crisis shares of Macy's (M) were already in decline. The stock fell nearly -90% from its 2007 highs and by late 2008 M traded near $5.00 a share. The market didn't bottom until early 2009. At that time M was trading about $6.25. The stock rallied the next six years in a row. It looked like 2015 would make it seven years in a row. Then momentum suddenly reversed in July 2015. The stock surged to all-time highs near $73.00 on rumors of an activist investors getting involved. That proved to be the peak. Macy's collapsed from about $73.00 in July to $34.50 in December - a 52% plunge. Recent action suggest Macy's has bottomed and all the bad news is priced in.

M is part of the services sector. They are in the department story industry. According to the company, "Macy's, Inc., with corporate offices in Cincinnati and New York, is one of the nation's premier retailers, with fiscal 2014 sales of $28.015 billion. The company operates about 900 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bloomingdale's Outlet, Macy's Backstage and Bluemercury, as well as the macys.com, bloomingdales.com and bluemercury.com websites. Bloomingdale's in Dubai is operated by Al Tayer Group LLC under a license agreement."

U.S. retail sales were very disappointing last year. All of 2015 saw retail sales rise +2.1%. That's down from the five-year average of +5.1%. All year long analysts were expecting consumers to spend more because they were saving more money at the gasoline pump due to falling oil prices. That extra spending never showed up. This lack of spending weighed on several retailers and M's stock continued to sink. Macy's management took advantage of their falling stock price and bought back over 30 million shares last year.

Of course stock buybacks will also do so much. On January 6th Macy's slashed their full-year guidance due to weak sales during the holiday shopping season. Cold weather apparel and goods were not selling due to an unusually warm winter. Macy's said their comparable-store sales dropped -4.7% during the November-December time frame. The company reduced their full-year outlook from $4.20-4.30 a share down to $3.85-3.90 a share. Wall Street was expecting $4.24. That same night Macy's announced a major restructuring program. They will close 36 stores this spring. Plus they will reduce staff and cut costs in an effort to save $400 million a year. Shares rallied the next day.

If a company can cut its earnings guidance and rally then all the bad news is probably priced in. If you haven't noticed lately the stock market is plunging. The S&P 500 is already down -8.0% in the first ten trading days of 2016. Shares of Macy's are moving the opposite direction and the stock is up +8.2% year to date. The recent lows near $34.00 look like a bottom. However, we would like to see M breakout past technical resistance at its 50-dma and past its recent highs.

Position 1/25/16:

Long 2017 Jan $45 call @ $3.40, see portfolio graphic for stop loss.

NFLX - Netflix - Company Info


The Netflix call was stopped out on Wednesday at $86.25. We are still short the $90 put. I wrote last week that we were not going to stop out on the put because I think the stock will find a bottom and be a lot higher by the end of 2016. If we are put we will sell some very expensive covered calls against the position.

The next material support is $79. The Nasdaq implosion on Friday caused a $7 drop after shares spent two days trying to form a bottom at $89. Once it appears Netflix has stopped going down we will replace that stopped call with a lower strike. We still have $9.45 in net premium received from selling the put after subtracting the $5.59 loss in the call. That will cover much of the price of a new call once a bottom is reached. Calls are still very expensive today despite the big drop.

Original Trade Description: January 24th.

Netflix has a plan for total domination of streaming video. On December 31st they were active in 60 countries. In early January they announced they had expanded into 130 additional countries a full year ahead of schedule. The original plan was to complete the expansion by the end of 2016. This gives them a huge additional base of prospective users of more than 450 million broadband accounts. Everyone around the world knows of Netflix. Many have been waiting for them to open in their country. Netflix could gain more than 25 million new users in 2016 alone. They currently have just under 75 million. The 190 countries does not include China. They are working on getting into China but the government has put numerous censorship roadblocks in their path that need to be overcome. They expect to be in China in 2017. They added 4.04 million international subscribers in Q4 and that was just from the existing 60 countries.

Netflix said it was targeting young, outward-looking, affluent consumers with international credit cards and would spread out from that base.

Last year Netflix raised prices for new subscribers by $1 to $10 a month for unlimited high definition streaming. Existing subscribers were left at the $8 level. Now the company is saying those grandfathered under the $8 plan will see their exemption expire in May. They can continue paying $8 a month for standard definition but the rate will rise to $10 for HD shows and movies. Premium subscribers getting 4K UHD videos will be paying $12 a month. With 75 million subscribers this represents a cash windfall with the $8 rate rising 50% to the $12 level if you want UHD. Netflix said they were already seeing very fast adoption of the $12 plan by existing users. Plus, premium subscribers can stream to 4 devices simultaneously rather than just 2.

Netflix plans to stream more than 600 hours of original content in 2016 compared to 450 hours in 2015. There will be 31 new and returning original series, up from 16 in 2015. There will be two dozen original feature films and documentaries, 30 children's series and a variety of comedy specials.

Analysts believe Netflix earnings are going to soar in 2017 as the adoption of streaming in those 130 new countries begins to accelerate. That is good news because Netflix shares are highly overvalued according to normal metrics. Revenues have been rising 25% annually and streaming content obligations rose by 15% in 2015. They are paying a lot for content but they are essentially taking it off the market to prevent anyone else from competing. They can now use that content in 190 countries so they are leveraging their assets to expand future revenue. Their current PE of 346 is less than half of Amazon's 851 PE. They are operating on the same business model as Amazon. If you build it subscribers will come. When they finish their expansion phase, which is limiting earnings today, they will be highly profitable with more than 200 million subscribers by 2020. That equates to $2 billion a month in revenue. That is a month, not a year.

Buying Netflix requires a leap of faith that investors will return to it as a momentum growth stock. After the earnings report shares have been weak as traders looking for an earnings bounce move on to other stocks in hopes of repeating the process. Shares closed at $100 on Friday after a low of $97 during Wednesday's market crash.

I am suggesting we target that $97 level for a long entry. However, the LEAPS are so expensive we have to use a combination play to make it work.

One option would be to buy the stock and sell a January $110 LEAP covered call, currently $17.50. if we buy the stock at the $97 target we are protected against a decline to $80 by the premium we receive. If Netflix does not drop significantly and rebounds to more than $110 then we make roughly 20% or $20 over the next year. We cannot complain about a 20% gain in this market. If Netflix shares did decline significantly so $90 or so, the option premiums will shrink significantly and we could buy back the $110 LEAP for a profit and then buy a LEAP at a lower level for less money.

Another option would be to use a combination position where we buy the LEAP and then sell a put spread or a naked put to offset the cost of the LEAP call. One example would be to buy the $110 call for $17 and sell the $90 put for $14.25 giving you a net debit of $2.95 to be long Netflix for the next year. If shares declined under $90 you "may" be obligated to buy the stock at $90 "if" it was put to you. With the volume of puts on Netflix that potential is minimal but it does exist. If you were put I would sell a covered LEAP call to cover any losses and you still have your $110 long call for when the stock rebounds.

The option I am recommending is the combination play. If Netflix trades at $97.25 we enter the following trade. I am using the even dollar strikes in case there is another stock split in 2016.

Position 1/26/16 when NFLX traded at $97.25

Long January 2017 $110 LEAP call @ $15.00, see portfolio graphic for stop loss
Short January 2017 $90 LEAP put @ $14.95, no stop loss.
Net debit 5 cents. If we are put the stock our cost will be $74.95 and a bargain.

NKE - Nike - Company Info


Nike hit its high for the week on Monday at $63.47 and it was downhill from there. Retailers were getting crushed without a good reason. This was sector rotation at its finest. Friday's decline stopped just above current support at $57.

Original Trade Description: January 24th

Nike split 2:1 on December 23rd at $132 and the stock went straight down from there. When a stock is a major fund holding and it splits, there is a rush to the exits by some funds. They can sell the new shares nearly tax-free when it is classed as a stock dividend and they still have the same number of shares in the original position. Some funds have restrictions on the number of shares they can hold in any single position. A stock split doubles the number of shares and sometimes puts them over the limit and they sell the extras. These factors cause what is called "post split depression." Nike shares have now experienced that depression.

Shares declined from the $66 level the day of the split to $56 last week on fears the holiday retail selling may have been weak. Given Nike's predominant position in athletic leisure apparel they will always be the dominant seller compared to Under Armour and LuluLemon.

The reported earnings in late December of 90 cents, that rose +22% and beat estimates for 85 cents. Revenue rose +4% to $7.686 billion but missed estimates for $7.808 billion because of the strong dollar. Excluding the dollar impact revenues rose +12% and well over $8 billion.

The company guided for earnings growth in the "mid teens percentages" and said there was no weakness in China. They announced a $12 billion stock buyback program in November and raised their dividend by +14%.

Nike is targeting $50 billion in annual revenue by 2020 with online direct ecommerce sales of $7 billion, up from $1 billion in 2015. Online sales rose +51% in 2015.

Competitor Under Armour is targeting total sales of $8 billion by 2018 to put that aggressive Nike target into perspective.

Nike plans to begin selling in Mexico, Chile and Turkey in 2016. Nike began e-commerce sales to Canada, Switzerland and Norway in the last quarter.Sales in China rose +28% despite the economic downturn. North American sales rose +10% with futures orders up +14%.

Earnings are March 22nd.

I am recommending we buy the $65 LEAP with a Nike trade at $62.25 to confirm the rebound from the lows last week.

Position 2/1/16 with NKE trade at $62.25

Long January 2017 $65 LEAP Call @ $5.00, see portfolio graphic for stop loss.

SBUX - Starbucks - Company Info


Starbucks was another retailer that was crushed last week. As a Nasdaq stock it was doubly hit on Friday for a -6.5% decline on no news. The close at $54.49 was just below support at $55 and stopped us out at $54.75.

Nothing changed with Starbucks. This was just a market event and we cannot compensate in advance when the markets go crazy.

I am recommending we reload this position using the January $60 LEAP, currently $3.95.

Original Trade Description: January 24th.

We were stopped out of the Starbucks position by a penny on the January 20th market crash. The company reported great earnings and failed to decline. The only hiccup was a temporary decline in sales growth in Europe because of the terrorist attacks. CEO Howard Schultz said they were headed for a record quarter in Europe until the Paris attack and then everything came to a screeching halt. He also said buying and traffic patterns were returning to normal and 2016 should be a good year. They reported 9% same store sales increases in the U.S. and 6% elsewhere other than Europe. Earnings growth is expected to be 15% annually for the next five years. They are opening 500 stores a year in China for the next 5 years and Schultz expects China's revenue to exceed the U.S. in the years to come. Schultz said at the current low stock price they were "backing up the truck" to buy as many shares as possible.

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years.

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX continues to serve up strong earnings and revenue growth too. The fourth quarter of 2014 saw a huge jump in SBUX gift cards. One out of every seven Americans received a SBUX gift card. SBUX has been reporting very strong overseas sales growth and consistently healthy same-store sales growth globally.

Position 1/29/16, closed 2/5/16:

Closed: Long Jan 2017 $65 LEAP Call @ $4.01, exit $2.47, -1.54 loss

RELOAD on Monday

Buy Jan 2017 $60 LEAP Call, currently $3.95, no initial stop loss

STZ - Constellation Brands - Company Info


I hope conservative investors took my suggestion and exited on Monday. That was not an official recommendation but I warned that the close above uptrend resistance could be a challenge. Unfortunately, I did not realize what a serious challenge it would be. This was another retail casualty with the stock dropping -$17 from Monday's high at $155. Friday's loss was especially ugly at -$8.69 on no news.

We were stopped out at $140.65 on Friday in the market implosion. I am not reloading this position until it is back over the 50-day average.

Original Trade Description: January 10, 2016

New Year's was just a few days ago and many people were thinking hard about their new year's resolutions. For most folks it's a desire to be healthier. Instead of working hard for six-pack abs you may want to just stop by the store for a six pack of whatever STZ is selling. This company appears to be running at full speed and the stock shows it.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level. The market's current decline, should it continue, will likely pull STZ back toward $145.00, which should be new support. Tonight I am suggesting a trigger to buy calls on a dip at $145.00. We'll start with a stop loss at $139.45. More conservative investors may want to wait and see if STZ dips closer to the $140-142 area as an alternative entry point.

Position 1/11/16, closed 2/5/16:

Closed: Long Jan 2017 $165 call, entry $7.90, exit $5.50, -2.40 loss

01/17/16 adjust stop loss lower from $139.45 to $138.25
01/11/16 triggered @ $145.00

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Earnings Change

by Jim Brown

Click here to email Jim Brown
After the Nasdaq crash on Friday we should be hoping for a rebound Monday. With the Chinese market closed for the week and very little in the way of economic reports all eyes will be on earnings and current support levels.

Stocks Dropped from Watch List:

JPM - Moved to active play list

NKE - moved to active play list.

Active Watch List Stocks:

DIS - Disney

Earnings Tuesday. Cancel current play recommendation until next week.

New Watch List Entry:

JCI - Johnson Controls - Company Profile

JCI is a diversified technology and industrial company worldwide. They design, produce and market building efficiency systems including heating, air conditioning, security, controls and mechanical equipment. They also have a division that manufacturers interior products, control systems, instrument panels, seating and passenger systems for cars and trucks. Their Power Solutions division makes batteries for normal cars and trucks as well as hybrid and all electric vehicles.

What makes JCI important to us today is their recently announced merger with Tyco (TYC). Tyco manufacturers fire and security systems and is headquartered in Ireland. After the merger JCI shareholders will own 56% of the combined entity to be called Johnson Controls Plc. Once the merger is completed the company will spin off the automotive segment to be called Adient leaving Johnson controls with a pure play on the HVAC, controls, fire, security products marketplace plus the Power Solutions division that will produce batteries for electric vehicles. Current JCI shareholders will own 56% of Adient.

The Johnson Controls company will have about $32 billion in revenue and Adient around $17 billion in revenue. The synergies to the merger include $150 million in tax savings because of the Ireland domicile. Another $500 million will come from eliminating corporate redundancies and from operational synergies. There will also be additional revenue synergies which has not been quantified. Both Tyco and JCI existing customers will immediately have a new range of products available to them. This should result in a significant sales boost in the first three years.

Normally when a merger is announced one of the companies sees their stock decline. That did not happen in this case. Tyco shares spiked 10% and are continuing to move higher while JCI shares moved sideways for the last two weeks but made a four-week high on Thursday. Friday's market crash knocked some of the wind out of JCI shares but they only declined -66 cents.

The actual merger has a long way to go since it was just announced on January 25th. With Tyco shares rising and JCI shares having put in a solid base at $34 I expect JCI shares to return to growth mode in the coming weeks.

This is a good deal for both companies. It will not only create a powerhouse in the building systems market but throw off the automotive business into another entity where it can be acquired by one of the larger players.

Earnings are April 28th.

With a JCI trade at $36.75

Buy Jan $40 LEAP Call, currently $2.30, no initial stop loss.

Active Watch List Play Descriptions:

DIS - Disney - Company Profile

Update 2/7/16: Disney moved sideways over the last week and skillfully managed to avoid both our upper and lower entry triggers. Earnings are Tuesday. While the stock appears to have found support at $93, I am not confident enough in their earnings to pick a direction today. Star Wars has produced more than $2 billion in revenue, which should go a long way towards offsetting any ESPN cancellations. However, given the opportunity to revisit the recommendation ahead of the earnings I am going to recommend we stand aside until next week.

If Disney moves lower we will be able to get in later at a better price. If Disney moves higher there may be some eventual post earnings depression and that could reduce the premium on the options. Disney has a long way to go to reach its recent highs at $120. That gives us plenty of entry points along the way if that is the direction is chooses.

Cancel current entry recommendations. I will reissue new strikes and entry points next week.

Disney has been pummeled since its $120 high in November. The problem for Disney was comments that ESPN subscribers are declining. This was attributed to cord cutting from the cable companies as consumers move to sites like Netflix and Amazon for streaming downloads. This is not the case although I am sure there are some losses for that reason.

However, Disney said there was a lack of a large number of major sporting events in 2015 that would keep ESPN subscribers happy. Disney said the 2016 Olympics would help bring those subscribers back. ESPN is only one of dozens of Disney networks and the rest are doing just fine.

In case you missed it Star Wars: The Force Awakens has earned over $2 billion worldwide and still going strong. This compares to only $572 million for Episode VI the Return of the Jedi that was the most popular movie in the prior seven movies. Merchandise sales are approaching $1 billion. This is a cash printing machine and it is only going to get better from here.

Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule

Jan 29th, 2016 - "The Finest Hours"
Mar 4th, 2016 - "Zootopia"
April 15th, 2016 - "The Jungle Book"
May 6th, 2016 - "Captain America: Civil War"
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

We should not overlook their theme parks, which are also doing great. Disney said they are considering a tiered pricing for tickets with high volume attenfance dates costing more. The three levels for the season pass holders would be gold, silver and bronze. Gold passes could be used any day at any time and would obviously be the most expensive. Silver would only be good for off peak days and not valid for holidays. Bronze would be the cheapest and would only be valid on certain off peak periods. Currently discounted tickets for those customers spending multiple days and with children under the age of ten begin around $100.

Shanghai Disney will open on June 16th and they expect 40-60 million people in the first year. At $100 or more per ticket the revenue is astromonical. The park is located within 4 hours drive time of 330 million people.

Don't forget their theme cruises. Disney is not having any problems filling up their cruise ships and prices have remained strong.

The only real challenge to Disney today would be a slowdown in consumer spending. The company said they are not seeing any decline despite the drop in retail sales numbers over the last several months. Consumers are just spending their money on diffrent things like cable movies, theme parks and iPhones.

Disney has earnings on February 9th. Normally I would not recommend a stock ahead of earnings but this could be a blowout given the unbelievable cash flow from Star Wars. Even if they disappoint there is decent support at $90 and profits are only going to rise in subsequent quarters from the items mentioned above.

Shares have found support in the $92-$93 range despite the recent market volatility. I expect shares to rise as we approach earnings. I am putting an entry trigger just slightly above $96 just to make sure we have upward movement after Friday's big gain. If shares decline again I would be thrilled to enter the position at $92.