Tech stocks led the market most of the week but short covering on the Dow was a big help. Tuesday and Wednesday saw big short covering days stimulated by earnings and a breakout on the S&P and Nasdaq. With only four Dow components reporting this week the volatility should be reduced. However, Apple reports on Tuesday so Wednesday morning could be hectic.
In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.
Original Play Recommendations (Alpha by Symbol)
AAPL - Apple Inc - Company Description
Apple reports earnings on Tuesday. If you do not want to hold over earnings you should exit over the next two days. We are in this position in expectation of a rally before the new iPhone is announced in Q3 and what could be a big seller. Analysts are calling the iPhone 8 a potential "supercycle" because of the large number of model 6 phones still in use.
Shares finally broke through the $120 level ahead of earnings.
Original Trade Description: January 8th
Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. Company description from FinViz.com.
I am not going to spend a lot of time and space explaining this play because everyone should be aware of their recent problems. iPhone sales slowed and earnings dropped. The company took a hit when they removed the earphone jack from the iPhone 7 and then could not ship the AirPods because of technical problems. The new MacBook Pro was not well received and Consumer Reports failed to give it their seal of approval. That was a first for Apple.
Sales fell -4% to $215.6 billion, well below their target of $223.6 billion. Operating income declined -0.5%. Net sales were down -7.7% and earnings were down -15.7% from 2015 levels.
Recently, Nikkei reported Apple suppliers had been told to reduce production of components for the iPhone 7 by another 10% in Q1. The stock barely wavered on the news. I believe this is due to the rising excitement over the 10th anniversary iPhone due out this fall.
There have been numerous product leaks suggesting they will have three sizes and the largest size will have an OLED screen. The internal feature leaks have been very few but CEO Tim Cook said they were going to introduce some features that you will wonder how you got along without them. Time will tell.
There are also numerous rumors about major upgrades to other devices and some analysts are talking about record revenues in the coming year.
Since this is the tenth anniversary of the iPhone, there is a very good chance it will be chock full of new features.
Apple is also rumored to be building a manufacturing facility in India to be run by one of their prior suppliers. Phone production could begin as soon as April. That would give them a big opportunity to sell new phones into India and that is a huge market opportunity similar to China in 2010.
Because of the calendar, anything we add over the next couple weeks is going to be earnings challenged. Apple has earnings on Jan 24th. Expectations are low but Apple activated more devices during the holiday week than any other vendor so I am not expecting a big miss. It is still a risk but based on the chart, nobody else seems to be worried.
The $120 level is going to be resistance but a breakthrough could trigger significant short covering and price chasing. The last update to price targets was Piper Jaffray to $155 with an overweight weighting.
Update 1/15/17: The iPhone 8 leaks continue and now sites are saying the phone will come with wireless charging. You just place it within 36 inches of the charger and it charges automatically with no connections. There have been more leaks about the OLED screen on the larger model and suggesting there will be no edges on the phone. The screen wraps around the edge. On the downside it is rumored to be plastic instead of glass. Glass breaks, plastic scratches. The phone will keep working but the screen will accumulate scratches if you are not careful. I thought that was what screen protectors were for? Nomura said based on the leaks and the massive installed base they are predicting sales of 86 million phones in Q4 compared to the peak of 74.7 million in 4Q15.
On a negative note, the 9th U.S. Circuit Court of Appeals reinstated a class action suit claiming Apple is a monopoly because iPhone apps can only be sold through the Apple App Store and Apple receives a 30% commission. Apple claims it just operates a "shopping mall" for apps rather than an actual store.
Long Jan 2018 $125 call @ $7.85. No initial stop loss until after any earnings volatility.
ADP - Automatic Data Processing - Company Description
No specific news. Shares declined about $2 for the week. It looks like minor profit taking.
Original Trade Description: January 16th.
Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.
Earnings for the last quarter rose 9.5% to $368.7 million on a 7.5% rise in revenue. For 2017, ADP is guiding for 7% to 8% revenue growth and 15% to 17% earnings growth. Considering their five year average growth is 3.38% for revenue and 5.22% for earnings, that is very strong guidance. At the end of last quarter, ADP had 2.8 billion in cash. In the last quarter cash flow from operations rose 202% to $330 million.
ADP is rapidly expanding their Total Service product where they provide comprehensive outsourcing solutions where workers are co-employed by ADP and its clients. Revenue in that division rose 16% to $3 billion in sales with 12% earnings.
Earnings February 1st.
We are right at the start of the earnings cycle. Our only option is to pick a lesser quality stock that has already reported or pick a good stock that should beat earnings and then hold through the volatility that normally follows.
ADP shares closed 3 cents below a new high on Friday and are poised to start a new leg higher. With the focus on job creation in 2017, ADP should find willing investors on the expectations for future growth.
Long Jan 2018 $110 call @ $5.10, see portfolio graphic for stop loss.
APA - Apache Corp - Company Profile
No specific news. Shares of the producers declined with the volatility in crude.
Original Trade Description: October 2nd
Apache Corporation, an independent energy company, explores, develops, and produces natural gas, crude oil, and natural gas liquids. It operates onshore and offshore assets primarily in the Permian Basin, the Anadarko basin in western Oklahoma, the Texas Panhandle, and Gulf Coast areas of the United States, as well as in Western Canada and Gulf of Mexico. The company also operates assets in Egypt and the United Kingdom in the North Sea. As of December 31, 2015, it had total estimated proved reserves of 794 million barrels of crude oil, 198 million barrels of natural gas liquids, and 3.4 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.
While that company description was valid six months ago the picture has changed for Apache. In early September Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. The "Alpine High" as they are calling it, "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The Alpine High play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage, they drilled 19 wells to prove out the reserves. Previously oil industry experts thought the area to be unfit for fracking because of an abundance of clay. Therefore, nobody was interested in this remote corner of the Delaware Basin inside the Permian. Apache said the amount of clay was significantly less than previously thought.
Compare the size of the discovery with the proved reserves in the company description. This one discovery is several times the size of the entire company six months ago.
Apache said it was raising capex by $200 million to $2 billion to reflect their anticipated activity in this area. They are going to allocate 25% of their capex budget to this discovery. Well costs are $4-$6 million for 4,100 foot laterals. They are going to start development with a 3-5 rig program and they have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone. The only drawback to the position is the lack of infrastructure, which Apache will have to build out along with its wells. The company will not be able to sell production until the second half of 2017 when they anticipate the first level if infrastructure will be completed. Volume production will not begin until 2018.
The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.
Apache is going to be getting a lot of attention over the next several months as portfolio managers reevaluate them as a potential investment. By more than tripling the company's reserves in one discovery the company has a lot of profitable work ahead for the next decade.
They were very smart to keep the discovery quiet until they had locked nearly every single acre in the entire discovery for very low prices.
Earnings Feb 2nd.
I have been waiting for the initial stock surge on the news of the discovery to fade to give us a better entry point. However, it never came and now with the OPEC production cut headlines we may never see the stock back below $60. I would rather buy a stock that is rising than wait forever for a dip that never comes.
I am not going to spread this LEAP because shares could run to $100 if the OPEC production cut actually occurs. We can spread out to exit the play on the backend.
Long 2018 $70 call @ $7.70, no initial stop loss.
You could sell a put to offset the call premium because I seriously doubt this stock is going significantly lower unless oil prices implode.
FB - Facebook - Company Profile
Facebook reports earnings on Wednesday. If you want to take profits now, you need to exit on Monday or Tuesday. I believe FB will continue to make news highs throughout the year even if there is a volatility dip after earnings.
Original Trade Description: November 13th.
Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.
The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.
Facebook still makes a lot of money and they still have a lot of assets to monetize. They have barely begun to monetize Instagram and WhatsApp. Facebook bought Instagram for $1 billion four years ago and Forbes said it was worth $25 to $50 billion today. Instagram has added 100 million users in the first nine months of 2016 to reach 400 million. They are targeting one billion. Instagram revenue is expected to triple in 2016 to $1.5 billion and then triple again to $5 billion by 2018 according to eMarketer.
Instagram only has 350 employees compared to the 14,500 Facebook employees. Instagram users average 21 minutes a day and upload more than 95 million photos and videos. There is gold in those posts and Facebook is working on finding more ways to monetize the app.
Facebook may expect revenue "growth" to slow but that is different from "decline." It is still a great business and there will be another explosion of growth as Instagram and WhatsApp hit their prime.
Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.
Earnings Feb 1st.
The drop in price after earnings plus the decline in the Nasdaq big caps last week helped to reduce the premiums but they are still expensive and require a spread position to receive maximum benefit at the lowest cost.
Long Jan 2018 $125 call @ $13.10, no initial stop loss.
Short Jan 2018 $150 call @ $5.00, no initial stop loss.
Net debit $8.10
HAIN - Hain Celestial - Company Description
Absolutely no news. Shares declined sharply on Thursday on normal volume but there was one block of about 200,000 shares that caused the most damage. Looks like somebody got tired of waiting for earnings.
Original Trade Description: January 22nd.
The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products in the United States, the United Kingdom, Canada, and Europe. Its grocery products include infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, granola bars, and cereal bars; canned, chilled fresh, aseptic, and instant soups; Greek-style yogurt; chilies and packaged grains; and chocolates and nut butters, as well as plant-based beverages and frozen desserts, such as soy, rice, almond, and coconut. The company's grocery products also comprise juices, hot-eating, chilled and frozen desserts, cookies, crackers, gluten-free frozen entrees and bars, frozen pastas and ethnic meals, frozen fruits and vegetables, cut fresh fruits, refrigerated and frozen soy protein meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads and jelly, honey, marmalade, and other food products. In addition, it provides snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla chips, whole grain chips, pita chips, puffs, and popcorn; specialty teas, including herbal, green, black, wellness, rooibos, and chai tea lattes; ready-to-drink beverages comprising organic kombucha and chai tea lattes; personal care products consisting of skin, hair and oral care, deodorants, baby care items, acne treatment, body washes, and sunscreens; and poultry and protein products, such as turkey and chicken products. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, and drug and convenience stores in approximately 70 countries worldwide. Company description from FinViz.com.
Hain had some problems back in August and they said they discovered an accounting problem that could force them to restate earnings. Shares fell from $55 to $35. In November they announced they found no wrongdoing and shares rebounded to $39 ahead of what investors thought would be some positive earnings restatements. We are now in late January and still no earnings. They have a variance from the Nasdaq and creditors that allows them until February to file their 10K and get current with their earnings. There has been a slight upward bias in the stock as we approach that February event. There is no confirmed date for the release.
Since there was no wrongdoing, the earnings restatement should reflect the movement of revenue recognition from one quarter into another. If I recall there was some problem with consideration given to some wholesalers when they received the product on what could be called a consignment basis. In other words they shipped product to a wholesaler and that wholesaler did not have to pay for it until it was sold. Hain has had two quarters to work through those mechanics and when they finally report earnings it should be several quarters at one.
There is nothing wrong with the Hain business. They continue to introduce new products and expand their distribution in more than 70 countries. I could be wrong but I do not foresee a major change in the business or in the financials.
This accounting delay has removed all the premium from the LEAPS. The Jan $45 call is only $3.30. If Hain reports anything close to their prior earnings the stock could be back over $50 very quickly because of the pent up demand.
I looked at buying an insurance put for $1.25 but the LEAP is so cheap and we have 11 months for a recovery that I decided against it.
Long Jan $45 call @ $3.22, no initial stop loss.
HON - Honeywell - Company Profile
Honeywell reported earnings of $1.74 that matched estimates. Revenue of $9.985 billion missed estimates for $10.152 billion. Revenue was down due to a spinoff of the Resins and Chemicals business and the divestiture of the government Aerospace business. Shares actually rose on the news.
Original Trade Description: October 23rd.
Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. It also offers fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate fertilizers, phenol, specialty films, waxes, additives, fibers, research chemicals and intermediates, and electronic materials and chemicals. Company description from FinViz.com.
On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.
The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.
After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.
The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.
He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.
Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.
On Oct 21st, Honeywell (HON) reported earnings of $1.67 compared to estimates for $1.60. Revenue of $9.80 billion beat estimates for $9.78 billion. The company said it was well positioned for double-digit earnings growth in Q4 and that would push them to 8-9% earnings growth for the full year. For Q4 they guided for $1.74-$1.78 in earnings and analysts were expecting $1.80. They guided for the full year to earnings of $6.60-$6.64 and revenue of $39.4 to $39.6 billion. Analysts were expecting $6.68 and $39.63 billion.
Shares rallied despite the lowered guidance because Honeywell had already warned two weeks earlier and shares were crushed. The company focused on being upbeat about 2017 saying they expect double-digit earnings because of the restructuring they accomplished in 2016. The company laid off 3,017 positions in Q3 as they separated the automation and control solutions business into two new reporting segments. They took a charge of $202 million on the restructuring and layoffs. Because of the big drop in early October, the risk should be reduced for Honeywell shares.
In this market, any company that can produce double-digit earnings in Q4 and give strong guidance for 2017 should find some buyers. I believe the worst is over for the shares and we should see a rebound back to the highs, possibly before year-end.
Long Jan 2018 $115 call @ $6.25, see portfolio graphic for stop loss.
After HON rises some we can turn it into a spread and reduce the premium.
INTC - Intel - Company Profile
The company reported earnings of 79 cents that beat estimates for 75 cents. Revenue of $16.37 billion compared to estimates for $15.80. Results were great and they have some new products in the pipeline but they lowered guidance for 2017. Cash on hand at the end of the quarter was $17.1 billion. Shares surged to a new high intraday but then faded into the close on Friday.
Original Trade Description: October 9th.
Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Software and Services, and All Other segments. The company's platforms are used in various computing applications comprising notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices, and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use, and other market segments. It offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip products that integrate its central processing units with other system components onto a single chip. The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers, and power management integrated circuits; and tablet, phone, and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions, and interoperability tests, as well as home gateway and set-top box components. In addition, it offers security solutions for computers, mobile devices, and networks, as well as software and services for technology integration; NAND flash memory products, which are used in solid-state drives; and custom foundry services, including custom silicon, packaging, and manufacturing test services. Company description from FinViz.com.
Yes, Intel. The father of modern computers, servers and everything chip related. They have a lot of competition today but Intel is still a chip behemoth. They rule the PC and server processor space with new developments faster than other chip makers can even conceive of them, with the exception of Nvidia, which is giving Intel a tough battle. There is enough market share for everyone so nobody is going to be squeezed out of the market.
I am not going to go into a lot of detail on Intel because everyone knows who they are and what they do. I believe this is the right time to play Intel because more than one company, including Intel, has said they underestimated PC demand over the last quarter.
The main reason behind the PC surge is Windows 10. The Window's Vista and Window's 8 problems have been forgotten because Microsoft went back to what worked and what customers wanted. Now that Windows 10 has been accepted by the mainstream consumer, the long awaited upgrade cycle is underway. That means tens of millions of PCs are being replaced with new models. Add in the millions of new tablets and servers and Intel should be doing well.
Their earnings are October 18th. I rarely suggest adding a new position only a week before earnings but the options are cheap and I expect Intel to beat the estimates and guide higher. I could be wrong but we have 14 months to be right.
Intel shares closed at a new 15-year high on Friday and just over $38. Intel is breaking out and shares could easily run to $50 over the next year. As a big cap tech with relatively little volatility, fund managers should be throwing money at the stock over the next three weeks.
Update 11/13/16: Intel announced a new chip technology and is releasing proof of concept chips while it scales up to produce them in mass 2-3 years from now. They figured out how to put a FPGA on the same chip as a Xeon processor. This eliminates the requirement to had separate chips on a single motherboard and eliminates all the bandwidth headaches of moving high-speed data between those two chips. Data transfer rates between the two processors on the same chip could start in the 50-100 gigabits per second range and increase to 2 terabits early next decade. This is going to be a game changer when it goes into production 2-3 years from now.
Update: 11/20/16: Intel held an analyst meeting and described a new chip that they will be testing in early 2017 and releasing to some test customers at the end of 2017 that is supposed to be very advanced. They claim their top of the line server chip can process a specific image recognition task in about 2,000 hours. The same task on a Nvidia GPU takes 33 hours. The new Nervana is said to be capable of performing the task in a fraction of that time. It will be more than a year before the refined chip will be available to the public. It is supposedly so fast that Intel was thinking about running it as a cloud service application. That is pretty strong talk for a chip that has not even been tested yet.
Update 12/11/16: Intel announced two deals with Amazon to expand the Alexa service. Intel is integrating the Alexa voice controls in to a smart speaker product and the company is expanding the Alexa voice controls into the Smart Home Hub. This means Intel will allow other developers to use its technology to build other Alexa powered devices. GE announced an Alexa lamp last week that replaces the Echo device.
Long Jan 2018 $40 LEAP Call @ $2.79, see portfolio graphic for stop loss.
Closed 12/16/16: Long Dec $32 insurance put @ .33, expired, -.33 loss.
NVDA - Nvidia - Company Profile
No specific news. Shares completed their consolidation phase and are heading back to the highs. The odds of seeing a return to $90 are almost zero.
I am leaving the order to close the $90 call open because we never know when the market is going to suddenly crash.
Previously: Our Nvidia strategy has not worked out too well. We had a $20 call spread using the 2018 $70/$90 calls. The idea was to allow the premium received from the $90 call reduce the cost in the $70 call. Nvidia reported blowout earnings that surprised everyone and the stock spiked $20 to $88 and caused the deep out of the money $90 call to explode in price. Obviously, the premium for an ATM call will decline over time relative to our deep in the money call. Temporarily, the accounting looks terrible but it will eventually correct. If we hold until expiration, we are guaranteed a $20 profit on the position.
Original Trade Description: September 18th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Update 10/3/16: Nvidia announced a new chip code-named Xavier that is specifically designed for self driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.
Q2 earnings were a blowout and shares rocketed to a new high. We closed the prior position at $63.11 and I am putting a $56 entry trigger of this Watch List recommendation. We may never get triggered but it we do it should be a winning position.
Breakout entry point.
Position 9/19/16 with a NVDA trade at $63.50
Long Jan 2018 $70 LEAP Call @ $9.40, see portfolio graphic for stop loss.
Short Jan 2018 $90 LEAP Call @ $3.73, see portfolio graphic for stop loss.
Net debit $5.67.
With NVDA trade at $90.50, CLOSE Jan $90 short call.
SMH - Semiconductor ETF - ETF Profile
The chip sector hit a new high on Friday as the sector found renewed life from the Q4 earnings cycle.
Original Trade Description: December 4th.
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors US Listed Semiconductor 25 Index (the "Semiconductor Index"). The fund normally invests at least 80% of its total assets in securities that comprise the fund's benchmark index. The Semiconductor Index is comprised of common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor sector. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange. Company description from FinViz.com.
The semiconductor sector has been in rally mode since July. The SMH hit a high post election at $71.83 but was crushed back to $67.50 last week in the Nasdaq crash. If the economy is actually going to accelerate as analysts believe, the chip sector will be a leader. Everything we do today has some kind of chip component from smartphones to refrigerators to automobiles. Everything we touch has a chip if it is even remotely electronic.
Chips were soft from the middle of 2015 until July 2016 as the economic struggled along at a roughly 1.25% growth rate. I believe they are poised to rally higher over the next year. The growth of the cloud with millions of servers added every year is just one area that is seeing new chip technology.
Because of the crash last week the LEAP prices have declined to reasonable levels unlike most individual stocks.
Long Jan 2018 $75 LEAP Call @ $3.44, see portfolio graphic for stop loss.
SPY - S&P-500 ETF - Put - ETF Profile
The expected January dip has failed to appear. The potential for a decline still exists.
I considered putting a stop loss on the position at $229 but there is considerable market risk. Despite the bullish improvement in the market, we could see a sharp decline at any time. The premium is currently under $1 and I am willing to risk that because we could still see a material decline before February expiration. I did add an exit stop at $223.50 because our time is growing short.
If you want to live dangerously, you could sell short a $227 put for $1.12 to offset the premium on the long put.
Original Trade Description: December 11th.
The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.
The market is nearing a top. When and where, nobody knows for sure. However, there are calendar and headline events in our near future that could trigger a significant decline.
The market has posted a remarkable string of gains with the Dow making a new high close on 14 of the last 22 sessions. The S&P has rallied 171 points in 22 days or roughly +8.2%. The Russell 2000 has rallied 20.1% over the same period. Those would be good annual gains but to do it in 22 days has moved the market into very overextended status. And, it may become even more overextended before the bubble pops.
The market typically rises in the two weeks before Christmas and has a mixed record for the days after Christmas. The direction in the post holiday sessions normally depend on the market in the weeks before the holidays. If the market is up strongly, then traders begin to short the market in anticipation of a January decline. If the market was only slightly bullish then window dressing tends to lift the indexes in the post holiday sessions. Those trends are not what we are worried about today.
There are three basic problems. The first is Dow 20,000. The odds are good we will hit that milestone over the next ten days and that could be a very obvious sell the news event. Large round numbers tend to be psychological targets and they do not get much larger and rounder than 20,000. When the target is hit, quite a few traders may decide to take profits and shut down for the rest of the year. Dow 20K could be a bump in the road but probably not the biggest obstacle.
The second problem is the monster market gains in the post election honeymoon phase. Fund managers are putting every penny they can raise into the market in order to leverage as many gains as possible before the end of the year. They are competing with their peers and to keep their jobs and collect their bonuses. This suggests the rally could continue in some fashion until after Christmas. The problem for the next two weeks is the lack of cash. Analysts claim most funds have run out of cash because of their efforts to leverage the gains for the rest of December. That means the withdrawal cycle in January could result in a lot of selling in positions that have exploded higher over the last month.
While there is a lot of end of year retirement money hitting the funds they are investing every penny. Once January arrives and we are in a new tax year, there is no longer any reason to hold grossly overextended positions. Traders and portfolio managers will want to capture the gains and then invest the money for the next year before being forced to pay taxes. That makes January potentially rocky after a big year-end gain.
Dow - January 2016
Lastly, there is the January 20th inauguration and the associated event risk. With more than one million people attending and hundreds of thousands more lining the parade route, the potential for a terrorist attack is very high. I am sure quite a few investors will want to lock in profits and raise cash before that event risk.
So, there are multiple reasons why the market could decline over the next five weeks and very few reasons why it should continue making new highs.
I am recommending we protect ourselves from potential loss by hedging with some puts on the SPY. The ETF closed at $226.50 on Friday and futures are up strong on Sunday evening. We could see a continued rally this week but this rubber band is just about stretched to its limit.
This is not a LEAPS position. This is insurance. I am using the February puts. I am going to start with an entry trigger at $224.50 and then move the trigger and strike up if the market continues higher. The SPY has initial risk to $219-$220 and secondary risk to $216.
The put position on the SPY was triggered on the 28th when the ETF traded at $224.50. The initial support is $219 and we could see a retest of $215.
Position 12/18/16 with a SPY trade at $224.50
Long Feb $221 put @ $2.70, see portfolio graphic for stop loss.
SPY - S&P-500 ETF - Call - ETF Profile
This is a potential long position on the SPY in case we do get a material market dip. We want to buy any dip in anticipation of a longer-term rebound.
Change the entry trigger to $223 and the strike to $228.
Original Trade Description: January 2nd.
The S&P ETF mimics the S&P-500 index on a 1:10 ratio.
Most analysts believe the market sill finish significantly higher in 2017. Some analysts expect the Dow to reach 24,000 or even 25,000 by the end of 2017. A 10% move would be 22,000 and 15% 23,000. Those targets are possible but 25,000 would be a real stretch.
Analysts are rapidly updating their 2017 S&P forecasts in light of the recent rally. These are the highest estimates on the street today.
2,275 Fundstrat, Tom Lee
2,300 Bank of America, Savita Subramanian
2,300 Credit Suisse, Lori Calvasina
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,425 Citigroup, Tobias Levkovich
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub
If any of those targets come true, buying some January 2018 SPY calls on a dip could be a profitable trade. Unfortunately, they are expensive.
I changed the strike to $225 and expect the premium to be about $8 if $220 is hit. If we get filled, we will hold them all year and sell a short call against them late in the year to recover some of that premium.
With a SPY trade at $223
Buy Jan 2018 $228 call, estimated premium $8, no initial stop loss.
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