A severe two-day market crash and rebound is the worst nightmare for long-term investors. We get all our positions established with the majority profitable and then a monster dip comes out of nowhere to stop us out of half of them only to see rebounds follow the crash. This is guaranteed to make everyone reconsider the value of stop losses. Unfortunately, we cannot run "naked" all the time because there are random market/stock declines that can cost us a fortune if we do not exit quickly. We lost five positions last week but the good news is that we only lost money on three and the average loss was 55 cents. While it is frustrating to be stopped, it is worth keeping those stops in place.
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 Profile
We closed the put position on Apple at the open on Monday. The stock was refusing to take profits. The Wednesday crash knocked it down from the Tuesday high at $155.65 to $149.71 but the rebound was almost immediate.
Original Trade Description: April 30th.
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.
We currently have a long call position in Apple that I have recommended closing on Monday. Earnings are Tuesday after the bell.
If you have been following the long position you know that rumors have circulated for the last 6-weeks or so about production delays. Those rumors are building to a fever pitch with increasing specificity.
The rumors are growing from multiple reputable sources that the iPhone 8 production could be delayed until November making sales in 2017 almost nonexistent. There are other rumors that Apple will scrap the iPhone 8 launch for 2017 and announce a 7s with an OLED screen instead.
Reported problems are low yields on the OLED screen for the big version of the phone. Samsung is reportedly having trouble making the screens for Apple and for the dozen other phones by other manufacturers.
There are reports that the wireless charging feature is causing the phones to overheat.
There are reports that the circuit boards that are the heart of the phone are now so compact that they are proving difficult to manufacture and the twin camera attachments to the board are causing trouble.
Note from AppleInsider.com
Note from Forbes
If Apple announces any chance of a delay when they report earnings on Tuesday after the close, the stock could take a major hit. I am going to recommend an October put spread because Apple shares appear to have topped out. The excitement is fading, probably as a result of these rumors.
I chose the October strike because the iPhone announcement is always in September so they can deliver in the holiday shopping season. If Apple cancelled that event it would be just as bad as admitting there will be no iPhone 8 sales in 2017. If they don't cancel it and announced a 7s instead, there will also be a major sell off because everyone expects the iPhone 8.
This is purely a speculative position and Apple could post blowout earnings on Tuesday. However, if we waited until after the earnings and they said something about production delays, we would be kicking ourselves. I am using a spread to reduce the cost.
Update 5/7/17: Apple missed on iPhone sales but the post earnings drop was short lived. Multiple headlines on Friday powered the stock to a new high.
Buffett was interviewed saying positive things about Apple. He said the weak iPhone sales in Q1 did not matter. "I don't own Apple because of what I think the earnings are going to be in the next three months or six months." He said he understood why sales are soft and used a car analogy. "If you knew a new car was coming out tomorrow and you had to pay roughly the same, for the year older model, you are probably going to wait." Berkshire owns 2.5% of Apple's stock. Apple just added $35 billion to their stock buyback program and raised the dividend.
Apple was also rising on a note from Citigroup giving a 40% chance they would buy Netflix. Analyst Jim Suva assigned percentages to several other companies as well saying a repatriation tax cut could give Apple a window of opportunity to make a big purchase. Suva said Disney was a 25% chance, Tesla, Activision Blizzard, Electronic Arts and Take-Two Interactive were at 10% or less. On Tuesday, CEO Tim Cook said he wants Apple to be a major player in online video. Buying Netflix would be a way to spring to the front of the pack. With Apple's cash, they could accelerate the production of original content.
There was also a new article suggesting Apple and Amazon were getting together in an Apple TV deal where the Amazon Prime Video app would run on Apple TV by Q3. Apple is also increasing funding for its own original content that will be on the Apple Music service.
With all the various headlines on Apple, the stock shot up $2.43 to a new high.
Closed 6/15/17: Long Oct $140 put @ $5.70, exit $2.68, -$3.82 loss.
Closed 6/15/17: Short Oct $125 put @ $1.70, exit .77, +.93 gain.
Net loss $2.99.
ADSK - Autodesk - Company Profile
Autodesk posted decent earnings but guided for strong growth. Shares exploded higher with a 15% gain.
Original Trade Description: March 5th.
Autodesk, Inc. operates as a design software and services company worldwide. The company's Architecture, Engineering and Construction segment offers Autodesk Building Design Suites to manage various phases of design and construction; Autodesk Revit products that offer model-based design and documentation systems; Autodesk Infrastructure Design Suites; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution; and AutoCAD Map 3D software for infrastructure planning, design, and management. Its Platform Solutions and Emerging Business segment offers AutoCAD software, a professional design, drafting, detailing, and visualization software; and AutoCAD LT, a professional drafting and detailing software. The company's Manufacturing segment provides Autodesk Product Design Suites for digital prototyping; Autodesk Inventor to go beyond 3D design to digital prototyping; AutoCAD Mechanical software to accelerate the mechanical design process; Autodesk Moldflow, an injection molding simulation software; Autodesk Delcam, a CAD and computer-aided manufacturing software; Autodesk PLM 360, a product lifecycle management application; and Autodesk Fusion 360, a product development environment. Its Media and Entertainment segment offers Autodesk Maya and Autodesk 3ds Max software products that offer 3D modeling, animation, effects, rendering, and compositing solutions; and Autodesk Flame and Autodesk Lustre software applications that offer editing, finishing, and visual effects design and color grading solutions. Autodesk, Inc. sells consumer products for digital art, personal design and creativity, and home design in digital storefronts and over the Internet. It licenses or sells its products to customers in the architecture, engineering, and construction; manufacturing; and digital media, consumer, and entertainment industries directly, as well as through resellers and distributors. Company description from FinViz.com.
Autodesk (ADSK) reported a loss of 28 cents that beat estimates for a loss of 33 cents. Revenue of $478.8 million beat estimates for $474.1 million. The company is losing money because they are converting from a software sales model to a subscription model and that always causes a short fall in the first 12-24 months of the process but results in larger profits in the future. New subscriptions rose 26% to 1.09 million, up 227,000 from the same period in 2015.
The company guided for the current quarter for a loss of 21-27 cents on revenue of $460-$480 million. Analysts were expecting $503 million and a 13-cent loss. Shares declined $2 on the news.
Earnings June 1st.
The stock pulled back slightly on the earnings but given the strong chart the decline was minimal. I would still like to buy it cheaper. There is a convergence of support at $82 and that is going to be my entry trigger.
Position 3/7/17 with a ADSK trade at $82
Long Jan $90 call at $7.50, see portfolio graphic for stop loss.
APA - Apache Corp - Company Profile
No specific news. Shares up with oil prices.
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.
Update 2/26/17: Apache reported an adjusted loss of 6 cents compared to estimates for a 7-cent profit. Revenue of $1.45 billion also missed estimates for $1.51 billion. Production averaged 420,846 Boepd with 64% liquids. Their average realized price per barrel was $47.39. They spent $112 million on E&P in Q4, down -85% from the $735 million in the year ago quarter. They announced a 2017 capex budget of $3.1 billion, which is light years ahead of that Q4 spending rate. Production is expected to rise 10% in 2017.
Update 3/12/17: I am recommending we average down on this position. If we do that, Apache does not have to return to $70, Just rebounding to $60 would reinflate the LEAP prices and we could be profitable. I would recommend a 2 for 1 ratio. If you own one contract, then buy two new contracts of the same LEAP, currently at 67 cents.
Update 3/26/17: Apache is rumored to be shopping various non-core assets to fund an aggressive drilling program in the Alpine High where Apache believes there is 15 billion barrels of reserves. Once they prove out the field limits they will be drilling thousands of production wells.
Update 5/7/17: Apache reported earnings of 8 cents compared to estimates for 16 cents. Revenues of $1.878 billion beat estimates for $1.486 billion. Production averages 397,792 Boepd. They completed $466 million in non-core asset sales. They reached first production at the new Alpine High discovery, two months ahead of schedule. They raised 2017 production guidance from 256,000 to 264,000 Boepd. They continued test drilling in the Alpine High discovery to delineate the fairway and confirm production expectations. Of the three new test wells drilled, two delivered the highest 24-hour oil production rates and the highest percentage of oil to date in the Woodford and Barnett formations. It was a good report and once oil prices firm, Apache should rise sharply.
Update 5/14/17: On Friday, Apache declared a quarterly dividend of 25 cents payable August 22nd to holders on July 21st. That is not going to make new investors rush into the stock but it may prevent a few from leaving. Shares rebounded nicely on the uptick in oil prices.
Apache said it was going to test loading a super tanker at its Corpus Christi Texas oil terminal. If the test is successful, it will allow Apache to export large quantities of WTI from the Permian. Our shale oil is super light and in high demand in Europe and Asia. U.S. exports are growing rapidly and that is another problem for OPEC oil exports.
Long 2018 $70 call @ $7.70, no initial stop loss.
Long (2) 2018 $70 call @ 82 cents.
Adjusted average price for 3 contracts = $3.18.
APC - Anadarko Petroleum - Company Profile
We closed the position at the open on Monday as the liability suits begin to pile up on Anadarko from the explosion in Colorado. We posted a minor loss of 26 cents.
Original Trade Description: May 7th.
Anadarko Petroleum Corporation engages in the exploration, development, production, and marketing of oil and gas properties. It operates through three segments: Oil and Gas Exploration and Production, Midstream, and Marketing. The Oil and Gas Exploration and Production segment explores for and produces oil, natural gas, and natural gas liquids (NGLs). The Midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production, as well as the gathering and disposal of produced water. The Marketing segment sells oil, natural gas, and NGLs in the United States; oil and NGLs internationally; and anticipated liquefied natural gas production from Mozambique. The company's oil and natural gas properties are located in the U.S. onshore, deepwater Gulf of Mexico, and Alaska; and in Colombia, Cote d'Ivoire, Mozambique, and other countries As of December 31, 2016, it had approximately 1.7 billion barrels of oil equivalent of proved reserves. Florida. Company description from FinViz.com.
Anadarko shares were hammered over the last several weeks by multiple events. The $10 drop in crude prices was the major cause of the first dip. Prices will rebound as we enter the summer driving season that begins on Memorial Day.
The second problem was a house explosion in Firestone Colorado. When the house was built the contractors cut into an abandoned flow line that used to run through the pasture that became a housing development. The line had been abandoned and the tanks removed long ago. However, when the well was shutdown in early 2016 the valve on the abandoned line was never closed. A new valve, new line to new storage tanks elsewhere was installed after Anadarko acquired the lease and the well was restarted in February. Unknown to Anadarko, the well was actually flowing gas into both lines. The gas from the line that had been cut saturated the ground around the house and entered the basement through a sump pump. The non-odorized gas built up in the basement until the owner tried to install a new water heater and the house blew up. Two men were killed and the wife was badly burned.
Anadarko shutdown more than 3,000 wells in the area to make sure they do not have any other problems. The well was drilled in 1993 and was last inspected in 2014. The well initially belonged to Gerrity Oil. Gerrity became a subsidiary of Patina Oil and Gas. Patina had 3,550 producing wells in the Wattenberg field within a 40 mile radius. Noble Energy bought Patina in 2005. How/when the well ownership moved from Noble to Anadarko is not clear.
I am sure there will be a settlement. However, Anadarko has insurance. If Somebody other than Anadarko was responsible for shutting down the well in early 2016 then they will be liable as well. That could have been any number of oil field service providers like Baker Hughes, Schlumberger or others. There is also the contractor that cut the line while they were building the house. If they did not report it, they could be liable.
Anadarko is a $30 billion company. Any fine, judgment or settlement that comes out of this event will be expensive but on a relative basis it will probably be less than the cost of drilling a single well and will probably be shared by several companies. I do not want to be uncaring but we are talking about a business reality that is important to this investment.
Earnings August 1st.
The double whammy of the oil price drop and the high profile house explosion crushed APC shares. The headlines on the explosion are already fading. Once oil prices begin to rebound ahead of Memorial Day the energy company shares will also begin to rise. Options are cheap because of the disaster. This is a buying opportunity.
Long Jan $60 call @ $2.19. No initial stop loss.
BA - Boeing Company - Company Profile
Boeing shares rebounded strongly from the Wednesday crash on expectations they will be big winners from the $350 billion arms deal with Saudi Arabia.
Original Trade Description: May 14th.
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.
Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part.
The temporary dip could be a buying opportunity. Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.
Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.
Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.
All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.
Earnings July 26th.
Shares made a new high on Wednesday at $187 before dropping back to $182 on the temporary flight halt. Options are expensive so I am recommending a spread.
Long Jan $190 call @ $7.80, see portfolio graphic for stop loss.
Short Jan $210 call @ $2.02, see portfolio graphic for stop loss.
Net debit $5.78.
CSX - CSX Corp - Company Profile
No specific news. Shares went from setting new highs to breaking below support at $50 to stop us out in the market crash.
Original Trade Description: May 7th.
CSX Corporation, together with its subsidiaries, provides rail-based transportation services in the United States and Canada. The company offers rail services, as well as transports intermodal containers and trailers. It transports agricultural and food products, fertilizers, chemicals, automotive, metals and equipment, minerals, and forest products; and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, and industrial plants. The company also exports coal to deep-water port facilities. In addition, it offers intermodal transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States; drayage services, including the pickup and delivery of intermodal shipments; and trucking dispatch services. Further, the company serves the automotive industry with distribution centers and storage locations, as well as connects non-rail served customers through transferring products from rail to trucks, which includes plastics and ethanol. Additionally, it acquires, develops, sells, leases, and manages real estate properties. The company operates approximately 21,000 route mile rail network, which serves various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, as well as owns and leases approximately 4,400 locomotives. It also serves production and distribution facilities through track connections. CSX Corporation was founded in 1978 and is based in Jacksonville, Florida. Company description from FinViz.com.
Railroads are not a sexy investment like Nvidia or Tesla but the volatility is far less and the risk will allow you to sleep at night.
CSX reported earnings of 51 cents that beat estimates for 43 cents. Revenue of $2.87 billion rose 10% and bear estimates for $2.76 billion.
The company announced a dividend of 20 cents payable June 15th to holders on May 31st. They also approved a $1 billion share buyback program to be completed by Q1-2018. They have repurchased $2 since April 2015 in the prior program.
They guided for 25% earnings growth in 2017 and free cash flow of $1.5 billion.
They are currently in a strong restructuring program that they expect will propel earnings even higher in the months ahead. A new CEO, Hunter Harrison, just took control after a hedge fund forced the old CEO out. Harrison was formerly with Canadian Pacific.
Raymond James sent a note to investors on Friday spelling out their expectations.
Relative to our model the beat came from stronger pricing and positive mix as opex matched our estimates. All-in "same-store" pricing was up 3.9% y/y, accelerating from 2.8% in 4Q16 likely on improving coal yields (particularly exports); however, "intermodal & merchandise" decelerated to 2.5% from 3.2% likely on weak core intermodal pricing. Total carloads rose 3% y/y. While coal volumes advanced only 2%, higher-priced exports drove a 23% y/y gain in RTM/coal carloads and management expects that trend to continue, (though potentially at less magnitude). The volume outlook sounded stable with ~70% of CSXâ€™s book of business expected to "favorable". Given pricing plus cost controls, the OR (ex-$173 million restructuring/severance charge) improved ~400 bp y/y to 69.2%. Importantly, CSX provided 2017 guidance that includes a "mid-60s" OR, 25% EPS growth, and $1.5 billion in FCF, and noted it will unveil a "multi-year strategy" in 2H17.
Earnings July 19th.
CSX closed at a new high on Friday and shares are starting to accelerate higher after the earnings beat on April 20th. The post earnings depression phase never really appeared suggesting investors are already boarding the train.
Closed 5/18/17: Long Jan $55 call @ $3.05, exit $2.63, -.43 loss.
CVX - Chevron - Company Profile
No specific news. Shares still holding at $105.
Original Trade Description: April 16th.
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.
Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.
Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.
Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.
Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.
Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.
Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.
Update 4/22/17: Chevron lost a $260 million tax case in Australia but they said they were considering an appeal. The case has been underway since 2009.
Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly. If we do get a continued decline to strong support at $100 we will double up on the position.
Update 4/30/17: Chevron reported better than expected earnings on Friday of $1.41 per share. Analysts were expecting 86 cents. However, the Chevron number included $600 million gain from an asset sale. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined -14% and capex for 2017 is down about 30%. Net production increased 3% and they guided for a 4-9% growth for the full year. Shares gained $1.23 to add 8.4 points to the Dow.
FB - Facebook - Company Profile
Facebook is joining forces with delivery.com and Slice to let you order and pay for food online and then have it delivered to your door. They have been testing it since October and are expanding the test locations. Grubhub declined on the news.
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.
Update 2/6/17: Facebook reported blowout earnings and spiked to $137 in afterhours. However, they repeated the claim they were going to spend more money for the future and that ad sales dollars were declining. They have more ad space to sell with their 1.86 billion active users and to fill up that space the ads are getting cheaper. This is a long story. This is what investors want to see Facebook do. Spend more money creating more content, more opportunities and monetizing spaces that are not yet bringing in the big bucks. Short-term investors were disappointed and shares dropped back to $131 on Friday. The resistance high is $133.28 and I have no doubt shares will move over that level as the year progresses. Facebook is now a giant and it takes longer for changes to be felt. Once enacted the benefits can be enormous.
Update 2/26/17: Facebook reported it earned $4.83 in Q4 for every user and it ended the quarter with 1.86 billion users. That represented $8.81 billion in revenue and $4.57 billion in profit. That per user rate was up 30% from the year ago quarter. The company added 270 million monthly active users in 2016.
Shares finally broke out to a new high after news broke FB was in advanced talks with Major League Baseball to stream one game per week live. This would be great for FB because they could stream ads along with the game and good for MLB because it could attract fans that would not normally watch a game.
Update 3/5/17: Facebook Video is starting to take shape. The company is asking for "TV-like" original scripted shows lasting up to 30 minutes and appearing weekly. The Wall Street Journal said Facebook is willing to pay a "premium digital rate" in the low to mid six figures per episode. The Facebook CFO David Wehner said they are licensing the shows to seed the ecosystem. Facebook Video will be similar to YouTube. Facebook said they want entertainment shows in sports, science, gaming, whatever but no hard news shows. Shares are holding at the recent highs.
Update 3/26/17: Facebook closed at a new high on Friday after multiple headlines about its advertising progress. The company said it now has more than one million advertisers on Instagram, up from 500,000 six months ago and 200,000 last March. That is a major boom and revenue should be shooting higher. Instagram added 100 million users over the last six months to hit 600 million at the end of December. Of those, 400 million are active daily users. Instagram has more than 8 million businesses with active profiles. Since they understand the power of the portal, they are easy converts into advertisers.
Update 4/16/17: Facebook said its new Snapchat message clone called Stories had risen from 150 million daily users in January to more than 200 million in March. That is more users than Snapchat has in the original application. Snapchat only has 161 million daily active users. With SNAP falling 4% last week some analysts are saying SNAP is already a dead app walking.
Update 5/7/17: Facebook reported earnings of $1.04 compared to estimates for 88 cents. Revenue of $8.032 billion rose 50% and beat estimates for $7.849 billion. Instagram now has more than 500,000 advertisers. Monthly active users rose 17% to 1.94 billion and daily active users rose 18% to 1.28 billion. They ended the quarter with $32 billion in cash.
Facebook said it was launching about two-dozen TV shows in June. The content will be in two forms. Some will be 5-10 min in length and others will be traditional TV format shows. Facebook said it was planning on creating an "ecosystem" of professionally produced video content to augment user-generated videos that currently run on Facebook pages. The idea is to attract viewers so they can sell more ads. Facebook is now interviewing for new positions for film producers, creative producers, film engineers and several other producer type roles. Some will be deeply involved with producing original content and some will "oversee" content generation by others, as in Facebook users, companies and aspiring writers/producers. Facebook is well behind Amazon, YouTube and others in this endeavor but they have plenty of cash and they are not afraid to spend it.
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
FEYE - FireEye - Company Description
The Wannacry outbreak was good news for Fireeye. More than 200,000 individual PCs and 10,000 corporate servers and PCs were hacked. Every time any event like this happens it proves why everyone should have a state of the art intrusion protection system. Fireeye is moving away from a firewall appliance and into a software by subscription service. This will be less expensive for Fireeye and provide long-term monthly cash flow. With more than 20 billion cyber attacks per day as tracked by Cisco Systems, it is only going to get worse as new attack methods are found. Fireeye has a good chance of being acquired as the sector consolidates.
Original Trade Description: February 12th
FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques. Further, it provides cloud-based subscription services; Security-as-a-Service; and incident response, compromise assessments, and related consulting, as well as training and professional, and customer support and maintenance services. Company description from FinViz.com.
FireEye is transitioning from a firewall appliance vendor to a cloud service and as always happens when companies go this route, the revenue slows temporarily. They reported Q4 results of a loss of 3 cents. Analysts were expecting a loss of 16 cents. This compares to a loss of 55 cents in the year ago quarter. Revenue of $184.7 missed estimates for $191.1 million.
For the current quarter, the company guided to earnings of 26 to 28 cents and revenue of $160-$166 million. Analysts were expecting $177.5 million.
The company said several large deals had been expected to close in Q4 and they were pushed into Q1 versus being "lost."
They added 330 net new customers during the quarter. They closed 34 deals for more than $1 million each, including one of their largest SaaS deals ever. They announced a new product called Helix and more than 250 customers have already signed up to get the product as soon as it is released.
Other onetime negatives from the earnings release was news the CFO was leaving to pursue another opportunity and Chairman David Dewalt resigned from the board.
Earnings May 4th.
Cisco (CSCO) recently acquired AppDynamics and that is expected to start a flurry of acquisitions in the cybersecurity space. The space is fragmented today and highly competitive with each player commanding its own niche. The quickest way to expand your product offerings is to acquire somebody else that is a leader in their niche. FireEye is a leader in intrusion detection and tracking. Their recent fall from grace should make them an attractive target with only a $2 billion market cap. The company turned down to acquisition offers in 2016 so we know there are tire kickers making the rounds.
Regardless of whether an acquisition cycle has begun, the stock drop to support is a buying opportunity.
Update 2/26/17: News broke that Symantec had tried to buy FEYE for $16 a share about 6 months ago but they could not agree on price. FEYE is more than likely still an acquisition target because of their focus, capabilities and low market cap. We have plenty of time. Cyber threats are increasing daily and the company warned they were seeing increasing activity from Iran and Russia both against the U.S. and Europe.
Update 3/13/17: Shares saw a minor boost on Friday after FireEye said it had discovered a phishing campaign targeting the SEC and 10 other organizations in financial services and other sectors. The disclosure by WikiLeaks of more than 7,000 pages of secret CIA documents on hacking electronic phones, TVs and appliances, also boosted the security sector.
Update 3/26/17: This was a great week for FireEye. They were upgraded by Bank of America from neutral to buy and by Goldman from sell to buy. This came after the company identified Russian hacking attempts at banks and government installations. The Goldman upgrade from sell to buy was especially important with the analyst saying the stock had bottomed and fundamentals were improving.
Update 4/22/17: Fireeye notified South Korea that Chinese hackers were trying to hack into their missile defense systems, including the new THAAD anti-missile system from Lockheed Martin. Fireeye said the hacking was being done by two groups supported by the Chinese military. One team was dubbed Tonto Team and the other as APT10 or Stone Panda from previous hacking of other agencies.
Update 5/7/17: After dipping almost to $10 in March, the stock has rebounded nearly 50% to close just under $15 on Friday. The company reported a loss of 9 cents compared to analyst expectations for a loss of 26 cents. Fireeye lost 47 cents in the year ago quarter. Revenue of $173.7 million beat estimates for $164 million. They guided for revenue of $155-$175 million in Q2 and $745-$775 million for the full year.
Long Jan $13 call @ $1.90, See portfolio graphic for stop loss.
ITW - Illinois Tool Works - Company Description
No specific news. Shares crashed with the market to stop us out.
Original Trade Description: February 19th.
Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces components and fasteners for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food equipment and related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.
Company description from FinViz.com.
ITW reported earnings of $1.39 compared to estimates for $1.37. Revenue of $3.4 billion matched estimates. Earnings were impacted by a 2% hit from the strong dollar.
The company reaffirmed their 2017 guidance for organic revenue growth of up to 3.5% and revenue from $13.8 to $14.1 billion. Operating margin is expected to rise 100 basis points to 23.5%. Free cash flow is expected to be $2 billion and $1 billion will be used in 2017 for stock buybacks. Q1 earnings guidance was $1.39 to $1.49. They ended the quarter with $2.472 billion in cash.
Earnings April 26th.
The commentary was positive and stock spiked sharply after earnings. Over the next four weeks traders took profits and shares traded sideways. On the 13th they declared a quarterly dividend of 65 cents payable April 11th to holders on March 31st. Shares ticked higher and began to make new highs.
On Feb 17th Goldman Sachs downgraded them from neutral to sell. Shares dropped nearly $3 at the open before rebounding back to close positive at another new high.
I believe the economy is accelerating. The Philly Fed Manufacturing Survey last week was the highest since 1984 after three months of rapid growth. The new president is doing everything he can to spur growth in the USA and this is going to be contagious throughout America. Tool demand is going to rise.
Because ITW moved sideways for several weeks before closing at a new high on Friday, the LEAPS premiums are relatively low compared to out of sight premiums on some of the big movers in this rally. When the rally does begin to fade, those fast movers will fall the hardest and companies like ITW should escape much of the mayhem.
Update 4/30/17: ITW reported earnings of $1.54 compared to estimates for $1.45. Revenue of $3.47 billion also beat estimates for $3.40 billion. The company raised guidance for 2017 from $6.00-$6.20 to $6.20-$6.40. They increased revenue guidance from a midpoint of +2.5% to +3%.
Update 5/7/17: ITW announced a quarterly dividend of 65 cents payable on July 12th to holders on June 30th.
Closed 5/17/17: Long Jan $135 call @ $6.40, exit $8.00, +$1.60 gain.
JPM - JP Morgan Chase - Company Description
No specific news. Shares dipped to $83.36 on Thursday as the banking sector was sold hard in the market decline. That missed our secondary entry point of $83.
The company declared a quarterly dividend of 50 cents payable July 31st to holders on July 6th.
I am recommending as double up on our position if the stock hits $83. With two more rate hikes expected this year, that is a windfall for the banks.
With JPM trade at $83, Buy Jan $90 call, currently $3.20.
Original Trade Description: January 29th.
JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds. The Commercial Banking segment offers financial solutions, including lending, treasury, investment banking, and asset management to corporations, municipalities, financial institutions, and nonprofit entities, as well as financing to real estate investors and owners. The Asset Management segment provides investment and wealth management services across various asset classes, such as equities, fixed income, alternatives, and money market funds; multi-asset investment management services; retirement services; and brokerage and banking services comprising trusts, estates, loans, mortgages, and deposits. JPMorgan Chase & Co. was founded in 1799 and is headquartered in New York, New York. Company description from FinViz.com.
I seriously doubt there are any readers who are not familiar with JP Morgan. The 218 year old bank has been around for many generations. They are widely seen as the strongest of the money center banks and they are only going to get stronger. The Fed is likely to raise rates three times in 2017 and every one of those hikes means free money to JPM and the other big banks.
JPM has put all the subprime mortgage suits and probes behind them and paid out billions to settle those problems. The Trump administration is expected to reduce regulation on banks and that will reduce expenses and open up new business opportunities. CEO Jamie Dimon was not a Trump fan before the election. Now he routinely speaks positive about the president and his expectations for the future of the economy.
JPM has already reported stellar earnings and lived through a strong bout of post earnings depression that knocked the stock back to $83. The rebound has been strong and it should breakout to a new nigh soon, market permitting.
Update 2/6/17: JPM said it resolved the final litigation over the Lehman collapse and will pay $797.5 million to end all litigation over the Lehman bankruptcy. The suit by Lehman claimed JPM had used its position as Lehman's largest clearing bank to siphon critical liquidity in the last few days before Lehman filed bankruptcy. JPM was in a position to see the collapse from the inside and sucked out billions of dollars from the cash flow in order to protect themselves from the collapse. Basically they raised minimum balance and margin requirements to reduce risk but that put a major strain on an already imploding Lehman.
Earnings April 14th.
Options are relatively cheap for LEAPS and we can give the stock plenty of leeway before stopping out. If you are afraid of future events you can add a March $82.50 put for 85 cents.
Long Jan 2018 $90 Call @ $5.37, see portfolio graphic for stop loss.
LULU - Lululemon - Company Description
LULU spiked the prior week on rumors they were in talks with private equity firms about taking the company private. Those rumors faded and the horrible retail earnings cycle knocked them below recent support to stop us out at $50.85.
Original Trade Description: April 2nd.
lululemon athletica inc., an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. It operates through two segments, Company-Operated Stores and Direct To Consumer. The company offers pants, shorts, tops, and jackets for healthy lifestyle and athletic activities, such as yoga and running; other sweaty pursuits; and athletic wear for female youth. It also provides fitness-related accessories, including bags, socks, underwear, yoga mats, and water bottles. The company sells its products through a chain of company-operated stores; outlets and warehouse sales; a network of wholesale accounts, such as yoga studios, health clubs, and fitness centers; license and supply arrangements; and showrooms, as well as directly to consumer through lululemon.com and ivivva.com e-commerce sites. As of January 29, 2017, it operated 406 company-operated stores under the lululemon and ivivva brands in the United States, Canada, Australia, the United Kingdom, New Zealand, China, Hong Kong, Singapore, South Korea, Germany, Puerto Rico, and Switzerland. Company description from FinViz.com.
LULU was crushed after earnings in a textbook knee jerk reaction. The company reported earnings of $1.00 that rose 17.6% but missed estimates for $1.01. Revenue of $789.9 million rose 12% and beat estimates for $785 million. Same store sales rose 6% while online comps rose 12% to $164.3 million. Clearly there is nothing wrong with those numbers.
The major crash in the stock came on weak guidance for Q1. They noted that January sales had been weak but the CEO said they immediately changed everything from inventory, colors and marketing and they saw "drastic changes" in sales almost immediately. The company guided to revenue in the $510-$515 million range with a 50 basis point improvement in gross margins. The stinky number was the earnings guidance at 25-27 cents and analysts were expecting 39 cents. Year over year, that guidance is only 3 cents below Q1-2016 levels.
For the full year they see revenue of $2.55-$2.60 billion and low single digit sales comps. LULU is debt free and very profitable even if they have a slightly slower Q1.
Mizuho Securities said it was time to make lemonade out of Lululemon. The analyst said forecasting low single digit Q1 comps compared to 5% in Q1-2016. The difference is not material given their revenue increases over the last 12 months. There are signs of a sharp increase in sales after they launched the "fast and free" collection in January. Long-term growth remains intact.
After the earnings five brokers cut their rating to neutral. Not to sell but to neutral so they can see how the quarter plays out. Telsey Advisory Group, a noted retail house, reiterated their outperform rating but cut the price target from $92 to $78. Shares closed Friday at $52.
This is a very profitable retailer growing revenue at 12% and earnings at 18% when nearly every other retailer is closing stores and losing money.
Earnings June 28th.
I am recommending we buy the dip. There may be some additional weakness in the short term but the drop stopped right on long-term support.
Update 4/30/17: Shares declined slightly for the week after Lululemon's founder Chip Wilson said they were closing all the US, UK and Australian stores of his new chain, Kit and Ace. They sell the same kind of athleisure clothes as LULU and Wilson acknowledged the bricks and mortar retail marketplace is changing. They are closing 51 stores leaving only the 9 they operate in Canada. He said the company was shifting primarily to online sales.
While this should be good for LULU because competition will decline, it was actually negative because it suggested the sales of athleisure were collapsing. Multiple analysts have said over the last several months that the athleisure fad was fading.
Just a week ago Barron's had an article saying LULU was close to a comeback. The analyst said they are introducing a new line of innovative sports bras. They are also using a new lightweight fabric that is boosting sales of leggings. He said the new advertising campaign showed live action physical activity rather than a model in a flat photo. Lastly he said the company had engaged a "millennial savvy ad agency to create a new global brand campaign with a heavy emphasis on social media.
Closed 5/16/17: Long Jan $55 call @ $5.25, exit $4.30, -.95 loss.
NVDA - Nvidia - Company Profile
Nvidia (NVDA) shook off the market crash and hit another intraday high on Friday after a Bernstein note. The analyst initiated coverage of Nvidia with an outperform saying the company has barely tapped into some massive growth markets. "Our analysis suggests their datacenter total addressable market (TAM) is likely somewhere between 'big' and 'huge,' driven by the mainstreaming of AI and the rise of accelerated computing; we forecast 63% annual growth through CY2019, reaching $3.6B in revenue." The analyst said Nvidia's multiyear head start in investing in artificial intelligence and deep learning puts the company well ahead of competitors in those two high-growth fields.
In addition, their automotive business is just getting started and could eventually be a multibillion-dollar business. Also, double-digit gaming growth should be sustainable in the long term. The analyst said even after their recent gains the stock remains reasonably valued compared to other high growth tech stocks and the market may not be fully appreciating Nvidia's long-term value. Currently the stock trades a 9 times sales and a PE of 40. Considering the explosive growth and technological lead on competitors that is probably conservative. Bernstein has a $165 price target.
UBS said Nvidia's new Volta chip has a 20% performance advantage over the yet to be released Vega chip from AMD and requires less power with better efficiency. They expect gross margin upside as sales of the Volta and Pascal chips increase. UBS has a $145 price target. Canaccord Genuity upgraded their price target to $155.
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.
Update 2/6/17: Nvidia announced a new class of supercomputing workstations with breakthrough design features. The new Quadro products provide more than twice the performance of their prior league leading technology and offer ultra-fast memory to further enhance the speed. The new GP100 GPUs provide more than 20 TFLOPS of 16-bit floating point precision computing. In English that means they are faster than the human brain can even comprehend. The Quadro GPUs can render photorealistic images more than 18 times faster than a CPU.
Update 2/12/17: Nvidia reported earnings of 99 cents that rose +183% from the year ago quarter and compared to estimates for 83 cents. Revenue of $2.17 billion rose 55% and beat estimates for $2.11 billion. Shares declined slightly after the company guided for Q1 revenue of $1.9 billion plus or minus 2% with gross margins of 59.7% give or take 50 basis points.
Update 2/17/17: Nvidia said its processors are going to be used to power Japan's fastest super computer named TSUBAME3.0. The new computer will be more than twice as fast as the prior super computer named TSUBAME2.5. The Tokyo Institute of Technology said the new computer would be fast enough to solve some of the world's once unsolvable problems.
Update 2/26/17: Two downgrades knocked the heck out of Nvidia last week. Romit Shah cut it from buy to sell with a price target of $90. BMO Capital cut the rating from market perform to underperform and an $80 price target. Shares fell about $15 as of Friday's open at $95. That is down from $120 two weeks ago.
Update 3/13/17: The Nvidia powered supercomputer in Japan is scheduled to go online in April and will be the most powerful in the world. The computer will use 24 Nvidia DGX-1 AI systems. This will be the largest installation of DGX-1 systems to date. Each DGX-1 combines the power of eight Nvidia Tesla P100 GPUs, each capable of delivering the performance of 250 normal servers. Each P100 can process 10 trillion instructions per second. That is a combined total of 192 P-100s equivalent to 48,000 regular servers with Intel processors.
I am recommending we add to our Nvidia position with a new strike while the stock is depressed. Nvidia topped at $120 in the last cycle and I have the utmost confidence it will breakout to new highs once the current consolidation is completed. I recommended we buy Jan $120 LEAP calls to add to our current position.
Update 3/26/17: Nvidia said TenCent had selected Nvidia's high power GPUs to power its cloud offerings to clients that need lots of processing power to run AI and machine learning in their clouds. TenCent said revenues rose 48% in 2016 to $21.9 billion. Angel List said more than 1,700 AI startups had been funded by 2,300 angel investors and almost all use cloud based Nvidia GPUs for their products and services. Nvidia can now claim that every significant cloud service provider is a customer and supplier of Nvidia GPUs as a service, including Amazon, Google, IBM SoftLayer, Microsoft, Alibaba Cloud and Nimbix.
Update 4/9/17: Nvidia was crushed on Tuesday after an obscure analyst from Pacific Crest cut the stock from sector weight to underweight saying PC gaming was slowing and data center sales were under pressure. Neither of those claims are true. Bank of America said consider the source (Michael McConnell) before paying attention to the downgrade. BAC said prior ratings calls did not work out for the analyst on several occasions. Shares fell from $108 to $100 on the downgrade but that was support and the Nvidia faithful rushed to buy more at a bargain price.
Later in the week Nvidia unveiled a new, bigger, faster, $1,200 graphics card and bragged about the high demand.
Update 4/22/17: Boutique research firm MScience said there was no weakness in the GPU market for Nvidia as another research firm had said several weeks ago. On the contrary, MScience said sales and pricing were strong while AMD was seeing some softness. Also, Nvidia's new graphics card, the GTX 1080 Ti, which has only been on the market for 20 days are selling for more than list as gamers bid up the prices in a market where the cards are almost unavailable. There are a few listed on Ebay for as much as $900. Nvidia has a new and even faster card launching in Q3. Nvidia just partnered with Bosch to build self-driving car equipment off the DRIVE PX AI car computer using Nvidia chips.
Update 5/30/17: In February Exxon announced a record time to process a one billion cell reservoir simulation program using 22,000 server nodes and 716,000 CPU cores. The cluster of computers occupied the space of half a football field and required a massive amount of power.
Last week IBM and Stone Ridge Technology smashed that record in only 92 minutes for one tenth the power and 1/100th of the space in 1/10th the execution time. The technology used was only 30 computers with 120 Nvidia P100 GPUs installed with 4 in each computer. The space required was about the equivalent of half a ping-pong table.
I keep telling everyone that Nvidia is the Intel of the future and their technology is light years ahead of conventional computing.
Update 5/14/17: Nvidia reported earnings of 79 cents that rose 126% and beat estimates for 66 cents. Revenue of $1.94 billion rose 48% and beat estimates for $1.91 billion. Datacenter revenues rose 186% and now 20% of total revenue. They also raised guidance well above estimates and said they would pay $1.25 billion in dividends this year.
The day after earnings they held their tech conference. The CEO held up the first Volta processor and said they have spent $3 billion developing it. "This is the first one. If you want to buy it the price is $3 billion."
During the quarter, Tesla P100 and P40 GPUs were added to the Microsoft Azure cloud. Tesla accelerators for datacenter AI were added to the Google Cloud, Tencent Cloud, IBM Cloud and Baidu Cloud. They announced a new project with facebook to create Caffe2 deep learning framework and Big Basin servers with Tesla P100 GPUs. They announced plans to train 100,000 developers this year, a 10X increase over 2016.
I have said it before and I will say it again, Tesla is the bleeding edge of technology development and they are running away from Intel, AMD and Qualcomm. Nobody is even close.
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.
Long Jan $120 LEAP Call @ $6.75, see portfolio graphic for stop loss.
QCOM - Qualcomm Inc - Company Description
Qualcomm demonstrated wireless charging at a test track in Versailles France. Cars were able to maintain a charge at highway speeds because of pads buried in the road. They are already able to charge cars wirelessly by parking them over a pad in the garage.
European regulators are scheduled to rule on the $38 billion takeover of NXPI by June 9th. Qualcomm said they priced $11 billion in senior unsecured notes due from 2019 through 2047.
Original Trade Description: March 12th.
QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.
Everybody knows Qualcomm because their communication chips are used in almost every major cellphone. They are announcing a new product and it could be a big winner and really upset the leadership in the chip sector.
Qualcomm has teamed up with Microsoft to develop processor chips to power cloud servers. Since Intel has a 98% lock on that sector in the standard processor world, any material breakthrough for Microsoft and Qualcomm would be earth shattering.
Qualcomm is using a redeveloped ARM chip called Centriq created on a ground breaking 10-nonometer manufacturing process. Even Intel has not yet perfected their 10-nanometer manufacturing. This puts Qualcomm one step ahead.
Partnering with Microsoft, the largest operating system provider on the planet, to produce a new server chip utilizing Windows Server technology, is also a big development. Microsoft has deep pockets and a strong desire to break the "Wintel" monopoly that has been in place for decades.
Intel's processors are expensive. Adding a Windows operating system makes those servers even more expensive. Microsoft loses market share to the Linux clones every year because those operating systems are free and that lowers the cost of ownership.
If Microsoft and Qualcomm can successfully market a server and OS that is cheaper than the Wintel versions, then both companies are winners.
The first server was demonstrated on Wednesday in Santa Clara so these companies are well down the development path. Qualcomm said it had technicians onsite at Microsoft to collaboratively optimize the Windows Server operating system for the Centriq 2400 processors. Qualcomm has also offered to provide an "open specification" for a Centriq server to the Open Compute community in an effort to rush to standardization that effectively lowers costs for everyone.
It will be months before these systems are commercially available but the headlines are sure to flow in the weeks ahead now that a working server has been demonstrated.
Qualcomm has some problems. They have roughly $4 billion in outstanding suits and fines based on a broad interpretation of their licensing strategy. Some will be paid and others negotiated and paid. If Qualcomm can keep the Centriq headlines flowing, the licensing problems will fade into the background.
Shares dipped to $53 on the licensing issues but the headlines on the Centriq processor caused a $2 spike last week.
Update 3/26/17: Qualcomm announced a new platform for entry level smartphones that do not depend on the fastest speed possible. The 205 Mobile Platform is for low dollar phones and offers all the basic functions including 4G LTE, RF front end, discrete WiFi, power management, audio codec, speaker amplifier and software. The comprehensive mobile solution is designed to power phones expanding into markets like India and emerging markets in Asia where incomes are very low.
Update 4/9/17: The company filed a motion with a federal judge to dismiss the lawsuit brought by the FTC claiming Qualcomm was using monopoly power and illegal marketing methods to force phone companies to use its devices. It is not likely to be dismissed. This is just one-step in a very long process that will cost millions in attorneys fees.
Qualcomm teased a potential new factoid on 5G phones. The company said all 5G phones should maintain an open connection to 4G-LTE in case the 5G connection failed. There is no reason for them to say that unless they already have plans to offer that technology.
Update 4/16/17: Qualcomm filed a counter suit against Apple seeking unspecified damages for nonpayment of license fees and conspiring with other entities to harm Qualcomm's licensing revenues. Blackberry was awarded $815 million in an arbitration case against Qualcomm on royalties it overpaid between 2010-2015. The news tanked QCOM shares with a drop from $56.50 to $52.75. The support break may have killed this position if there is any other bad news in the weeks ahead.
Update 4/21/17: Qualcomm said phone demand for the Snapdragon 835 processor, is exceeding supply of the chips. The company implied they were unable to get enough 10nm wafers to meet customer demand for the processors. They expect supply and demand to begin to equalize in Q4. Note the word begin. Obviously prices are not going down and margins should be strong. Samsung has been having yield issues with the 10nm platform. Since Samsung is now manufacturing the chips for Qualcomm, it suggests they will get first right of refusal on all the chips they produce. This is the chip that is in the new Samsung S8 phone.
Update 4/30/17: Qualcomm said Apple has stopped making billions of dollars in royalty payments as their suits and counter suits heat up. Qualcomm was forced to warn for Q1. Apple said it was withholding all royalty payments to contract manufacturers, including sales for the March quarter, and plans on continuing to withhold payments "until the dispute with Qualcomm is resolved." Qualcomm said this was a $500 million hit to quarterly guidance and could get worse. The company cut earnings guidance from $.90 to $1.15 to $.75 to $.85.
Update 5/7/17: Qualcomm said it was going to appeal to the International Trade Commission (ITC) to try and block Apple from importing any iPhones into the USA after Apple stopped paying its license fees.
Qualcomm extended its tender offer for NXP Semiconductor (NXPI) until May 31st. This is the second one-month extension and it appears they lost some shares. When they extended the offer in early April until May 2nd they disclosed that 54,811,28 shares had been tendered. In the press release for the May 31st extension they only claimed 50,300,920 shares had been tendered. They lost 4 million. The 50 million represents 14.9% of the company so they have a long way to go to actually complete a deal. I am sure Qualcomm's recent legal trouble is clouding the issue. Qualcomm has received U.S. approval but is waiting on approvals from Russia, China and the EU. Since the merger is not expected to close until the end of 2017, there is no rush to get the required 80% of shares tendered. The tender will be extended again.
NXPI shares are rising and closed at $106.58 on Friday with the cash offer from Qualcomm at $110. It would appear that some investors are expecting Qualcomm to be forced to raise the offer to get the required shares tendered.
I would close the position except the sudden drop in QCOM shares has reduced our premium to 87 cents. It is not worth closing because that 87 cents buys us an option through the January expiration that QCOM and APPL will come to an agreement.
I am actually recommending we add to this position at the current bargain price. Qualcomm could easily rebound $15-$20 by year-end if they resolve the battle with Apple.
Update 5/14/17: Qualcomm announced two new mobile phone processors, the Snapdragon 660 and 630 with faster speeds, better audio, video, cameras, faster LTE, etc.
Earnings July 19th.
Long Jan $65 call @ $2.79, see portfolio graphic for stop loss.
Long Jan $65 call @ 84 cents.
Adjusted cost = $1.81.
SHOP - Shopify Inc - Company Description
I tightened the stop last week because of the spike from the takeover rumors. The drop in the market crash stopped us out with a whopping $14.30 gain. If we get any further market declines, I will add SHOP back as a new play with a different strike. I expect them to be acquired.
Original Trade Description: March 5th.
Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in Canada, the United States, the United Kingdom, Australia, and internationally. Its platform provides merchants with a single view of their business and customers in various sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces; and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting. Company description from FinViz.com.
Shopify is a cloud based retail environment for everyone. If you have a product you do not need to build a large complicated website, host servers and hire a bunch of programmers. You subscribe to Shopify and immediately begin uploading your inventory. Their front end handles all the sales for you and collects the payments. Their backend is a complete accounting package to manage inventory, sales and reporting. They built the cloud based framework and now anyone can have an online store. The service interfaces with Facebook and Amazon so people on Amazon can buy from your store and not even know your store exists. More than 377,500 companies now have storefronts on Shopify with 133,000 added in 2016.
They reported an 85% rise in revenue for Q4. They reported adjusted earnings of a penny that beat expectations for a 2-cent loss. Revenue of $130.4 million beat estimates for $121.6 million. They guided for a 66% rise in revenue for the current quarter to $120-$122 million.
Update 4/16/17: Shares rose again as rumors circulated that the company may be a takeover target for Ebay. Reportedly Ebay approached SHOP with a bid but neither company will comment on the rumor.
Update 4/23/17: Shopify announced a new chip/swipe card reader for small to medium sized businesses doing personal sales. This puts Shopify in the same group as Square. Shares spiked to a new high.
Update 5/7/17: Shopify blew away earnings estimates and soared to a new high. The company said revenue rose 75% tp $127.4 million and beating estimates for $121.6 million. They reported an adjusted loss of 4 cents compares to estimates for a 10-cent loss. They raised guidance for the full year from $580-$600 million to $615-$630 million.
Shares were also rising on analyst chatter that Amazon or Ebay could be an acquirer. Neither has the merchant services capabilities Shopify just announced. Their revenue from merchant services rose nearly 100% to $65.3 million. Canaccord raised their price target from $68 to $90.
Earnings May 17th.
Shares spiked from $56 to $64 on earnings but then faded over the last two weeks to $60. Shares are starting to tick higher again.
SHOP does not have LEAPS. I am using the longest strike, which is October. The stock hit $64 two weeks ago and the drop back to $60 will allow us to use the $65 strike call.
Long Oct $65 call @ $6.00, see portfolio graphic for stop loss.
SLCA - U.S. Silica Holdings - Company Description
No specific news. Shares should begin to rise with the higher oil prices.
Original Trade Description: March 19th
U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.
Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.
Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.
Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.
U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.
They were crushed again on the week of Feb 6th when oil prices fell 7% in just two days to the lows for the year.
Oil prices are down on record inventory levels. Inventories at 528.4 million barrels are the highest since record were started. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.
Earnings May 24th.
We know oil prices are going to rise when refiners come back online and the summer. We also know Saudi Arabia needs high oil prices when they try to IPO Saudi Aramco later this year. Rig activations are exploding. For the week of March 17th, there were 21 new rigs. We have almost double the number of rigs operating today than we did last May.
Update 3/26/17: Halliburton said they were hiring 2,000 in Texas in Q1 in an attempt to catch up with the surging oil field activity. More importantly, they said they were getting killed by sand prices because they did not have enough long term supply contracts. They said they could lose $50 million because prices were rising so rapidly. Halliburton story
In a related article analyst firm Tudor Pickering Holt said sand use in individual wells was exploding. In 2013 drillers used an average of 3 million pounds per well. In 2014 that rose to 8 million pounds as laterals grew longer and fracking techniques improved. Today that is expected to climb to 11 million pounds per well in Q2 and some "leading edge" companies were experimenting with 15-20 million pounds. Gas wells in the Haynesville are now experimenting with 30 to 50 million pounds per well. The article said moving this much sand was going to be a logistical nightmare. That is a plus for SLCA because they have the "Sand Box" container that is moved by truck or train right to the well head where they are stacked to provide as much sand as needed. Sand Usage
Premiums are high on SLCA so I am recommending a spread.
Update 4/30/17: Silica reported earnings of 9 cents compares to estimates for 6 cents. Revenue of $244.8 million easily beat estimates for $227.2 million. Guidance was off the charts with very strong demand for fracking sand, anticipated shortages and soaring prices.
Update 5/7/17: Silica shares fell all the way to $34.39 on Thursday as oil prices continued to implode. While I understand why it is still hard to believe investors are bailing after such strong guidance in the earnings call. Full transcript
On our fourth quarter call, we outlined the steps we're taking to meet this growing demand through a combination of greenfield sites and brownfield expansions with a likelihood of some M&A in the mix as well.
Our comments last quarter and other industry capacity expansion announcements have created questions for some investors over the potential future supply and demand balance of sand proppants and the implications for pricing and other industry dynamics. Let me take a few minutes this morning to share some thoughts on how we see this unfolding and why we believe that the sand proppant market fundamentals should say strong for the foreseeable future.
We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons.
Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry. Second, oil sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs. And third, even all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.
There are several implications of this on a national level. First, our markets are expected to stay very tight. Most of the major sand suppliers, including U.S. Silica, are running flat out today. Demand is expected to continue growing faster than supply for the foreseeable future and as such, we expect to continue pricing recovery and improving margins in our sand sales. Second, customers do come in to us to lock in sand supply for the next 3 to 5 years. We're using these discussions to form deeper relationships with the companies that we expect to be the long-term winners. We're also working on the next generation of agreements that can better weather the cycle, both for our customers and for U.S. Silica. And third, rapid growth in proppant demand represents a massive opportunity for Sandbox. Keep in mind that this new local sand phenomenon is not just an opportunity for U.S. Silica to substantially increase sand sales. All this new capacity has to get to the wellhead and we believe that Sandbox is the ideal delivery solution with an unmatched combination of flexibility, efficiency and scalability.
Now let's talk more about the Permian, specifically. It remains very hard to add capacity there. Despite all the hoopla, there are numerous challenges to bringing on new capacity locally in the Permian, including permitting, water, infrastructure, trucking and equipment availability, just to name a few.
You not only need to find a good site, you need a lot of cash and the ability to sign long-term contracts with reliable customers, which leads me to my final point. When it comes to local sand, it's definitely not a field of dreams. We believe the market for local Permian sand will have limitations and that it will only be a subset of E&Ps who choose to use these products. And once those companies or their service companies sign long-term supply agreements, it's highly unlikely that additional capacity would be needed or built. Moreover, Permian local sands might not be right for some E&Ps because of their well designs and geology within their acreage.
Long Jan $50 LEAP Call @ $6.93, no initial stop loss.
Position 5/8/17: Long Jan $50 LEAP Call @ $2.30.
Adjusted cost in the position: $4.61.
Closed 5/8/17: Short Jan $65 LEAP Call @ $2.58, exit .80, +$1.78 gain.
UNP - Union Pacific - Company Description
All the prior spreads representing $40 million in option premiums, are still in force. Shares hit a 2-year high the prior week on good earnings.
Shares crashed with the market but support at $106 held.
Original Trade Description: February 26th.
Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates railroads in the United States. It offers transportation services for agricultural products, including grains, commodities produced from grains, and food and beverage products; automotive products, such as finished vehicles and automotive parts; and chemicals comprising industrial chemicals, plastics, fertilizers, petroleum and liquid petroleum gases, crude oil, and soda ash. The company also provides transportation services for coal, petroleum coke, and biomass; industrial products consisting of construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products; and intermodal import and export container traffic. Its rail network includes 32,070 route miles linking the Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways. Union Pacific Corporation was founded in 1862 and is headquartered in Omaha, Nebraska. Company description from FinViz.com.
On February 17th, somebody bought 70,000 of the Union Pacific (UNP) January $130 calls for $2.57 each. I made a note of it but never got back to do the research. When I was reviewing my notes this weekend I discovered that somebody had bought 140,000 of those calls and sold 140,000 of the January $150 calls at 50 cents. They put on 70,000 contracts on January 30th and another 70,000 contracts on February 17th. This is important because they spent just over $29 million in premium to put on this January spread with UNP at $108. I am betting that you have to be pretty sure of a trade to invest $29 million for a spread that is roughly $25 out of the money.
Somebody knows something. After Warren Buffett bought BNSF Railway, maybe somebody else is looking to grow by acquisition. I have no clue what is going on but you do not bet $29 million just because you are feeling lucky.
The railroad reported earnings on January 19th of $1.39 that beat estimates for $1.33. Revenues of $5.168 million beat estimates for $5.143 billion. The company said it was optimist for 2017 as coal shipments began to increase again and the energy sector was recovering. That means additional frac sand shipments and more drill pipe shipped to the shale fields. Coal shipments were down -25% in 2016 and -6% in Q4.
They guided for low single digit growth in freight volumes compared to volume declines in recent quarters. The CEO said various macro-economic indicators that drive the core business were also improving.
UNP is the only railroad serving all six major gateways to Mexico and they connect to Canada's rail system. Their routes cover 20 states.
They bought back $940 million in shares in Q4.
Earnings April 20th.
Shares of UNP have been in a choppy uptrend for the last year and made a new high in January. Shares fell last week when the Transports crashed for a single day. This will give us a buying opportunity for a long-term hold. I am going to follow the big money trade described above but I am not going to add the short call. At 50 cents, it is not worth it and I am going to pick a lower strike just in case that investor was overly optimistic.
Update 4/9/17: This week a new spread appeared with 50,000 contracts each of the Jan 2019 $140 calls @ $3.50 and $160 calls at $1.25. Even as a spread that is another $11 million in premium. This has gone past the point of "somebody knows something" to "somebody is making a run at UNP."
Last week: The 140,000 Jan 2018 $130 LEAP contracts are still in play. However, another 140,000 Jan calls appeared at $150 that could mean the investor saw his investment shrinking and turned it into a spread to reduce the amount of premium at risk.
UNP only has 811 million shares outstanding. Assuming those two positions are the same entity, they have a future claim on 19 million shares. Assuming somebody like Carl Icahn or Warren Buffett was going to make a play on UNP, they could benefit from their play by launching these positions. Let's say they made an offer for $150. The stock would immediately spike to somewhere in the $145 range. The $130 calls would spike to roughly $20 ($280 million) and the 2019 $140 calls would be worth about $18 ($90 million). Let's call it $370 million. They could cash out and even if the offer was never accepted, they have a very nice payday.
For whatever the reason, somebody has $40 million invested in LEAPS calls on UNP. I really hope they are right.
Update 4/30/17: The company reported earnings of $1.32 that rose 14% and beat estimates for $1.23. Revenues of $5.132 billion rose 6% and beat estimates for $4.997 billion. The railroad bought back 7.5 million shares for $802 million.
Long Jan $120 call @ $4.95, no initial stop loss.
WDC - Western Digital - Company Description
The battle for the Toshiba memory business is not going well. Broadcom is the current high bidder and Toshiba has warned WDC not to impede the progress of the sale. WDC has filed an arbitration case trying to stop the sale. Analysts are worried WDC will be forced to pay too much and possibly do a monster secondary. Shares quit rising and the market crash knocked them back to $84 to stop us out of the position for a 24 cent loss.
Original Trade Description: April 9th.
Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Additionally, the company licenses its technologies. The company sells its products under the HGST, SanDisk, and WD brands to original equipment manufacturers (OEMs), distributors, resellers, cloud infrastructure players, and retailers. It serves storage subsystem suppliers, OEMs, Internet and social media infrastructure players, and PC and Mac OEMs. Company description from FinViz.com.
Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the March 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.
Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.
They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.
At the end of March shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future. However, on April 7th, Toshiba said it had reduced the active bidder list and WDC was not mentioned. At the beginning of the week Amazon, Apple, Google, Broadcom, Foxconn and Hynix were still in the list but Apple was reported to have dropped out by the end of the week. The Japanese government is expected to reject Foxconn and Hynix on national security concerns.
For Apple, Amazon or Google to be the winner, it would guarantee a cheaper supply of memory for their devices. Bids were said to be in the $18 billion range. Since those three companies have a bottomless checkbook, WDC may have exited the bidding rather than see it skyrocket higher.
Conversely, Silverlake/Broadcom reportedly have bid the highest and Silverlake has a strong relationship with Seagate. If Silverlake was to win and partner with Seagate, they could compete directly with WDC. That is a strong incentive for WDC to bid higher to maintain control of their market share.
WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.
They also announced a new pocket sized SSD drive for portable data so developers and content creators can take their data with them wherever they travel. These are the fastest portable drives with speeds of up to 515 Mbps and come in 256gb, 512gb and 1TB capacities starting at $99. This is an amazing accomplishment and these will be hot products.
WDC is on a roll. They have the right products at the right time and profits are soaring. Because of the memory shortage over the last several months and the 20+% rise in prices, their Q1 earnings could be strong.
Update 4/16/17: Western Digital says it has the right to veto any chip deal Toshiba accepts because the chip business joint venture is half owned by WDC. We learned on Friday that Apple may be making a run at the business in a partnership with Foxcomm where Apple would own 20% and Foxconn 30% and Toshiba would retain 50%. It would be better for WDC to end of the winner but there is a lot of money in play.
Update 4/30/17: Western Digital (WDC) reported earnings of $2.39 that beat estimates for $2.16. Revenue of $4.65 billion beat estimates for $4.59 billion. The drive maker guided for revenue of $4.8 billion in Q2 and earnings in the $2.55-$2.66 range. Analysts were expecting $4.6 billion and $2.14. They generated $1 billion in free cash flow and ended the quarter with $5.8 billion in cash. They are kicking Seagate's butt in the drive market and since they bought SanDisk last year they now have another business line and they are announcing new products every couple of weeks.
Just last week they announced a new 12 TB Ultrastar enterprise hard drive, filled with helium, which is the largest enterprise drive on the market for random activity. Helium is 1/7th the density of air, which allows the read/write heads to "fly" closer to the recording surface, allows for thinner disks and the addition of two extra platters. They have shipped more than 15 million of these in the smaller sizes. This is a must own stock for long-term investors but look for a dip.
Update 5/7/27: Western Digital declared a quarterly dividend of 50 cents payable July 17th to holders on June 30th.
Update 5/14/17: The battle for the Toshiba memory business just went nuclear. WDC filed in the ICC International Court of Arbitration to stop the sale of the memory business and unwind the illegal spinoff of that unit. Under the terms of their 17-year joint venture both parties have to approve any asset sale and any potential buyer. Under the agreement WDC can block any sale at any time. Toshiba tried to circumvent the agreement by spinning off the chip unit from the parent company and claim the JV did not apply to the new company. The arbitration will be held in San Francisco, which is spelled out in the JV agreement.
The arbitration could take a long time and Toshiba needs the money now. They are desperate. This could force Toshiba to sell to WDC for a smaller amount just to stop the cash drain and end the standoff. This would be a major win for WDC and give them a significant advantage in the market.
Earnings July 27th.
Closed 5/17/17: Long Jan $90 call @ $8.13, exit $7.33, -.80 loss.
Closed 5/17/17: Short Jan $110 call @ $2.58, exit $2.02, +.56 gain.
Net loss 24 cents.
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For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.