There is a strong possibility of fund manager portfolio restructuring in January.
This will probably impact our existing positions. I am recommending we close several and I put stop losses on most of our existing plays. I would love to exit near the highs and then buy any January dip.
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)
AABA - Altaba Company Profile
MKM Partners analyst Rob Sanderson said Alibaba would win the race to $1 trillion in market cap. Apple is currently the closest at $861 billion but Alibaba at $442 billion is growing much faster. The analyst said Google, Amazon, Facebook and Tencent were also in the race but he is betting on BABA.
Alibaba shares have gone dormant and are holding at $172.50 for the last two weeks. If the Nasdaq declines sharply next week, BABA is going to follow.
Still no earnings date. None of the earnings sites are listing a date.
Original Trade Description: September 17th.
Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com.
Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments including Snap Inc. (SNAP). They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.
Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free.
We have tried to play Alibaba several times but the volatility kept knocking us out. Unless you want to buy a $30 Jan $180 call and just sit on it with no stop loss, AABA is the only way to play Alibaba.
Update 10/15/17: Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.
The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.
Update 11/3/17: Alibaba reported an outstanding quarter with a 61% rise in revenue. They raised guidance for 2018 for a 49-53% rise in revenue, up from prior guidance of 45-49%. Their cloud computing business revenue rose 99%. Earnings of $1.29 bear estimates for $1.04. Revenue of $8.29 billion beat estimates for $7.86 billion. Monthly active users rose 3.8% to 549 million. The current quarter is going to show explosive growth given the expanded Single Day promotion. Shares faded from the post earnings bounce but should pickup this week when the Singles Day headlines appear.
Update 12/10/17: Susquehanna said there were 6 reasons Alibaba shares should hit $220. They are the category killer in China with Taobao and Tmall claiming a 75% online market share. Alibaba has not monetized their advertising with 45% upside in ad revenue for 2018 and 30% in 2019. The company just bought the leading Southeast Asia e-commerce platform Lazada with expected growth of 78% in 2018. Alicloud already has a 40% market share in Asia and they are just getting started. Overall the analyst expects Alibaba to grow revenue by 40% with 40% margins.
Long Jan 2019 $70 call @ $8.20, see portfolio graphic for stop loss.
You could sell short the $90 call for $2.15 but that would limit your gain to $15. Alibaba shares are going to the moon, just like Amazon. They are growing faster than Amazon and have a bigger market with 4.5 billion consumers in Asia.
AAPL - Apple Inc Company Profile
Apple shares have collapsed back to support again and I am recommending we close the position. With all the rumors and lawsuits circling, shares will probably be sold hard in any Nasdaq weakness in January.
Original Trade Description: September 24th.
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. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. 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.
Earnings October 31st.
Apple shares have fallen $13 since the September 1st high and $12 since the product announcement on September 12th. The shares have fallen into a cluster of converging support levels and the post announcement decline should be "about" over. Nobody will know for sure until the rebound begins.
After the product announcement, Apple reaffirmed its guidance saying we planned for the recent event surrounding the production and release of the new products when giving the prior guidance. Apple rarely misses guidance. Knowing they were having production problems and staggered release they probably low-balled the number.
They are expected to sell 85 million phones in Q4. More than 66% of iPhone users have phones older than 2 years. They will have five active models for sale in Q4. They have the 7, 7+, 8, 8+ and the X plus they still have some of the older, cheaper models they are selling overseas in places like India. The new Watch could be the model that actually turns the Watch into its own revenue category instead of being lumped into the "other" category.
I have been negative on Apple for the last three weeks and the decline is going as expected. I believe the stock has reached a level where buyers will appear. There could still be several dollars of decline but the rebound could be just as quick once it appears to have bottomed.
Because the option premiums are so large this has to be a spread position. I expect Q4/Q1 sales to be so strong that shares explode to new highs. Analysts are talking about $200 and shares closed at $152 on Friday.
Update 10/15: Apple shares closed at a 3 week high despite continued rumors about slow production on the model X. Also, Qualcomm filed lawsuits in China seeking to halt the manufacture and sales of the iPhones. The suits claim patent infringement and request an injunction to halt production. Since iPhone production employs over 1 million people in China, it is doubtful they will be successful in getting production halted. At issue is Qualcomm's patent fees where they charge a percentage of the retail value of the device that uses those patents. For instance, when the iPhones sold for $500 a 15% fee would have been $75. Now that the phones are over $1,000 that fee would be $150 per phone even though the technology is 10 years old. One of the patents in question is the touch screen technology. Apple and others want to pay a fixed fee like $25 rather than a percentage. Qualcomm's response is that the phone would not be possible without their technology. If Apple was smart they would just buy Qualcomm and then they could collect the $25 billion a year in revenue from patents and hardware. They could immediately resell Qualcomm, minus the patents, with a free use license on any new Qualcomm patents, and save themselves billions of dollars every year.
Update 10/21: Apple shares were knocked back to $155 on news they had cut component orders by 50% on the iPhone 8 because of weak demand. The weakness is due to the late delivery of the X and people are holding off buying an 8 until they can see the X and decide if they want to spend a little more to get the coolest new toy. Once the X appears, consumers will pick either the 8 or the X and sales will boom. Unfortunately, another news article in Forbes said the weak yields on the X components means there will only be about 3 million available for sale when they open for orders next Friday. There will be a long wait for the X and that could push a lot of people back into the 8.
Update 11/3/17: Apple reported earnings of $2.07 that beat estimates for $1.87. Revenue of $52.6 billion beat estimates for $50.7 billion. They sold 46.7 million iPhones and beat estimates for 46 million. Services revenue hit $8.5 billion. They declared a quarterly dividend of 63 cents. They now have $268 billion in cash. The company guided for Q4 revenue of $84-$87 billion and above analyst estimates for $84.18 billion.
Update 11/12/17: Apple shares have stalled at $175 which equates to $900 billion in market cap. They are well on their way to $1 trillion when shares hit $195.
Update 11/26/17: Apple shares dipped only $8 post earnings instead of the typical $10. Apparently, that was close enough for investors and shares rocketed back to $175. Apple is expected to launch a new phone in the spring called an SE2 that will retail for $450 and have a 4-inch screen. This is targeted for emerging markets where incomes are a lot lower.
Update 12/10/17: Apple (AAPL) is reportedly in talks to acquire Shazam Entertainment Ltd for $400 million. The Shazam app lets a user identify songs or TV shows by pointing your smart phone at the audio source. The song app already works with Siri ("Hey Siri, what is that song?") but the TV show portion has not yet been integrated. Shazam is privately held and has raised $183 million in venture capital over its 18-year lifespan. Pitchbook recently valued the company at $1 billion. Apple is trying to beef up its 27 million subscriber music service to compete with Spotifiy's 60 million subscribers.
Apple said Chief Design Officer Jony Ive is returning to day-to-day management of the company's design teams after a two-year stint focusing on other projects. Ive was behind many of Apple's iconic designs including the early Macs and iPhones. His recent job was designing the new spaceship campus.
Rumors continue to flow over the three iPhones to be announced in 2018 according to AppleInsider. Yes, the iPhone X is only a little over a month old and there are new phones in the pipeline. The largest one will have a monster 6.5-inch OLED screen. There will also be a 5.8 inch and 6.1 inch model with an LCD screen. All three will have larger batteries, which suggest longer battery life, except they have to power those larger screens. The biggest phone is rumored to have a 3,300-3,400 mAh battery, much larger than the current 2,716 mAh in the iPhone X. AppleInsider said Apple is planning an earlier ramp on these phones so there will be sufficient quantity available when they are announced in September.
Update 12/15: Apple announced a new iMac Pro, which is the most powerful ever. The base model starts at $4,999 and is targeted at professionals, 3D designers, video editors, photographers, scientists and researchers. The computer comes with Intell Xeon processors with up to 18 cores, up to 22 teraflops of graphic performance and a 27-inch retina 5K display. It will be capable of rendering real time 4K and 8K video editing. Shares rallied $1.75 to close at a two-week high.
Long Jan 2019 $160 call @ $12.90, see portfolio graphic for stop loss.
Short Jan 2019 $190 call @ $5.40, see portfolio graphic for stop loss.
Net debit $7.50.
ABBV - AbbVie - Company Profile
No specific news. Shares flat for the week except for the drop with the market at Friday's close.
Original Trade Description: June 4th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
Estimated earnings date is July 28th.
I would not normally pick a stock that has had a $5 run over the last three weeks but ABBV is about to break out to a new high and that could kick it into high gear. People love to buy stocks when they first make a new high.
Update 6/23/17: The company received a favorable opinion on MAVIRET, a once daily He-C drug, from the European Medical Agency and the CHMP. This is an 8 week cure for Hep-C that will compete with Gilead's products.
Update 7/28/17: AbbVie reported earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Update 8/5/17: AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Update 9/10/17: The company declared a quarterly dividend of 64 cents payable Nov 15th to holders on Oct 13th. They have increased their dividend for 25 consecutive years.
The company also submitted two NDAs to the FDA for approval. AbbVie also released positive results on a new drug for eczema. The drug called upadacitinib, produced stronger results than the competitor drug from Regeneron (REGN).
Update 9/17/17: AbbVie's drug Humira is expected to sell more than $18 billion in 2017 after a $16.1 billion revenue in 2016. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs.
Update 10/1/17: AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams. Shares spiked $5 on the news.
Update 10/21/17: AbbVie entered into a new immuno-oncology research collaboration with biotech firm Harpoon Therapeutics. The partnership hopes to develop a T-cell treatment for cancer using Harpoon's tri-specific T-cell activating molecules. The prior week AbbVie partnered with Turnstone Biologics to gain access to their next-generation oncolytis viral immunotherapies. AbbVie is on the move and not afraid to go where no company has gone before.
Update 10/29/17: AbbVie (ABBV) reported earnings of $1.41 that beat estimates for $1.39. Revenue of $7.0 billion missed estimates for $7.04 billion. They guided for the full year for earnings of $5.53-$5.55, up from $5.44-$5.54, and increased their quarterly dividend by 11% from 64 cents to 71 cents. The company said sales of Humira, the world's largest selling drug, would bring in $21 billion in annual sales by 2020. That is up $3 billion from prior forecasts. Sales in 2016 were $16.08 billion. Sales of the arthritis drug in Q3 were $4.7 billion.
Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.
Update 12/10/17: The company issued a press release on Saturday saying they had significant success with the drug Imbruvica in treating Mantel Cell Lymphoma. Half the patients in a trial survived more than 3 years and more than 25% did not have any disease progression.
Update 12/15/17: AbbVie and Roche Holdings released the results of the phase-3 MURANO trial on Venclexta plus Rituxan for the treatment of lukemia. The drug combination reduces the progression of the disease or death by 83% compared to Bendamustine plus Rutuxan. Venclexta has been granted 4 breakthrough therapy designations by the FDA.
Long Jan 2019 $75 call @ $4.70, see portfolio graphic for stop loss.
Previously closed 7/28/17: Short term: Long Jan 2018 $72.50 call @ $2.81, exit $2.63, -.18 loss.
AKAM - Akamai Technologies - Company Description
No specific news. Elliott Management is in talks on ways to cut costs but that is not exciting the market.
Original Trade Description: November 5th
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com
Expected earnings Jan 23rd.
Akamai reported Q3 earnings of 62 cents that beat estimates for 59 cents. Revenue of $621.4 million beat estimates for $610 million. Web division revenue rose 14% to $328 million. Media division revenue fell -1% to $273 million. Enterprise and carrier division revenue rose 2% to $20 million. Performance and security solutions revenue rose 11% to $381 million. Cloud security solutions revenue rose 27% to $121 million. Services and support revenue rose 12% to $57 million. International revenue rose 18% to $213 million. Cash on hand was $1.4 billion. They repurchased $129 million shares of stock in the quarter.
Shares spiked $4 on the report but faded over the next week. That decline appears to have ended. Deutsche Bank reiterated a buy rating and raised their price target to $75. The analyst pointed to what would be monster traffic volumes from the Winter Olympics in Q1 and the World Cup Soccer in Q2.
In October, Akamai announced the acquisition of Nominum, a market leader in DNS and enterprise security solutions for carriers. Akamai also announced the launch of Bot Manager Premier, designed to help organizations manage the impact of bots across their entire digital environment, including websites, mobile applications and wed APIs.
The company guided for Q4 revenue of $638-$656 million with gross margins of 65% to 77%. Earnings are expected to be in the 60-65 cent range after a 4 cent impact from the acquisition of Nominum. They are forecasting 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.
Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.
Akamai collaborated with Google, Cloudfire, Flashpoint, RiskIQ and the RBI to squash a botnet named WireX that had infected 120,000 Android phones in early August. The bot was generating 20,000 page requests a second against a set of targeted servers in a DoS attack.
Akamai announced it had set a new record for throughput delivered on September 12th with more than 60 terabytes per second (Tbps). That beat the old record of 47 Tbps set on August 29th. Akamai delivers more content on a daily basis than any other content provider. In January, they set a single event record of 8.7 Tbps streaming the Presidential Inauguration. The company has more than 200,000 servers spread across 130 countries to accomplish this record content delivery.
Akamai announced the Content Delivery Network (CDN) capabilities for enterprises are now available on the IBM cloud. The new offering is part of the IBM Cloud Content Delivery Network. Akamai currently provides CDN services on 1,700 networks in 131 countries. That now included IBM's footprint of 60 cloud centers across 19 countries. Akamai has more than 200,000 servers across 130 countries.
In October, Akamai announced the acquisition of Nominum, a market leader in DNS and enterprise security solutions for carriers. Akamai also announced the launch of Bot Manager Premier, designed to help organizations manage the impact of bots across their entire digital environment, including websites, mobile applications and wed APIs.
I am using a spread to reduce the cost of a nearly ATM long call.
Update 12/15: Elliott Management disclosed at 6.5% stake in Akamai saying the shares were significantly undervalued. Elliott said it would attempt to talk with the board, other shareholders and potential acquirers about strategic alternatives.
Long Jan 2019 $55 LEAP Call @ $6.97, see portfolio graphic for stop loss.
Short Jan $75 call @ $1.47, see portfolio graphic for stop loss.
Net debit $5.50.
AMD - Advanced Micro Company Profile
In the last newsletter I recommended buying an April $9 put to protect us from further downside. After further review, AMD is just not showing any life despite the partnership with Intel. I am recommending we close these positions. It may be worthwhile to keep the long put open for a couple weeks with a good possibility AMD will decline sharply with the market if volatility appears in January.
Original Trade Description: October 29th.
Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.
Several weeks ago news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.
It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $11 billion market cap compared to $121 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.
Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.
In early October AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory.
AMD shares rallied after a processor conference and an article with a picture of a new Intel processor with "Vega Inside." Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.
AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.
Last week a top fund manager, Tony Mitchell, was pounding the table on AMD and their new CEO Lisa Su. On the earnings call, Su she said their new product introductions and earnings beat marked another milestone for AMD as a "premier growth company in the technology industry." AMD is projecting 26% revenue growth for 2017. For years, you could not use the term revenue growth and AMD in the same sentence. That has changed with their wide array of new product offerings.
Updatw 11/12/17: News broke on Monday that AMD had partnered with Intel to build a super chip for laptops that had embedded graphics and high speed memory along with the processor. Shares spiked sharply but gave up their gains when the semiconductor sector crashed 3% on Thursday.
Position 10/30/17 with an AMD trade at $11:
Long Jan 2019 $12 LEAP Call @ $2.16, see portfolio graphic for stop loss.
Position 12/11/17: Long Apr $9 Put @ 68 cents, see portfolio graphic for stop loss.
ATVI - Activision Blizzard - Company Profile
No specific news. The new high on the Goldman upgrade did not last long.
Original Trade Description: July 16th.
Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com
Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.
Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.
Earnings Nov 2nd.
Activision has been beating on earnings and given the success of their last two releases the Q2 earnings should also be a beat. The stock is poised to break out to a new high over $61. I am recommending the 2019 LEAPS ahead of earnings. For those that do not want to hold that long I am also going to list the January 2018 strikes as well.
Update 7/30/17: Blizzard announced that player signing for the professional Overwatch Gaming League will begin on August 1st. All players for the league will become members of the seven teams that have joined the league so far including, Boston, Los Angeles, Miami-Orlando, New York City, San Francisco, Seoul and Shanghai, or for teams that sign on before the player signing period closes Oct. 30. Each player is guaranteed a $50,000 salary or more, lodging and practive facilities, health insurance, a retirement savings plan and 50% of the team's winnings. Each team will have 6-12 players. The total bonuses in Season 1 will add up to $3.5 million with a minimum of $1 million to the winning team. The e-Sports craze is exploding and this will be a money maker for ATVI.
Update 8/5/17: ATVI reported earnings of 55 cents compared to estimates for 30 cents. Revenue of $1.42 billion beat estimates for $1.21 billion. They guided for earnings of 34 cents in the current quarter with full year earnings of $1.94 per share. Shares spiked to a new high close at $64 on Thursday but gave back $2 on Friday.
Update 9/24/17: Call of Duty: WWII is due out in November and retailers have already reported a huge wave of preorders after the beta testing was completed. Those that were allowed to download the beta version were very excited and the news is spreading. This takes Call of Duty back to its roots and should be a very successful game.
Update 10/15/17: NPD reported that sales of Destiny 2 were down 50% from sales of the original at this point in the release. That caused the stock to decline sharply on Monday to stop us out of the January position. However, this is not what is appears on the surface. Destiny 1 was sold mostly at retail in a CD package. Destiny 2 is being sold mostly online with a digital download so the comparison of boxed retail sales is apples to oranges. Secondly, Destiny 2 has not even launched on the PC yet. That will happen on Oct 24th. That is another entire wave of sales.
Activision issued a press release calling Destiny 2 the biggest console video game launch of the year with the PC launch still to come. They cited "franchise pre-orders records broken and record day-one performance on the Playstation Store and engagement at the highest ever in week one of a launch" it would appear Activision is not admitting to any sales decline.
Update 11/5/17: The company reported earnings of 47 cents that missed estimates for 50 cents. Record revenue of $1.62 billion missed estimates for $1.74 billion. They guided for the full year for $2.08 on revenue of $6.68 billion. Analysts were expecting $2.14 and $6.79 billion.
However, Activision had guided in August for earnings of 34 cents and revenue of $1.385 billion. Based on their guidance they had a blowout quarter. Activision Blizzard had 384 monthly active users (MAU) with a record 49 million online players. Subsidiary King Digital had 293 million MAU. Numerous engagement metrics were at record highs. For Q4 they guided for 36 cents and $1.7 billion in revenues.
Update 11/19/17: The new release of Call of Duty appears to be a blowout. Concurrent players on the PC platform after the first week of release was up +395% compared to the prior release of CoD Infinite Warfare and the highest levels since 2012. Retail sales in the UK showed a 57% increase compared to last year's game installment. The CEO said the opening weekend took in more than $500 million. The last WWII CoD Black Ops 3 game in 2015 took in $550 million.
Update 12/3/17: Electronic Arts (EA) caused an uproar on how they were charging for in game purchases and the entire sector crashed. EA immediately changed the process but it is hard to recover that negative sentiment over just a few days. Shares of ATVI fell $4 in the reaction as investors worried the problem would carry over in to ATVI games. There is very little danger of that because the processes are a lot different.
Update 12/15/17: Goldman upgraded ATVI from hold to buy saying the stock would get multiple earnings boosts from the game sequels currently in production. Call of Duty: WWII has already become the bestselling video game in 2017 after only being out for a few weeks.
Long Jan 2019 $65 call @ $8.20, see portfolio graphic for stop loss.
Short Jan 2019 $85 call @ $2.61, see portfolio graphic for stop loss.
Net debit $5.59.
Closed 10/9/17: Long Jan 2018 $65 call @ $4.05, exit $2.80, -1.25 loss.
BA - Boeing Company - Company Profile
Boeing has stalled at the recent highs just under $300. Shares have been trading sideways for two weeks and the odds are very good we are going to see some profit taking in January. I am recommending we close the position at the open on Tuesday. We might be able to make a couple hundred dollars extra if we held out for expiration but let's clear the deck for January volatility and potential new entries.
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.
Update 11/19/17: Boeing signed the order for 175 737-Max planes to FlyDubai for $27 billion to close out the Airbus attempt to gain market share with that customer. Boeing won 33 firm orders including an order of 45 jets to China's CDB Leasing and 20 737-Max planes to ALAFCO and 6 787-9 jets to EgyptAir. In all Boeing and Airbus secured orders for nearly 700 planes with a 430 plane order going to Airbus from investor Bill Franke's Indigo Partners who will lease those planes to budget US carriers. It was a good weekend for Boeing with almost $50 billion in new orders.
Update 11/26/17: With only a couple days left in November, Boeing is celebrating nearly $90 billion in new orders for the month. The highlights were a $27 billion upgraded order for 225 737-MAX planes from FlyDubai. Another $37 billion for 300 planes from China Avaiation Suppliers HoldingCompany. A $15 billion deal with Emirates for 40 787-10 Dreamliners. A $7.4 billion contract with CDB Aviation for 42 737-MAX 8s, 10 737 MAX-10s and 8 787-9 Dreamliners. A deal with ALAFCO lease Finance for 20 737-MAX 8s was worth $2.2 billion and a $1.9 billion order from Azerbaijan Airlines for 5 787-8 Dreamliners. There was also a deal for $14 billion with Singapore Airlines.
Boeing has now sold more than 4,000 737 MAX planes to 92 customers for the fastest order ramp in history for a new plane.
Update 12/10/17: Boeing said they were going to beat Elon Musk and SpaceX to Mars. The CEO said eventually we are going to put a man on Mars and I believe he will get there on a Boeing rocket and not SpaceX. Elon Musk responded "just do it!" Boeing is working on their "Space Launch System," which is 36 stories tall and they are planning a first flight around the moon in 2019. SpaceX expects to begin its Mars mission in 2022.
Boeing suffered a setback on its plan to supply F-18 fighters to Canada. Canada's Bombardier and Boeing are locked into a trade dispute over Canada's support, which allows Bombardier to sell planes below cost into the US market. Canada is expected to announce next week that they will buy a used fleet of F-18s from Australia. The model is the same as the ones Canada currently operates.
Update 12/15/17: Boeing continues to make new highs despite losing a $12 billion order to Airbus when Delta signed an order for 100 planes. Boeing hinted that the order may have been lost because of price. Our bidding process was "strong and disciplined" suggesting Boeing already has so much business they did not need to lowball the bid to get the order.
Boeing also announced an $18 billion share buyback program and increased the dividend by 20% to $1.71. This buyback replaces the existing one, which had $4.8 billion left. They have bought back $9.2 billion in stock in 2017.
Earnings January 24th.
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.
CAT - Caterpillar Inc Company Profile
No specific news. Shares are up $30 since we entered the position but our net gain is up only $22. CAT is likely to decline sharply with any market volatility next week. I tightened the stop loss significantly and I would like to exit the spread if the stock declines and then reenter with a standalone LEAP call on a decent dip.
Original Trade Description: October 8th.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986.
Company description from FinViz.com.
CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.
The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.
In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.
In January they guided for $36-$39 billion in revenue and $2.90 in earnings.
In April they guided for $38-$41 billion in revenue and $3.75 in earnings.
In July they guided for $42-$44 billion in revenue and $5 in earnings.
In April they guided for revenue from construction at flat to 5%.
In July they guided for 10% to 15% growth.
In April they guided for revenue from mining at 10% to 15%.
In July they guided for 20% to 25% growth.
In April they guided for energy revenue at flat to 5%.
In July they raised it to 5% to 10%.
At the September 12th investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.
In late September CAT reported a global increase in machine sales of 11% for August. Total sales in Asia and the Pacific surged 44%.
After the devastation in Houston, there were new estimates from analysts for 17% or higher revenue growth in construction equipment.
I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.
Update 10/29/17: Caterpillar (CAT) reported earnings of $1.95 that nearly quadrupled and blew past estimates for $1.22. That is the kind of earnings beat that should have spiked the stock $13 like MMM but given CAT's recent string of new highs over the last three months, a lot of excitement was already priced into the stock. Revenue rose 25% to $11.41 billion compared to estimates for $10.61 billion. Construction equipment revenue rose 37% with energy and transportation equipment revenue rising 12%. CAT raised guidance for the full year from $5.00 to $6.25 on revenue of $44 billion. Analysts were expecting $5.29 and $42.94 billion. This was a killer quarter for CAT and this confirms more than anything else that the global economy is beginning to surge.
Caterpillar makes an Android phone that is indestructible. It has 44 days of standby time, 38 hours of talk time with a 5,000mAH battery. You can even charge other phones with the CAT phone and it comes with a cable to do exactly that. The price is $509. Article
Update 12/15/17: Caterpillar announced a 78-cent dividend payable Feb 20th to holders on Jan 22nd. The company said sales rose 26% for the 3-months ending in November. The last time they saw sales this high was in 2012. The 3-month gains were driven by a 43% rise in Asia Pacific, Europe, Asia and Middle East were up 32%, North America 12%. Latin America sales rose 48% in October but no number was given for November. Sales were strong across all divisions, resource, energy, construction, etc.
Long Jan 2019 $135 call @ $8.63, no initial stop loss.
Short Jan 2019 $155 call @ $3.13, no initial stop loss.
Net debit $5.50.
COST - Costco Company Profile
No specific news. COST shares are holding just over $186 and our stop loss is $184.50. If shares decline any further we will be out.
Original Trade Description: September 24th.
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online.
Company description from FinViz.com.
We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.
Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.
Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.
Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.
Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.
Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.
On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.
That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.
In another recent survey by BMO Capital, they found that Costco consistently had lower prices and faster shipping than Amazon. They surveyed 16 categories and Costco was an average of 7% cheaper than Amazon. Shipping took an average of 4.5 days from Costco compared to 5.5 days from Amazon. Wal-Mart and Jet.com had prices that were 18% higher than Amazon and average shipping was 9.8 days.
Costco also has its own private label brand in the Kirkland label. Last year Kirkland was the largest selling grocery brand on Amazon. Yes, on Amazon.
We exited the existing January position last Monday and I wrote at the time I wanted to reinstate it with a longer dated option. I am using June options because the 2019 LEAPS are ridiculously expensive.
Update 10/23: Oppenheimer reiterated an outperform rating and $185 price target. The analysts said management was pleased with direction and marketing was succeeding. The credit card transition was well behind them and new stores were opening in unserved markets. The free 2-day delivery service had just begun and was not in the stock price. IT investments over recent years were paying off and future costs would be less. Advertising was focusing not only on cost savings but on the advantages of membership, which are substantial.
Update 11/5: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.
Update 12/3: On Wednesday Costco reported November sales rose 13.2% to $11.26 billion, up from $9.95 billion in the year ago month. This was a blowout report. For the 12 weeks in the first fiscal quarter ending Nov 26th, sales rose 13.3% to $31.13 billion and that was with one day less than last year because of where Thanksgiving fell on the calendar. Online E-commerce sales rose 39% for the month and 43.6% for the quarter. Shares exploded higher with a $12 gain over the last 3 days.
Update 12/15: Costco posted a $6 gain after beating on earnings by 2 cents. Revenue rose 13.3% to $31.12 billion. Expectations were high because of their recent release of blowout sales numbers for November. Same store sales rose 10.5% and e-commerce sales rose 43.5%. Membership renewals were 90%, which is in line with the historical average, so no drop offs. Member households rose from 49.4 million to 49.9 million and cardholders rose from 90.3 million to 91.5 million. They plan to add 20-25 stores in 2018. I challenge anyone to show me the impact of the Amazon/Whole Foods acquisition. I have pointed out many times the two stores are not related.
Long Jun $165 call @ $7.47, see portfolio graphic for stop loss.
Optional: Short Jun $185 call @ $1.96, see portfolio graphic for stop loss.
Net debit $5.51.
DIA - Dow ETF - ETF Description
The watch list position recommending a long put spread was entered at DIA $248 when the market gapped higher on the 18th. This may have been a perfect entry point since there is strong resistance at $248.50.
Original Trade Description: December 10th
The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.
We have a lot of uncaptured gains in our portfolio. The tax reform bill should be approved next week and the market "should" continue to be positive throughout the week. There is always the potential for a sell the news event but I am betting the market will remain positive for the rest of the year.
We also have the government funding problem on December 22nd that could cause a government shutdown but that dip would probably be bought.
However, once we turn over to a new tax year with lower tax rates, we could see some significant volatility as traders restructure their portfolio in January.
In 2016, the S&P lost 269 points in three weeks after setting new highs in early December. There is no guarantee of a repeat but the major indexes are up strongly for the year and it has been 18 months since we have had even a 5% retracement.
I am recommending we enter a long put position if the Dow trades at 24,800. Since many traders try to anticipate sell the news events at big round numbers, I want to enter the position a little early. This will help get us into the position even if the Dow does not reach 25,000.
Position 12/18/17 with a DIA trade at 248:
Long March $240 put @ 2.76, no initial stop loss.
Short March $230 put @ $1.30, no initial stop loss.
Estimated net debit $1.46.
ECA - Encana Corp - Company Profile
No specific news. Shares rebounded strongly with oil prices over $60 and gas prices up from 52-week lows.
Original Trade Description: May 21st.
Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.
Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.
Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.
They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.
With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.
JP Morgan initiated coverage with an overweight rating and $16 price target.
I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.
Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.
Encana sold its Permian Basin produced water infrastructure to H2O Midstream. No price was given. This included over 100 miles of interconnected pipeline and 80,000 bpd capacity. H2O plans to double the pipeline to 200 miles and capacity to 140,000 bpd plus adding storage for 2 million barrels of produced water. The produced water can be reused in new fracing projects and reduces the cost of new wells.
Update 7/21/17: Encana reported earnings of 18 cents that beat estimates for 4 cents. Revenue of $1.083 billion beat estimates for $773 million. Production averaged 246,500 Boepd, a 9,200 boepd rise. Condensate rose 14% to 124,900 bpd. The margin per barrel rose 25% to $12.10. Recent wells with the newest fracking technology have been coming with production 20% higher than expected. The company has more than 11,000 "premium" drilling locations and thousands of non-core locations.
Update 10/21/17: At the investor day last week, Encana said they were targeting 25% compound annual growth in non-GAAP cash flow over the next five years and $1.5 billion in non-GAAP free cash flow. They are going to do this without any rise in commodity prices. They stressed their 23,000 potential drilling sites with 11,000 offering premiums returns of more than 35%. That included 3,450 in the Permian, 220 in the Eagle Ford, 500 in the Duvernay and 6,900 in the Montney. Most people have not heard of the Montney but that play has over 1,000 feet of pay with six zones of stacked production. Link to presentation slides
Update 11/12/17: Encana reported earnings of 2 cents that missed estimates for 5 cents. Revenue of $861 million beat estimates for $826.8 million. Production of 284,000 Boepd declined from 338,000 in the year ago quarter. The majority of the decline was a 29% drop in natural gas production. The decline came from hurricane impacts and third party curtailments of gas in western Canada. The company said it was firmly on track to hit its full year targets. Shares are holding at 8-month highs after earnings.
Long Jan 2018 $12 call @ $1.50, see portfolio graphic for stop loss.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
Long (2) Jan 2019 $15 calls @ .50.
Adjusted 2019 position (3 contracts) @ 80 cents each.
Long (3) Jan 2019 $15 calls @ $1.10.
Adjusted 2019 position (6 contracts) @ .95 each.
GSAT - GlobalStar - Company Profile
GSAT shares declined 40 cents on the secondary offering. Our option is only worth 20 cents and we have more than a year until expiration. While this is disappointing to see the decline, a lot can happen in a year and it is not worth selling for 20 cents.
Original Trade Description: May 28th.
Globalstar, Inc. provides mobile voice and data communications services through satellite worldwide. The company offers duplex two-way voice and data products, including mobile voice and data satellite communications services and equipment for remote business continuity, recreational, emergency response, and other applications; fixed voice and data satellite communications services and equipment in rural villages, ships, industrial and commercial sites, and residential sites; and satellite data modem services comprising asynchronous and packet data services. It also provides SPOT products, such as SPOT satellite GPS messenger for personal tracking, emergency location, and messaging solutions; SPOT Global phone; and SPOT Trace, an anti-theft and asset tracking device. In addition, the company offers commercial Simplex one-way transmission products to track cargo containers and rail cars, to monitor utility meters, to monitor oil and gas assets, and other applications. Further, it provides engineering services, such as hardware and software designs to develop specific applications; and installation of gateways and antennas. The company primarily serves recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining, and forestry; construction; utilities; and transportation markets. Globalstar, Inc. distributes its products directly, as well as through independent agents, dealers and resellers, independent gateway operators, and its sales force and e-commerce Website. As of December 31, 2016, it served approximately 689,000 subscribers. The company was founded in 2003 and is headquartered in Covington, Louisiana. Company description from FinViz.com.
This is a buy and forget position. Globalstar has a lot of thing currently in the works and is likely to be acquired over the next 18 months. With the 2019 LEAP at $1, we could be well rewarded if we just buy a few contracts and forget them.
You probably saw the bidding war over Straight Path Communications. Verizon won the war with a $3.1 billion bid. Verizon was not buying STRP for its business value. Verizon was buying bandwidth and spectrum. That is the licenses and frequencies that allow a company to transmit conversations and data through the air.
Globalstar has a lot more to offer than Straight Path. Globalstar is a satellite operator and won approval from the FCC in December to use its spectrum for terrestrial wireless. That approval means Globalstar's spectrum would be available to an acquirer for immediate use. Globalstar has spectrum that is perfect for small cell networks where population density is too thin to support a group of major cell towers.
Globalstar has targeted 100 countries in which it will see approval for wireless service. The company said, "At the end of Q1 we have filed for terrestrial authority in countries covering more than 375 million people. If you include the USA the total population covered would be about 700 million.
Analysts believe companies like Facebook, Amazon, Netflix and Google could see this capability as very valuable. The ability to communicate wirelessly with people not already reached with broadband opens up entirely new markets. Google has already tried to reach the masses with Google Fiber but the cost was too expensive and they had to scale back that initiative. Facebook is experimenting with solar powered planes and airships to beam wireless internet to millions of potential customers.
If anyone makes a run at Globalstar, it could turn into another bidding war. If nobody tries to acquire them by the end of 2017 they will have even more assets in the form of operating authority in numerous other countries. The company is an interesting lottery ticket play where we can invest very little but likely be rewarded even if an acquisition does not appear.
Earnings August 3rd but in this position we really do not care what the quarterly reports say. This is a buy and forget position. The chart over the last ten years is ugly. As a satellite company they have failed in generating any material interest. It is the recent approval to use their spectrum for wireless that holds promise for the future.
Update 10/1/17: GlobalStar and IPmotion Inc. announced the formation of GlobalStar Japan and the launch of commercial mobile satellite service at a press event today in Tokyo. Globalstar Japan will offer a suite of mobile satellite products and services with voice, data, asset monitoring, tracking and emergency S.O.S. capabilities for the consumer, enterprise and government markets.
Update 10/8/17: GlobalStar announced a secondary offering of $125 million in shares to satisfy lender requirements for capital levels. 80% of the proceeds will be deposited with the lenders and will be interest bearing until the funds are used to pay P&I due under existing loan agreements in December 2017 and June 2018. The shares were priced at $1.65 and will close on Oct 11th.
Update 11/5/15: The company reported earnings of 4 cents on revenue of $30.5 million. They completed their capital raise of $115 million in the quarter. Interestingly, the CEO James Monroe is also the majority owner of Thermo Capital Partners. Thermo took down 40% of the $115 million capital raise. That means the CEO is very focused on the future and was willing to put more than $45 million of his own money into Globalstar. Monroe/Thermo invested $33 million in a prior raise in 2017 and $700 million since 2004. GSAT has a $2 billion market cap and the CEO owns roughly 33%.
Update 12/17/17: FL Investment Holdings, a company controlled by the CEO of Globalstar, filed last week to sell 38 million shares or approximately 4% of their holdings in GSAT. They said they were selling for tax planning purposes. Morgan Stanley will be the agent and shares will be sold at market prices. The offering was expected to close and settle on Dec 12th.
Globalstar is not selling any shares and will not receive any proceeds from the offering.
Long Jan 2019 $2.50 call @ $1.00, see portfolio graphic for stop loss.
HD - Home Depot - Company Description
No specific news. Shares are holding at the recent highs. However, I put a stop loss on it because the odds are good there will be profit taking.
Original Trade Description: August 27th.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves homeowners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico.
On August 14th, HD reported earnings of $2.25 that beat estimates for $2.21. Record revenue of $28.11 beat estimates $26.47 billion. They raised guidance for the full year for 5.3% revenue growth. They guided for an 11% rise in earnings to $7.15 in May and raised that guidance in this report to 13% and $7.29.
Despite posting record results and raising guidance, the stock was crushed for a major loss. The conference call started with analysts asking how long the good times can continue since the housing market has been strong for so long. HD reps answered the question well then immediately got hit with a bigger bomb. How can your sales continue to rise when you can now buy many of your products cheaper on Amazon. The analysts even asked how much Alexa was hurting HD's business. Every question seemed to be about why Amazon was stealing market share and why HD sales were not falling. Sentiment turned bearish and shares fell $9 over the last four days.
We were stopped out on the big drop. There is nothing wrong with the company. There is strong support at $144.50.
We entered the HD position on a dip in July and with support at in the $144-$146 range, I am recommending we try to buy another dip.
Update 11/5/17: HD shares crashed on news the NYC terrorist rented his truck from Home Depot. Obviously, that has nothing to do with the stock price but investors immediately bailed until the smoke cleared. Friday saw a $1.68 rebound and it should continue back to the recent highs. Thousands of people rent trucks from Home Depot every month and only 1 has turned it into a battering ram.
Update 11/19/17: The company reported earnings of $1.84 that rose 15% and beat estimates for $1.81. Revenue rose 8.1% to $25.026 billion, up from $23,154 billion. This beat estimates for $24.523 billion. Same store sales rose 7.9%. HD said the hurricanes added about $282 million in sales but also cost them about $51 million in store damages and inventory shifting costs. The company guided for Q4 revenue growth of 6.3% and same store sales of 6.5%. Those numbers were up from 5.3% and 5.6% in prior guidance. Earnings are expected to grow 14% to $7.36 for the full year, up from prior guidance of $7.29. They currently have an $8 billion share repurchase program in effect.
Update 12/10/17: Home Depot (HD) announced a $15 billion buyback and raised guidance for annual sales between $114.6-$119.8 billion by the end of 2020. The new repurchase program replaces the existing $15 billion program. The company expects to buy back $8 billion in shares total in 2017 with $2.1 billion in Q4. Since 2002, Home Depot has bought back 1.3 billion shares worth $73 billion.
At an investor presentation on Wednesday the company said they expect revenue to grow 6.3% for the current year with same store sales rising 6.5%. Earnings are expected to rise 14% to $7.36. Full year 2017 sales are expected to be $100.6 billion.
Long Jan 2019 $155 call @ $11.42, see portfolio graphic for stop loss.
Short Jan 2019 $175 call @ $4.52, see portfolio graphic for stop loss.
Net debit $6.90.
IBM - IBM - Company Description
Priceline and IBM reached an agreement on their ongoing patent suit. The terms of the settlement were confidential but both companies will cross license patents from the others portfolio. IBM shares have been choppy for the last month and I added a stop loss to the position.
Original Trade Description: October 27th
International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term inventory and accounts receivable financing to suppliers, distributors, and remarketers; and remanufacturing and remarketing services. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. The company was founded in 1910 and is headquartered in Armonk, New York. Company description from FinViz.com.
IBM surprised investors with positive revenue growth when they reported earnings. Revenues had declined for 20 quarters. They had been beating on earnings for the last 12 quarters but revenue continued to slide. Earnings of $3.30 beat estimates for $2.84. Revenue of $19.15 billion beat estimates for $18.61 billion. They reiterated their full year guidance of $11.95 per share.
Morgan Stanley said the earnings were a clear inflection point for IBM and the multiyear restructuring was finally beginning to produce results. IBM said they had a new mainframe server and orders were strong.
Shares hit $162.50 for the biggest one-day gain since 2008. They have faded back to $153 and I am recommending we enter a position with a trade at $150.
Update 11/12/17: IBM announced the availability of a 20-qubit quantum computing machine available as a cloud service. Previously they had offered a 5-qubit machine for free in an effort to stimulate companies to develop programs to run on a quantum computer. A regular computer operates with a 2 state processor that utilizes bits set to 1 or zero to indicate certain conditions, letters numbers, etc. A quantum computer has an unlimited number of states. That is like saying the 1 bit of information in a normal computer can now represent any number from 0 to 1000 or even 10,000. The possibilities are endless but no commercial programming currently exists for quantum computers. IBM expects to produce a 100-qubit machine in the not to distant future. HAL are you listening? Skynet are you paying attention?
Update 11/19/17: Warren Buffett sold most of his position in IBM in Q3. Berkshire sold 17 million shares to lower his stake by roughly one third to 37 million shares. At one point Berkshire held 81 million shares of IBM. Berkshire used the proceeds to buy more Apple shares and more shares in Bank of America. Several analysts said this was a turning point for IBM because of Buffett's capitulation. Shares declined to $146.21 in the market drop on Wednesday has rebounded back to $150 intraday on Friday.
Update 12/17/17: IBM added JP Morgan Chase, Barclays and Samsung to its quantum computing project. These companies join a dozen others in developing applications for the new quantum computing technology that is expected to far surpass conventional computers in speed and power. IBM said quantum computing today is equivalent to the state of conventional computing back in the 1950s.
Position 11/9 with an IBM trade at $150:
Long Jan 2019 $160 LEAP calls @ 8.06. See portfolio graphic for stop loss.
MCD - McDonalds - Company Profile
No specific news. Shares have softened over the last couple weeks and I added a stop loss.
Original Trade Description: August 27th.
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 6.6%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
Shares have topped out over the last two weeks from their constant new highs. The lethargic market has put a drag on their shares. Given their strong metrics, rapidly rising sales and refusal to sell off from their highs, it suggests they will go higher when the market begins moving up again.
Earnings Oct 24th.
Update 9/10/17: McDonalds said it was going to sell some of the McCafe beverages in supermarkets in early 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
Update 9/17/17: McDonalds shares were crushed after data tracker M Science suggested they could miss on earnings and revenue as a result of the hurricanes. McDonalds has more than 2,000 locations in Texas and Florida but obviously only a very few were impacted. They have more than 31,230 stores so the impact to 10-20 or even 50 for several days is not likely to impact revenue that significantly. I think this was a cry for attention by M Science. Shares should rebound once investors think it through.
Update 9/24/17: McDonalds raised its quarterly dividend by 7% to $1.01 payable Dec 15th to holders on Dec 1st. This is a killer dividend, now $4.04 annually. This is the 41st consecutive annual dividend increase.
Update 10/1/17: McDonalds shares rebounded after a consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Update 10/29/17: McDonalds (MCD) reported earnings of $1.76 that only matched estimates. Revenue of $5.75 billion declined from $6.42 billion and matched analyst estimates. Global same store sales rose 6.0% and beat estimates for 4.6% with US sales rising 4.0%. This was a disappointing report. Many analysts, including myself, expected the company to post stronger results because of their new premium burger menu and the full implementation of the delivery program. McDonalds did say the premium burgers were responsible for its earnings growth along with the McPick 2 menu. That is where you get two low dollar items for $2.50 or two larger items for $5.00. The company returned $2.9 billion to shareholders in Q3 through share buybacks and dividends.
Update 12/10/17: On Tuesday, Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company is going to restart its dollar menu in January and there will be $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3. Shares rose $2.34 on the upgrade.
Long Jan 2019 $165 call @ $7.92, see portfolio graphic for stop loss.
Short Jan 2019 $185 call @ $2.49, see portfolio graphic for stop loss.
Net debit $5.43.
MMM - 3M Co - Company Description
No specific news. Shares are fading with the market and I added a stop loss.
Original Trade Description: October 29th.
3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. The company serves automotive, electronics and energy, appliance, paper and printing, packaging, food and beverage, construction, medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems, food manufacturing and testing, consumer and office retail, office business to business, home improvement, drug and pharmacy retail, and other markets directly, as well as through wholesalers, retailers, jobbers, distributors, and dealers. The company was founded in 1902 and is headquartered in St. Paul, Minnesota. Company description from FinViz.com.
The company reported Q3 earnings of $2.33 compared to estimates for $2.21. Revenue of $8.17 billion beat estimates for $7.92 billion. 3M raised its full year guidance range from $8.80-$9.05 to $9.00-$9.10. 3M gets 60% of its revenue from overseas and the weak dollar added to its profitability. Obviously, a 12 cent beat and a minor top end hike on guidance does not merit a $17 intraday spike in the stock. This was a monster short squeeze after the stock closed at new highs over the prior three days. I get it that the global economy is growing and this is good for 3M but this is going to be a short magnet over the next couple of weeks until the $13 closing gain is neutralized.
3M set a new closing high at $237.68 on Wednesday. Shares have traded sideways with the broader market mostly positive. With the Dow extremely overbought we could see a significant decline in 3M if the Dow corrects.
Ideally, we would like to buy a dip to the 100-day average but at $210 that does not appear likely in the near future or we would have serious market problems.
Update 12/17/17: The company said it was tracking towards the top half of its guidance range of 4% to 5% and earnings of $9.00-$9.10. Analysts were expecting $31.49 billion and growth of 4.6%. Consensus earnings estimates were $9.06. 3M guided for 2018 for earnings of $9.60-$10.00 and revenue up 5% to 7% compared to analysts at $9.70 and 5.3%. The company stressed it was investing in high growth areas including automobile electrification, air quality and personal safety.
Position 11/10/17 with a MMM trade at $227:
Long Jan 2019 $240 LEAP call @ $10.46, see portfolio graphic for stop loss.
Short Jan 2019 $270 call, @ $3.06, see portfolio graphic for stop loss.
Net debit $7.40.
MNST - Monster Beverage - Company Profile
The president and CEO combined to sell nearly 400,000 shares over the last week. They pair had exercised options for 433,000 shares each on Dec 12th. Shares of MNST declined from the new highs on Thursday.
Original Trade Description: June 4th.
Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. Its Monster Energy Drinks segment sells ready-to-drink packaged drinks and non-carbonated dairy based coffee energy drinks primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, and the military. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations; and ready-to-drink packaged energy drinks to bottlers and full service beverage distributors. It sells its products under the Monster Energy, Nalu, Monster Rehab, NOS, Monster Energy Extra Strength Nitrous Technology, Full Throttle, Java Monster, Burn, Muscle Monster, Mother, Mega Monster Energy, Ultra, Punch Monster, Play and Power Play, Juice Monster, Gladiator, Ubermonster, Relentless, Samurai, BU, and Mutant Super Soda brands. The company was formerly known as Hansen Natural Corporation and changed its name to Monster Beverage Corporation in January 2012. Company description from FinViz.com.
Monster reported earnings of 33 cents that rose 26.9% and beat estimates by a penny. Revenue of $742.1 million rose 9.1% and beat estimates for $741.4 million. These numbers beat estimates despite a -$3.7 million hit from foreign currency translation. Net sales outside the U.S. rose 28% to $190.9 million. Sales of new products were so strong there was actually a shortage of product.
Earnings August 3rd.
Monster is doing great in a weak retail sector. This proves if you sell something habit forming you will always have a market.
They have multiple initiatives underway to increase global sales and they appear to be overcoming all the daily headaches that impact a retail distribution company. Gross profits rose from 62.2% to 64.8%.
For the last couple of years Monster has been transitioning their distribution into the Coca-Cola network. Coke took a major equity stake in Monster and part of the deal was that Coke would distribute the product globally. That is working out well and giving Monster a wider presence than they could have ever done on their own. Coke has an option to buy more Monster stock, or even the entire company. Given the slowdown in carbonated sugar drinks, Coke could be looking to exercise their option soon.
I am recommending two positions. The first is a Jan-2018 call that will get us through the rest of the year and capture any short-term gains. The second is a Jan-2019 LEAP call that could capture a run to a new high and/or acquisition by Coke. You can do one position or both.
Update 8/13/17: Monster reported earnings of 39 cents that missed estimates for 40 cents. Revenue of $907.1 million beat estimates for $906.6 million.
Update 9/10/17: There was more analyst speculation last week that Coke might be getting close to acquiring the rest of Monster shares it does not own. Coke has a 16.7% stake in Monster and that is the only portion of the drink business that is growing. Coke's Q2 revenues declined 16% for the 9th consecutive quarterly decline.
Update 11/12/17: Monster reported earnings of 40 cents that matched analyst estimates. Revenue of $909.5 million beat estimates for $901.1 million. Shares dipped to $56 after earnings and then exploded higher over the next two days to close at $61 on no specific news.
Position 8/14/17: Long Jan 2019 $55 call @ $6.76, see portfolio graphic for stop loss.
I will turn the 2019 call into a spread once the stock moves higher so we can widen our potential gains.
Previously closed 8/9/17: Long Jan 2018 $55 call @ $2.65, exit $1.95, -.70 loss
Closed 8/9/17: Long Jan 2019 $55 call @ $5.60, exit $5.70, +.10 gain.
MRK - Merck & Co - Company Description
Merck said the drug Steglatro and the combination drug Steglujan, both for diabetes, had been approved by the FDA. These drugs are in partnership with Pfizer. Both will be available in January.
Original Trade Description: November 12th
Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey.
Company description from FinViz.com
Expected earnings January 26th.
Merck reported earnings of $1.11 compares to the $1.03 that analysts expected. Revenue of $10.33 billion beat estimates. The company guided for full year earnings of $1,.78-$1.84 up from $1.60-$1.72. Revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion.
Shares were crushed after the company said it had pulled its European application for the cancer drug Keytruda. Sales of the drug nearly tripled to $1.05 billion where it has already been approved and are expected to continue to grow to $5 billion over the next two years.
The reason they pulled the European application was to modify a phase III trial to focus on "overall survival" or OS rather than short-term "progression free survival" or PFS. This pushed the trial end date out to early 2019. Overall survival is the holy grail of any cancer drug. It is one thing for cancer to grow slower and let the patient live a longer life but gaining another 6-12 months of life is a fleeting goal. Living out your normal life span is the target all drugs shoot for. By modifying the trial to focus on longer term benefits, the eventual drug approval will be worth more. If the short term drug is worth $10,000 per treatment, a drug that give you upir life back is worth 10 times or even a 100 times that amount.
Merck will refile the application when they have the new data but this is one drug with $3 billion a year in sales compared to their current $40 billion in overall volume. If they get the OS data they want, Keytruda could grow to $10 billion a year by 2022.
I believe this drop is a buying opportunity because the LEAP premiums are miniscule for a company with a $150 billion market cap and $40 billion in annual sales.
I am going to recommend two LEAPS because they are so cheap. Choose either one or buy both.
Update 12/3/17: Merck announced another $10 billion share buyback program and they increased their dividend to 48 cents.
Update 12/17/17: Merck said a late stage trial for its blockbuster drug Keytruda failed to meet the main goal of extending lives of patients with gastric cancer. The drug is effective in other forms of cancer. Shares declined slightly on the news.
Long Jan 2019 $60 LEAP Call @ $2.38, see portfolio graphic for stop loss.
Long Jan 2020 $60 LEAP Call @ $3.90, see portfolio graphic for stop loss.
MU - Micron Technology Company Profile
Micron reported earnings of $2.45 that beat estimates for $2.20. Revenue of $6.8 billion rose 71.4% and beat estimates for $6.39 billion. They guided for current quarter earnings of $2.51-$2.65 and revenue of $6.8-$7.2 billion. Analysts were expecting $1.95 and $6.08 billion. Shares spiked on the news then declined for the last week as the semiconductor sector rolled over in a generally weak market.
Original Trade Description: October 22nd.
Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.
Micron is on a roll. Some analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.
For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.
For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.
Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.
Shares spiked on earnings and ran up to $40.50. They have been consolidating in the $40-$42 range for the last two weeks.
On October 10th, they announced a $1 billion secondary offering and shares dipped for several days while the offering was priced and completed. This added 25 million shares to the float with 1.14 billion shares outstanding.
This was a great deal. They are using the proceeds to help fund the retirement of $2.25 billion in debt priced at 7.5% and 5.5% interest. This will reduce their costs and eliminate those debt service payments. They raised about $1.2 billion after the offering was upsized and the rest of the funds for debt retirement will come out of cash on hand.
Summit Redstone said buy because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Credit Suisse reiterated an outperform rating and $50 target. Susquehanna has a $50 target and Evercore ISI has a $50 target. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Stifel has a $60 target. Needham's, Rajvinda Gill has a price target of $76.
UBS analyst Stephen Chin says he expects Micron's profits to rise 50% in 2018 to $7.50 per share. If you put any kind of market multiple on those earnings, the stock should double.
Update 12/17/17: Morgan Stanley said buy Micron despite rising production on NAND memory and the expected softening of prices. Analysts expect Micron's NAND cost to decline 30% over the next 12 months. They said demand remains very healthy and new sources of demand keep popping up everywhere. They referenced the IoT, AI and self driving cars.
Long Jan 2019 $45 call @ $7.00, see portfolio graphic for stop loss.
Short Jan $60 call @ $3.10, see portfolio graphic for stop loss.
Net debit $3.90.
NVDA - Nvidia - Company Profile
The Nvidia rally may have run its course. Shares have been struggling over the last month and there is more than likely some profit taking ahead in January. I am recommending we close the position.
Original Trade Description: September 18th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Update 12/3/17: Nvidia shares fell $20 for the week on the crash in the chip sector, the Nasdaq decline and a downgrade from Morgan Stanley saying they expect the cryptocurrency buying binge will fade in 2018 as coin mining slows. Multiple analysts call this a buying opportunity. Nvidia fell to uptrend support and the logical entry point. TheStreet.com called this the once in a lifetime buying opportunity. Unfortunately, 2019 LEAP options all the way out at $250 are still $18 and crazy expensive.
Update 12/10/17: Nvidia (NVDA) announced a new Titan V graphics processing unit (GPU) for PCs. The Titan V is built on the company's new Volta architecture. The video card is targeted at machine learning and artificial intelligence (AI). The 12gb HBM2 video memory card has 21.1 billion transistors, can deliver 110 teraflops of performance and is NINE TIMES more powerful than its predecessor the Titan Xp, which was just announced in April.
Think about that. Nvidia already had the fastest GPU on the planet that was less than 9 months old and they have already produced a new one that is nine times faster. This is why AMD and Intel do not have a chance. While they are trying to figure out how to copy Nvidia's prior architecture, Nvidia is already light years ahead of them with the next version.
Gartner (IT) said PC shipments rose 3.6% in Q3 but the high-end PC market that includes gamers and GPU enabled PCs grew much better than expected. Allied Market Research said the GPU market is expected to reach $157 billion by 2020 with an annual average growth rate of 35.6% from 2016 through 2022. Jon Peddie Research said graphics board shipments rose 29.1% in Q3 over Q2 and 21.5% YoY. Nvidia continues to be the leader with 72.8% market share.
Nvidia shares fell $30 from $217 to $187 in the chipwreck over the last two weeks. Everything I wrote about above plus the dozens of other areas they dominate, suggests this is yet another buying opportunity.
Update 12/17/17: RBC Capital said the reports of Nvidia's expected decline have been greatly exaggerated. RBC believes crypto currency will continue to be a driver even if ethereum moves out of the mining category into a proof of stake category. The analyst said there were multiple new currencies that are still mined including monero, bitcoin gold, ethereum classic and others. He believes that even if crypto currency mining eventually disappears Nvidia will still be needed to build out the giant world computer that will be the repository of the unlimited number of blockchain applications. Every blockchain application requires a giant network of powerful computers to house and constantly proof the trading register/ledger.
Position 9/19/16 with a NVDA trade at $63.50
Closed 6/14/17: Long Jan 2018 $70 LEAP Call @ $9.40, exit $84.50, +75.10 gain.
Closed 6/14/17: Short Jan 2018 $90 LEAP Call @ $3.73, exit 64.30, -60.57 loss.
Net gain $14.53.
New Position 3/13/17:
Long Jan $120 LEAP Call @ $6.75, see portfolio graphic for stop loss.
PGR - Progressive Corporation - Company Description
No specific news and a new high on Thursday.
Original Trade Description: November 26th
The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com
Expected earnings January 16th.
Despite the hurricanes in Aug/Sep, Progressive reported earnings of 41 cents that rose 13.9% and beat estimates for 30 cents. Premiums written increased by 18% to $7.1 billion. Premiums earnings rose 14% to $6.5 billion. Premiums written benefitted from a 15% rise in prices. Operating revenues rose 15% to $2.1 billion. Investment income rose 20%, fees and other revenue rose 16% and service revenues rose 22%. These are outstanding numbers despite the impact from the hurricanes on auto losses.
At the end of the quarter there were 5.9 million direct auto policies in force and 5.5 million agency auto policies in force, an 11% overall rise.
In early November they reported premiums written in October totaled $2.758 billion, up 22% from Oct 2016. Total personal policies in force rose 9% to 15.950 million and commercial policies rose 5% to 643,500.
There is no bad news anywhere in their financial disclosures.
Shares are not fast movers but premiums are cheap. Previously Progressive did not have LEAPS but they were just added. The 2020 LEAPS have no open interest and the bid ask spread is 100%. A $55 2020 LEAP is bid $2.85, ask $5.80. We do not want to go there.
Update 12/17/17: Progressive said net premiums written in November rose 20% to $2.022 billion. Total policies for personal insurance like auto or home rose 9% to 15.98 million. Total business policies rose 20% to 1.436 million. Shares spiked to a new high and then faded on Thursday.
Long Jan 2019 $55 Call @ $3.00, see portfolio graphic for stop loss.
PYPL - PayPal - Company Profile
No specific news. Shares have weakened with the Nasdaq in December. I added a stop loss.
Original Trade Description: July 30th.
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies.
Company description from FinViz.com
PayPal has been on a roll lately. They reported earnings of 46 cents, up from 36 cents and beat estimates for 43 cents. Revenue of $3.14 billion beat estimates for $3.09 billion. Transactions processed rose 23%. They guided for the full year for revenue of $12.78-$12.88 billion with earnings of $1.80-$1.84. Analysts were expecting $12.7 billion and $1.79. Paypal added 6.5 million accounts to total 210 million customers. The company said they were on track to add 25 million new accounts in 2017.
The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.
Pacific Crest Securities said their market cap of $71 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.
Update 8/13/17: Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.
Update 8/21/17: Paypal said payment platform Venmo was on track with expectations. The platform processed $8 billion in payment volume, a 103% YoY increase. Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.
Update 9/24/17: Evercore ISI reiterated a buy rating and raised the price target from $68 to $81. The company has $7 billion in cash and it looking for bolt on acquisitions that will be immediately accretive to earnings and continue to expand the brand.
Update 10/1/17: Bernstein wrote a piece on potential acquisition candidates by PayPal. Square (SQ) was a potential target. Bernstein article
Update 10/21/17: PayPal reported earnings of 46 cents that rose 31% and beat estimates for 44 cents. Revenue of $3.24 billion rose 21% and beat estimates for $3.17 billion. They processed $114 billion in payments and person to person payments rose 47% to $24 billion. The Venmo app processed $9 billion in payments for 93% growth. They added 8.2 million new active members. They guided for the current quarter to earnings of 50-52 cents and for the full year for $1.86-$1.88. Shares spiked 5% on the report.
Update 11/19/17: The company said it has sold its credit card assets to Synchrony Financial (SYF) for $5.8 billion. The bank will become the exclusive issuer of Paypal branded credit cards. The company also raised its guidance for Q4 to 52-59 cents on revenue of $3.64-$3.7 billion. Prior guidance was 37-39 cents on $3.57-$3.63 billion. Paypal said they had been using 40% to 50% of their free cash flow to fund the credit card business. With the asset sale, they will continue to promote the cards and grow the business but it will be up to Synchrony to fund the credit expansion. This was a win-win for both companies.
Update 12/3/17: Keybanc raised their price target to $90 saying the Venmo app was the preferred payment app for 76% of responders in a recent survey. They expect $75 billion in Venmo payments in 2018 and Paypal will see earnings rise 4 cents for every $10 billion.
Long Jan 2019 $65 call @ $6.27, see portfolio graphic for stop loss.
ROKU - Roku Inc - Company Description
No specific news. There are 5.94 million shares short against a float of 17.4 million. There are 97.8 million shares outstanding but the rest are tightly held by insiders. The average daily volume in December was 8.487 million shares. There is a good possibility of higher highs if the market turns positive.
Original Trade Description: December 3rd
Roku pioneered streaming to the TV. We connect users to the streaming content they love, enable content publishers to build and monetize large audiences, and provide advertisers with unique capabilities to engage consumers. Roku streaming players and Roku TV models are available around the world through direct retail sales and licensing arrangements with TV OEMs and service operators. The company was founded by Anthony Wood, inventor of the DVR. Roku is headquartered in Los Gatos, Calif. Company description from FinViz.com
Expected earnings February 7th.
Roku is the hottest streaming service going today. Unlike Netflix where they stream movies, Roku streams everything from broadcast channels, cable channels, Hulu, Showtime, ESPN, HBO, Directv Now, Amazon Video, Sling TV, Google Play, ABC, NBC, CBS, FOX, Disney channels, 140 Sports channels, European channels, Asian channels, hundreds of other channels and even Netflix. Roku is a set top box or in the case of new TVs just a USB flash drive and a remote. Recently, most smart TVs come with the Roku app preloaded.
Manufacturers are partnering with Roku and nearly every content generator is putting their content on Roku. This is the answer to cutting out those sky high cable bills. This is the cord cutting device for millennials.
The challenge is that Roku IPOed at $15 in early October and the stock has run up to $45 in only two months. Some analysts are predicting it will triple over the next two years and others are saying it will return to $15. Short interest is 27%.
Roku is a very small company with a market cap of $789 million. Amazon, Disney, Google or even Netflix could buy them for pocket change and have another highway right into your living room.
I believe this is the wave of the future. The only drawback is that it is not a DVR. The plus side is that you can download almost anything on demand and will not need a DVR for most of your TV viewing.
Roku is currently almost giving away its hardware. This is the Amazon model. Give away the device and profit from the content delivery. Hardware revenues rose only 4% last quarter. Those are one-time sales. Platform revenues rose 137% and those repeat every month. The platform generates 80% of Roku revenues at this point. It has crossed the bridge from being just another over the top box to a service that everyone wants.
I think this company has a better chance of being acquired than seeing its stock triple. The company is too cheap and the service is too easy to use.
The bears point to Tivo and the disaster it became. This is not Tivo. That was a set top box that depended on a cable or network feed to film shows for later viewing. Comcast and Directv killed that service with their own DVRs.
LEAPS are not cheap but if the bullish analysts are right and the stock triples from here, it will be worth the investment. If the bears are right, we will lose some part of the $700 per contract we are going to spend. We will stop out if the stock goes against us.
Long JAN 2019 $45 call @ $13.03, see portfolio graphic for stop loss.
Short JAN 2019 $75 call @ $5.88, see portfolio graphic for stop loss.
Net debit $7.15. Potential gain $23.00.
TEVA - Teva Pharmaceuticals - Company Description
Teva said its BLA application for Fremanexumab as a preventive for migraine headaches had been granted a priority review designation by the FDA. There were two successful Phase III studies under the HALO program with patients with episodic migraine and chronic migraines.
Original Trade Description: December 10th
Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com
Expected earnings Feb 1st.
Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.
Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO,Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. Last week, the stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.
Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.
I believe the worst is over. The reaction to the news over the last four months has been horrendous. Shares had fallen from $32 to $10. Since the new CEO took control, they have rebounded back to $16.
Because of the giant drop, the LEAP premiums are very reasonable. I am suggesting we take advantage of the los premiums and the potential for a share price recovery. I am recommending both the 2019 and 2020 strikes. This way we can take some gains in late 2018 and let the longer term bet ride.
Update 12/17: Teva announced on Thursday they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.
Long Jan 2019 $20 LEAP Call @ $2.10, see portfolio graphic for stop loss.
Optional: Long Jan 2020 $20 LEAP Call @ $3.70, see portfolio graphic for stop loss.
TTD - The Trade Desk - Company Description
No specific news. Wells Fargo initiated coverage with a buy rating.
Original Trade Description: November 19th
The Trade Desk is a technology company that empowers buyers of advertising. Through its self-service, cloud-based platform, ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social, on a multitude of devices, such as computers, mobile devices, and connected TV. Integrations with major data, inventory, and publisher partners ensure maximum reach and decisioning capabilities, and enterprise APIs enable custom development on top of the platform. Headquartered in Ventura, CA, The Trade Desk has offices across North America, Europe, and Asia. Company description from Trade Desk.
The Trade desk reported earnings of 35 cents that rose 46% and beat estimates for 26 cents. Revenue of $79.4 million rose 50% and beat estimates for $77 million. TTD has a history of strong earnings beats.
Mobile In-App revenue rose 77%, Mobile video rose 140% and connected TV revenue rose 159%. Customer retention remains over 95% for the 16th consecutive quarter.
The problem came from the guidance. The company said Q4 revenue would be around $101 million and EBITDA of $34 million. Analysts were expecting $102 million and $37 million.
However, they raised full year guidance for revenue of $306 million and EBITDA of $90 million. Up from $303 million and $88 million.
The company said they were investing in growth and expanding in Spain, France, Singapore, Germany, Korea and Indonesia where their business grew by 100% or more over the year ago quarter. China is now seen as a major growth opportunity.
There is nothing wrong with this company. Every company wishes they could post the same kind of growth numbers. Shares were crushed from $65 to nearly $45 after earnings. I suggest we buy the dip. The options are expensive so this has to be a spread.
Long Jan 2019 $55 call @ $10.52, see portfolio graphic for stop loss.
Short Jan 2019 $80 call @ $3.80, see portfolio graphic for stop loss.
Net debit $6.72.
VAR - Varian Medical Systems Company Profile
No specific news. Shares almost closed at a record high on Thursday and only missed it by 20 cents.
Original Trade Description: October 1st.
Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.
Expected earnings October 25th.
Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.
The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.
Shares had rebounded to a new high at $107.87 on Sept 14th but ran into a bout of profit taking that knocked it back to $98. There was no news that would have been negative. It was simply time for portfolio managers to rotate into something else for the next earnigns cycle.
Varian just announced the initial treatments of cancer patients using their new Halcyon radiation system. The first patient had head and neck cancer that required delivery of the treatment to nine different locations. The entire treatment time including setup, imaging, 3 minutes of beam time and patient discharge was only 13 minutes. Typically, a treatment like this using other technology requires 10 minutes of beam time and 20 min of total treatment time, plus it is far less precise.
Varian is delivering state of the art radiation systems all over the world and they are the leading edge in this technology.
The recent decline has taken VAR back to uptrend support and I believe it is time to buy the dip.
Varian does not have LEAPS so I am using the longest dated option available for May 2018.
Update 10/29/17: Varian reported earnings of $1.09 that missed estimates for $1.19. The company had guided for $1.16-$1.23. Revenue of $739 million also missed estimates for $741.7 million. The company revised full year guidance to $4.20-$4.32 on revenue of $2.72-$2.78 billion. Analysts were expecting $4.47 on revenue of $2.8 billion.
All of the sales metrics were very positive with strong bookings for their multimillion dollar systems. They booked 23 Halcyon systems and 6 proton therapy orders. They did take a charge for $13 million relating to a doubtful loan to California Proton Therapy Center. Earnings projections are rocky because delivery, installation, acceptance and payment of these monster systems are sporadic. There are hundreds of details involved in the site preparation, delivery, installation and training.
Long May $105 call @ $5.40, see portfolio graphic for stop loss.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
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.