Option Investor

Daily Newsletter, Monday, 2/18/2019

Table of Contents

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

Leaps Trader Commentary

Hungry for Chinese?

by Jim Brown

Click here to email Jim Brown
Have you ever eaten Chinese food only to be hungry again a couple hours later? Investors are suffering from the same problem. They get a dose of news about the Chinese trade process and it fills them up for a couple hours but they are almost immediately hungry for another serving.

Unfortunately, there is a lot of news flowing and not all of it is positive. The prior week the market tanked temporarily on news we were a long way from an agreement and there would be no meeting between Trump and Xi. Last week the market exploded higher on news the talks were progressing and negotiators would return to Washington this week for further talks. Furthermore, Trump and Xi agreed to meet at the end to sign a memorandum of understanding once an agreement was reached. Trump even said he was willing to postpone the March 1st tariff increase if there was measurable progress in the talks.

Using the recent trend, it would suggest there will be another round of negative news this week. The president is fond of the carrot and stick approach. The prior week was a stick week, last week was a carrot week and this coming week could be another dose of the stick involving a new round of threats.

With the markets closing in on strong resistance from two months ago it is going to take another carrot week to lift us over those levels. Futures on Sunday evening were positive but only barely. Futures on Monday evening are slightly negative. There are no indications of direction. The Asian markets are mixed with minor gains and losses.

On Monday President Trump is threatening military involvement in Venezuela if an orderly transition of power cannot be made. While the conditions in Venezuela are horrific, the market will not be happy with a military incursion because Venezuela is supported by China, Russia, Iran and Syria, four of our favorite countries. Russia and China could respond because of their extensive investments in the country. They will not want to lose billions of dollars in debts and facilities. Venezuela owes China more than $20 billion in oil backed loans. Russia was using the country as a military base in South America to project power closer to the USA.

Markets like to climb a wall of worry so they may get their chance this week.

Analysts are puzzled as to why the market keeps rising. The Dow, Nasdaq and Russell have been up for 8 consecutive weeks. Another streak that is not getting as much attention is the 11 consecutive weeks of outflows from equity funds. Bank of America said $83 billion has flowed out of equities over the last 11 weeks. These two facts seem to contradict each other. How can the markets rally for 8 weeks if there have been outflows for 11 weeks?

The market cap of the US equity market is $34 trillion. The $83 billion in outflows is only 0.00237% of the total market cap. This is the proverbial drop in the bucket. This does not mean $83 billion is not material because the vast majority of the US market cap never changes hands. Those stocks sit in investor accounts for years or even decades at a time without being traded. Average daily trading volume is about $350 billion. The $83 billion in outflows over the last 11 weeks equates to about $1.5 billion a day. Compared to the $350 billion average daily volume, it is insignificant. This is another example of people worrying about a headline that is immaterial in the bigger picture. It sounds like a big number, but it isn't once you do the math.

What is important is the resistance at 2,815 on the S&P. This level repelled rallies three times since October and we are getting close again. The S&P has rallied 429 points since the December 26th low at 2,346. There have been three periods of decent retracement along the way, but this rebound is very overbought given the length of the rebound and the weak fundamentals in economics and earnings. Nobody will be more excited if we break through that 2,815 level but I remain skeptical until it happens.

We do know that these high-profile resistance targets act like tractor beams when the index gets close so the odds are good, we will test it. It is the results after the test that are important. Do we push through or fail again? Also, since this level is such a high-profile event the bears are likely to be setting up their shorts once we pass 2,800.

The Dow benefitted from the rotation into industrial stocks and stocks that will benefit from a Chinese trade agreement. Boeing continues to be a leader whenever the China talk turns positive. The index closed over the first line resistance at 25,817 with the next target at 26,191. The giant round number in our future is 27,000. If we get through that resistance from November, the 27,000 level is going to be the instant target.

The Nasdaq Composite closed just barely over the 200-day at 7,465 and a move over 7,500 should set up a sprint to 8,000 and the highs from October. The decline in the FANG stocks held the index back on Friday.

The Russell 2000 closed 3 points over correction territory with the second-best percentage gain at 1.56% of all the major indexes. The small caps reacted much stronger than expected on the positive news from China. They should not be impacted as much from the tariffs other than cost of goods and raw materials. The small caps are mostly domestically focused companies and do very little business in Asia.

We have a light calendar for next week with the FOMC minutes the highlight. The Philly Fed Manufacturing Survey and the Existing Home Sales are the next most important.

Chinese trade negotiators will travel again to Washington this week in hopes of getting closer to a final deal before the March 1st trade deadline. The meeting days have not been published.

The Q4 earnings cycle is 80% over with 394 S&P companies having already reported. Q4 earnings growth is now projected at 16.4% with 6.0% revenue growth. Some 69.5% of companies have beaten estimates and 61.7% beat on revenue. For Q1 there have been 56 guidance warnings and 23 guidance upgrades. The are 51 S&P companies reporting this week. The forward PE has risen to 16.3%. The Q1 earnings forecast has declined to -0.5%. Energy is the biggest drag with a projected decline of -13.6% and healthcare is the strongest sector with a +6.2% forecast.

The earnings calendar is shrinking. Dow component Walmart will report on Tuesday. Agilent, CVS, Dominoes Pizza and Hewlett Packard Enterprise should be the most watched for the rest of the week.

With the government shutdown out of the way and Chinese negotiators coming to Washington to play nice once again, there is little in the headlines to roil the market. The market does best when it is climbing a wall of worry and we seem to be entering a calm period. However, the last two weeks of February are normally the weakest as post earnings depression weighs on the market. With the major indexes nearing their prior highs on weak earnings projections ahead of a weak period on the calendar, what could possibly go wrong? Obviously, quite a bit but investors appear to be drunk on the potential for a trade agreement. The hangover could be painful.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Lots of New Highs

by Jim Brown

Click here to email Jim Brown

Current Position Changes

PAYX - PayChex
The long position was entered on Monday.

ATVI - Activision Blizzard
The long position was stopped at $42.65.

Stop Loss Updates

Check the portfolio graphic for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any lines in gray were previously closed.

Current Portfolio

New Plays

Sector Reversal

by Jim Brown

Click here to email Jim Brown

XBI - S&P Biotech ETF - ETF Description

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The S&P Biotechnology Select Industry represents the biotechnology segment of the S&P Total Market Index (S&P TMI). The S&P TMI is designed to track the broad U.S. equity market. The biotechnology segment of the S&P TMI comprises the Biotechnology sub-industry. The Index is modified equal weighted. The ETF seeks to track a modified equal weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks. The ETF allows investors to take strategic or tactical positions at a more targeted level than traditional sector-based investing. ETF description from S&P.

The biotech sector was crushed in Q4 and has rebounded strongly since Christmas. However, the sector is still down about 15% from the August highs. More than $600 million flowed out of the IBB/XBI ETFs in Q4. This means fund managers are still underweight biotech even after the January rebound. Barron's believes these funds will be forced to chase prices in the weeks ahead to rebuild their biotech positions.

Jefferies said the decline in Q4 was the largest outflows from the actively managed funds in 15 years. Should the XBI continue to rise, Jefferies expects strong fund flows back into the sector with managers very underweight the sector.

The XBI closed at a 4-month high on Friday after struggling for a month to move over the $85 level. This could be the breakout that allows a rebound to the $101 high or beyond.

Options are expensive so I am making this a combination position.

Buy January $90 call, currently $8.00, stop loss $81.25.
Optional: Sell short Jan $75 put, currently $4.00, stop loss $81.25.
Net debit $4.00.

Play Updates

Head Fake

by Jim Brown

Click here to email Jim Brown

Editors Note:

Various headlines caused several days of volatility suggesting the rally was fading. Clearly that was not the case and many investors were surprised with Friday's gains.

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)

ABBV - AbbVie - Company Profile


AbbVie bought the rights to BCMA-targeting immunotherapeutic candidate TNB-383B from Teneobio for $90 million. This will be developed as a treatment for multiple myeloma.

Original Trade Description: February 11th.

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. The company reported Q4 adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.

The company's many new 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.

AbbVie's drug Humira is expected to sell more than $20 billion in 2018 after a $18 billion revenue in 2017. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs. 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.

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.

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, women's health and Hepatitis C.

Update 1/27: Friday was a bad day for ABBV. The company reported earnings of $1.90 that missed estimates for $1.94. Revenue of $8.305 billion missed estimates for $8.350 billion. Sales of their key drugs rose 9% but competition from generics provided a stiff headwind. They guided for 2019 for earnings of $8.65-$8.75 and analysts were expecting $8.72. Shares fell 6% on the news.

Position 2/12/18:
Position 7/30/18:
Long Jan 2020 $100 call @ $7.70, see portfolio graphic for stop loss.

Dropped 12/9/18: Long Jan 2019 $120 LEAP Call @ $8.50, expiring.
Position 3/26/18:
Long Jan 2019 $120 LEAP Call @ $3.30.
Adjusted cost now $5.90. expiring -5.90 loss.

AMD - Advanced Micro Devices - Company Description


No specific news. Shares are holding most of the post earnings gains.

Original Trade Description: Dec 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. The company's products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, 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; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, 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 brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. In addition, it provides 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, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products. It serves original equipment and design manufacturers, datacenters, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Santa Clara, California. Company description from FinViz.com.

AMD was always the red-headed stepchild that Intel kept around to prevent Intel from being called a monopoly. They let them have just enough business to keep them going. After decades of picking up Intel's scraps, the company has finally come of age and has announced multiple processor families that are more technological advanced than Intel's chips and they are 12-18 months ahead of Intel's first foray into this level of manufacturing.

Cloud operators are taking notice of the faster, cooler, cheaper processors and this sector buys hardware by the truckload. AMD is stealing market share from Intel and this is likely to accelerate as these new processor families flood the market before Intel can catch up.

Earnings Jan 23rd.

Over the last two weeks of Nasdaq decline, AMD pulled back to uptrend support and could be ready to rebound sharply if the market cooperates.

Update 1/11: AMD's president and CEO, Dr Lisa Su, gave the keynote address at CES 2019 on Wednesday. She announced the fastest GPU video card they have ever produced running on a 7nm process. The card has 60 compute units, 3840 stream processors, 16gb of ultra-fast HBM2 memory with a 1 TB memory bandwidth for stunning high-speed graphics on 4K and 8K monitors. Shares popped at the open but faded in the afternoon.

Update 2/3/19: AMD reported earnings of 8 cents that matched estimates. Revenue of $1.42 billion missed estimates for $1.44 billion. AMD guided for Q1 revenue of $1.2-$1.3 billion and analysts were expecting $1.65 billion. With the misses you would have expected shares to fall. However, Intel appointed a business CEO rather than a "technologist" and that was seen as an opportunity for AMD to extend their lead in the server area.

Update 2/10: The Abu Dhabi sovereign wealth fund is exercising warrants for 75 million shares at $5.98 that it received in 2016. It is then selling 35 million shares for cash. AMD gets $448.5 million for the warrants and the fund sells half its stake and retains a 7% position in AMD. With shares up nearly 400% since the $1.75 low in 2016, the fund has made a nice profit and said it was recycling that profit into other investments as it does from time to time. By keeping a 7% stake in the company they can continue to profit as the stock moves higher.

Position 12/24/18:
Long Jan 2020 $20 LEAP Call @ 3.57, see portfolio graphic for stop loss.

APA - Apache Corp - Company Description


No specific news. Oil prices are rising again and that is lifting equities.

Original Trade Description: Nov 11th.

Apache Corporation, an independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids (NGLs). The company has operations in onshore assets located Permian and Midcontinent/Gulf Coast onshore regions; and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt's Western desert; and offshore assets in the North Sea region, including the United Kingdom. As of December 31, 2017, the company had total estimated proved reserves of 1.2 billion barrel of oil equivalent, including 583 million barrels of crude oil, 204 million barrels of NGLs, and 2.3 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.

In September 2016, Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. This "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The "Alpine High" play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage they drilled 19 wells to prove out the reserves.

Apache said it was raising capex from $200 million to $2 billion to reflect their anticipated activity in this area. Well costs are $4-$6 million for 4,100 foot laterals. They have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone.

The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.

Apache said they also discovered oil at the Garten Prospect in the North Sea. The initial well found more than 700 feet of net pay with expectations for 10 million barrels of recoverable oil. This was the 2,500th exploration well off the UK coast. Apache owns 100% of the discovery. This is the 4th discovery in the Beryl region in the last three years and all wells will be tied back to the Beryl Alpha platform.

Apache and Enterprise Product Partners (EPD) signed an agreement to accept 205,000 bpd of NGL from Apache's Alpine High play. The 658-mile EPD pipeline is expected to be completed in Q2-2019 with an initial capacity of 550,000 bpd. Apache also has the option to acquire a 33% equity stake in the pipeline once it is completed. This is a great deal for Apache and allows them to export their NGLs from the Permian while others are still backlogged.

Apache partnered with investment firm Kayne Anderson to form a $3.5 billion Permian Basin pipeline firm. Apache will contribute $1 billion of assets and Kayne will contribute $900 million after a private placement offering. When the deal closes, Apache will own 71.1% of the company and it will be called Altus Midstream. There are three other companies that will participate in the private placement. Altus will operate Apache's assets in the Alpine High field and have options to buy Apache's stakes in five other planned pipeline projects from the Permian to the Gulf Coast. Apache will be able to shift about $170 in pipeline capex in Q4 to Altus and $250 million in 2019. The Altus results will be consolidated with Apache's.

Apache said it was selling its 35% operating interest in the Seagull development in the North Sea and 50% of the Isabella prospect to Neptune Energy for $1 billion. Apache intends to use the proceeds to pay down debt and invest in the Alpine High project.

On Halloween, Apache reported earnings of 63 cents that rose 29% and beat estimates for 43 cents. Revenues of $2.0 billion beat estimates of $1.9 billion. Apache declared a quarterly dividend of 25 cents payable Nov 21st to holders on Oct 22nd.

Q3 production averages 476,255 Boepd with 64% of that was liquids, a gain of 6% from the year ago quarter. Oil and NGL production averages 305,436 bpd. Production in the Permian rose from 201,832 to 222,259 Boepd. They received an average of $69.12 per barrel for oil and 2.56 per Mcf for gas.

They guided for US production to increase from 262,000 to 260,000 by the end of December.

Apache is sitting on a gold mine. Black goal. The Alpine High discovery is just now accelerating into production as the initial infrastructure has been completed. As the pipelines begin operation their production is going to soar. They have been drilling like crazy and the production will catch up once the pipelines open.

Oil prices are at nine-month lows and energy equities are nearly that bad. Apache has declined from $50 to $36 and has held there for the last two weeks despite the continued decline in crude.

There are multiple factors that pushed oil prices lower and they are all temporary. I believe oil prices are going to rebound and lift the sector. We are able to buy APA leaps cheaply because of the crude decline.

Update 11/18: Apache and Kayne Anderson Acquisition Corporation (KAAC) completed the transaction to create the Altus Midstream Company (ALTM) Permian Basin midstream pipeline company. Upon closing KAAC changed its name to Altue Midstream. Apache owns 79% of the company. Upon closing Altus entered into a credit arrangement for an $800 million unsecured five-year revolving credit facility with the ability to upsize it to $1.5 billion. The interest on this commitment is capped at LIBOR +1.425%. The new company has options to acquire stakes in five top tier Permian pipeline projects. The company currently has no debt and a substantial cash position.

Update 12/9: Apache achieved first oil at the Garten development in the North Sea less than 8 months after the discovery. The initial well found 778 feet of net pay and initial production was 13,700 barrels of oil per day and 15.7 million cubic feet of gas. Apache said there is more than 10 million barrels of light oil plus gas in this discovery.

Update 2/10: Apache announced an upstream capital budget for 2019 of $2.4 billion with 70-75% to be spent in the USA. They expect 2019 production to average 410,000-440,000 Boepd. They guided for 6-10% production growth, 12-16% growth in the US and 5% growth in the Permian. The company said it was returning 50% or more of free cash flow to shareholders. They declared a quarterly dividend of 25 cents payable May 22nd to holders on April 22nd.

Position 11/12/18:
Long Jan 2020 $40 LEAP Call @ $5.05, see portfolio graphic for stop loss.

Position 12/31/18:
Long (2) Jan 2020 $40 LEAP Calls @ $1.27, see portfolio graphic for stop loss.

Average cost = $2.53 with 3 contracts.

ATVI - Activision Blizzard - Company Description


Activision reported adjusted earnings of 90 cents that was nowhere close to the estimate for $1.29. Revenue of $2.43 billion also missed estimates for $2.84 billion. The company announced a restructuring and said it was laying off some non-essential workers and management and ending some efforts that were not seeing any progress. They said they would take a restructuring charge of $150 million. Despite the planned layoffs they will be increasing the developer headcount for Call of Duty, Candy Crush, Overwatch, Hearthstone and Diablo.

The company guided for full year earnings of $1.85 on revenue of $6.03 billion. Analysts were expecting $2.50 on more than $7 billion in revenue. The company did increase its dividend by 9% to 37 cents and approved a $1.5 billion two-year stock repurchase plan.

Unfortunately, we were stopped out at $42.65 on the dip.

Original Trade Description: Dec 9th.

Activision Blizzard, Inc. develops and distributes content and services on video game consoles, personal computers (PC), and mobile devices. The company operates through three segments: Activision Publishing, Inc.; Blizzard Entertainment, Inc.; and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content for the console and PC platforms through retail and digital channels, including subscription, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies; and offers downloadable content. It also 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; and develops and publishes interactive entertainment content and services primarily on mobile platforms, such as Android and iOS, as well as distributes its content and services on the PC platform primarily through Facebook. In addition, the company engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. Its products include various genres, including first-person shooter, action/adventure, role-playing, strategy, and others. The company serves retailers and distributors, including mass-market retailers, first party digital storefronts, consumer electronics stores, discount warehouses, and game specialty stores through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision, like all game developers, lives and dies by the number of games launched in the quarter. If they have a couple of strong games, the earnings are great. If they have a quarter without a launch, the earnings are bad.

For Q3, ATVI reported earnings of 34 cents that rose 36% from the 25 cents in the year ago quarter. Revenue of $1.51 billion declined -6.6% from $1.62 billion. The Activision segment saw revenue rise $50 million to $397 million despite the fact that Cll of Duty: Black Ops 4 did not launch until early Q4. Engagement rose slightly to 46 million MAUs in Q3. The Blizzard segment saw revenue rise 29% to $635 million with MAUs at 37 million and strong engagement in esports. The King segment saw MAUs decline from 270 million to 262 million as the Candy Crush game fades in popularity. Revenue declined 4% and income -12%. They are currently launching Candy Crush Friends Saga as a new chapter in the game. It soared to the top of the iPhone game download chart in 93 countries. The new game is on pace to drive meaningful growth of the franchise in 2019. In game bookings rose to a record $3 billion year to date.

The company reiterated guidance for the full year for revenue of $7.36 billion and earnings of $2.46. Shares declined sharply because the company was not outperforming and raising their own guidance. This is simply a lack of foresight because of the game release schedule and a weak market.

However, China has not approved any new games over the last nine months. China reviews games for violence, gambling, political content, sexual content as well as addictive components. China is also planning on limiting mobile games in an effort to reduce child myopia. The rapid growth in screen time on mobile devices has increased near-sightedness in children.

China has been changing the way they review and approve games and there have been several start/stop methods throughout the year. The overhaul of the approval process is expected to be completed in January and a surge in approvals will occur.

The bottom line is that ATVI shares crashed because of a game release schedule that was not favorable to Q3 results and the Nasdaq was already imploding at the time. Shares have found support at $47 and once the market recovers, we should see shares rise on Q4 results.

I looked at adding a short term put in case the market continues lower but the cost was not worth the coverage. The worst should be over for ATVI but there is never any guarantee.

Update 1/11: Activision said it was getting a divorce from Bungie after an 8-year marriage and shares imploded with a 10% decline. For those that do not know, Bungie developed the Destiny game and Destiny 2 was the third best selling game title in 2017. The NPD has not yet released the 2018 rankings. Bungie and Activision made the joint announcement and Bungie said they would begin self-publishing future games including the Destiny franchise.

Piper Jaffray expects the split to cost Activision $400 million in revenue and 15 cents in earnings this year. RW Baird also saw a 15-cent drop but only $300 million in lost revenue. The Baird analyst said he was not surprised with the split because Activision had said it was going to "pull the plug on underperforming games" and Destiny may have run its course. BMO capital had the same outlook that Destiny revenue was likely fading.

Not everybody was cutting estimates. The Benchmark Company reiterated a buy rating and $87 price target. Stephens initiated coverage with a buy rating and $65 target. Piper Jaffray only cut their price target by $2 to $55. The biggest hit came from Keybanc with a target price cut from $80 to $64.

Position 12/10/18:
Closed 2/6: Long Jan 2020 $55 call @ $6.35, exit $3.50, -2.85 loss.

CAT - Caterpillar Inc Company Profile


No specific news. Shares back to resistance on positive China trade news.

Original Trade Description: February 11th.

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.

CAT said sales for Q4 rose 35% on strong global demand for construction equipment. They reported earnings of $2.16 compared to estimates for $1.79. Revenue of $12.9 billion beat estimates for $11.9 billion. The company guided for 2018 earnings of $8.25-$9.16 and analysts were expecting $8.19. The CEO said demand remains strong thanks to rising oil prices, booming construction and a rapidly rising global economy. CAT reported before the open on Thursday and shares were volatile over the last two days. However, despite the volatility shares are only down about $2 from the pre-earnings close.

Given CAT's big rally over the last six months, it was no surprise to see the stock sell off sharply. However, shares found support at $142 and the 100-day average at $144.

Update 2/3/19: CAT reported earnings of $2.55 that missed estimates for $2.98. Revenue of $14.3 billion matching analyst estimates. They guided for 2019 earnings of $11.75-$12.75 and analysts were expecting $12.73. Despite the misses shares rallied on expectations for a trade deal with China.

Position 10/15/18:
Long Jun $160 call @ $6.45, see portfolio graphic for stop loss.

Position 2/12/18:
Dropped 12/9: Long Jan $160 call @ $14.48, expiring, -14.48 loss.
Closed 7/9: Short Jan $185 call @ $5.51, exit .68, +$4.83 gain.
Net loss $9.65.

CGC - Canopy Growth - Company Profile


Canopy reported a loss of 38 cents compared to estimates for a loss of 11 cents. Revenue rose from $9.8 million to $83.1 million. They sold 10,102 kilos of marijuana. Analysts were expecting 12,782 kilos. The company said the loss stemmed from the cost associated with the buildout of multiple large grow facilities and the volume miss came from a shortage of product. They can sell all they can grow and they are rapidly increasing capacity.

This is a 2021 position.

Original Trade Description: Sept 23rd.

Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana Inc. and changed its name to Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Company description from FinViz.com.

The cannabis sector is on fire and nobody knows how to play it because of the volatility. There will be downs as the rules are drawn and additional countries go all in on recreational use. Canada has approved recreational use starting in October for the entire country. Numerous U.S. states have passed new laws approving the use. Multiple countries have been legal for years but dozens are considering it today.

Tilray (TLRY) has been getting all the news because of its wild swings on only 17.8 million shares outstanding. Tilray is actually the smallest of the big three marijuana producers.

The other two are Canopy Growth (CGC) and Aurora Cannabis (ACBFF). Aurora also traded 15 million shares on Friday but they have 950 million shares outstanding. Canopy traded 11 million against 228 million outstanding.

Aurora is expected to produce 570,000 kilos of weed in 2019 and Canopy is expected to produce more than 500,000 kilos. Tilray said it would only produce 76,000 kilos in 2018 and 150,000 in 2019.

All three of these companies are primarily in weed today but they are rapidly moving to the CBD oils, which have a more mainstream use. Coke is looking at making drinks with CBD oil. Constellation Brands (STZ) is looking at making drinks and edibles with THC, the active ingredient in marijuana. Constellation made a $4.1 billion investment in Canopy with the option to buy more. With big money and big marketing behind Constellation and Canopy I am picking them to be the long term winner.

Look how far the legalization of marijuana has come in just the last two years. Where will the business be two years from now? This is truly a "sky's the limit" potential. The tobacco companies have not yet entered the sector and the most likely entry would be the acquisition of one of these companies. There is eventually going to be a land rush as everyone interested tries to get a piece of this sector starting with the growers.

If you look at the chart it is going to scare you. The recent spike was the $4.1 billion investment by Constellation. I would not be surprised to see the stock pull back to the uptrend around $40 and if it does we will close the short call for a gain.

Because of the interest in the sector, Canopy has LEAPS out in 2021. That is very long-term and should get us past all the initial volatility. Ideally, I would like to eliminate that short call at some point in the future if we see a material decline in the sector.

Update 10/7: Canopy has secured supply contracts for about 35% of expected demand in Canada. Marijuana for recreational uses becomes legal on October 17th. The current US Farm Bill will legalize CBD and Canopy is one of the largest CBD producers in the world. Two additional states have marijuana legalization on the ballot in November and 8 states have already made it legal. Constellation Brands currently owns 38% of Canopy and has warrants that will allow them to take control with more than a 50% stake over the next three years.

Update 10/26: Shares fell on a sell the news trade after marijuana became legal in Canada. That decline was accelerated by a bad market. Support appeared when news from Canada said that 50-75% of inventories were sold out. In Quebec the government run stores were only open 4 days a week because they ran out of product. Some brick and mortar retail locations were expected to remain closed until further notice because of supply shortfalls by producers. One online store, Ontario Cannabis made more than 100,000 sales in the first 24 hours. Various government run stores said they were only receiving about 40% of the products they ordered. The supply shortage is likely to last. New licenses to produce marijuana are taking about 341 days to process which will then be followed by the grow time to develop mature plants ready to harvest.

Update 11/18: Canopy reported a loss of $1.52 against no estimates. Revenue rose 33% to C$23.3 million and well below estimates for C$60.0 million. The biggest challenge is that Canada's legalization did not occur until the middle of October and after this reporting quarter ended. Sales of oils made up 34% of product sold, up from 18%. Kilos of cannabis harvested rose 265% to 15,127 but kilos sold rose only 9% to 2,197 because of the legalization deadline. The average price per gram rose 24% to C$9.87. The number of active registered patients in their medical program rose 34% to 84,400. It was actually a good report with the exception of the date issue.

Update 1/11: Canopy shares soared for the week after Piper Jaffray upgraded the stock and partner Constellation Brands said they expected the company to see $1 billion in revenue over the next 18 months. That is 56% higher than analyst estimates.

Update 1/27: Piper Jaffray raised the price target on Canopy by 50% to $60 saying the stock was well positioned in the emerging and growing markets for legal and medical marijuana. Piper expects the global cannabis market to be worth $250-$500 billion a year in the long term and $15-$50 billion in the short term. Canopy is developing health and wellness beverages infused with CBD thanks to the government legalization of hemp. The CBD market is expected to outperform the marijuana market over the long term.

Position: 9/24:
Long Jan 2021 $50 LEAP Call @ $20.30, see portfolio graphic for stop loss.

Previously closed 11/26/18: Short Jan 2021 $75 LEAP Call @ $14.80, exit $7.30, +7.50 gain.

CRM - Salesforce.com - Company Description


No specific news. Shares stalled at the prior high at $160. Consolidating ahead of next move. Earnings on 27th.

Original Trade Description: Jan 13th.

SalesForce.com, Inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, which helps to schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and solutions for financial services, healthcare, and government. Additionally, the company offers cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and consulting firms, systems integrators, and other partners. salesforce.com, inc. has a partnership with Apple Inc. to develop customer relationship management platform. The company was founded in 1999 and is headquartered in San Francisco, California. Company description from FinViz.com

When the market is weak, go with strength. CRM shares rallied on the strong earnings then pulled back only slightly during the latest Nasdaq crash. With CRM shares showing relative strength, this may be a safe port in a volatility storm.

SalesForce.com reported earnings of 61 cents that beat estimates for 50 cents and the year ago quarter of 39 cents. Revenue rose 26% to $3.39 billion and beat estimates for $3.37 billion. The company guided for revenue as much as $3.56 billion in Q4 and analysts were expecting $3.53 billion. They said they were on path for $16 billion in revenue in 2020 and $22 billion by 2022.

Billings, metric of future performance, rose 27% to $2.89 billion and beat estimates for $2.68 billion. Revenues rose 25% in the Americas, 26% in APAC and 31% in EMEA using constant currency. Sales cloud revenues rose 11%, service cloud rose 24% and marketing and commerce cloud rose 37%. Platform and "other" cloud revenues rose 51% or 30% if you exclude the acquisition of Mulesoft. The number of deals for more than $1 million rose 46%.

Adjusted gross profit of $2.6 billion came from gross margin of 76.9%. They ended the quarter with $3.45 billion in cash.

This company can seemingly do no wrong. When the tech sector eventually recovers SalesForce will be a leader.

Earnings February 26th.

Unfortunately, options are expensive so we will have to go with a combination position. I am using an upside trigger because the futures are negative on Sunday evening. If we do get a meaningful market dip, I would not hesitate to buy CRM on the dip and just move down on the strike prices.

Position 1/15/19 with a CRM trade at $148.65:
Long Jan 2020 $160 call @ $15.58, see portfolio graphic for stop loss.
Short Jan 2020 $120 put @ $6.72, see portfolio graphic for stop loss.
Net debit $8.86.

CSCO - Cisco Systems - Company Profile


The company reported earnings of 73 cents that beat estimates for 72 cents. Revenue of $12.45 billion beat estimates for $12.42 billion. They guided for the current quarter for earnings of 76-78 cents on revenue of $12.96-$13.21 billion, a 4-6% increase. Analysts were expecting 76 cents and $12.84 billion. They also raised their dividend 6% to 35 cents and added $15 billion to their stock repurchase program.

Original Trade Description: Aug 26th

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology industry worldwide. The company offers switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points, and servers; and next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice, and video applications. It also provides collaboration products comprising unified communications products, conferencing products, collaboration endpoints, and business messaging products; data center products, such as blade and rack servers, series, fabric interconnects, and management software solutions; wireless products consisting of wireless access points, WLAN controllers, cloud and appliances based services, and integrated software services. In addition, the company offers security products, including network and data center security, advanced threat protection, Web and email security, access and policy, unified threat management, and advisory, integration, and managed services; and other products, such as emerging technologies and other networking products. Further, the company offers a distributed file system for hyperconvergence that enables server-based storage systems; service provider video software and solutions; and technical support services and advanced services. It serves businesses of various sizes, public institutions, governments, and service providers. The company sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California. Company description from FinViz.com.

It appears that everyone is moving to the subscription model for software after the success of companies like Adobe in moving from a sales to a license subscription model. Microsoft Office, Autodesk, even BlackBerry is moving to a subscription model.

Cisco is moving to a subscription model on their highest capacity routers and switches. These devices cost from tens of thousands of dollar to hundreds of thousands. These are Cisco's highest capacity and smartest devices. However you need a masters in device programming to make them work correctly. With cyber security threats growing daily, enterprise users want to be able to stop the majority of the threats at the router level.

Cisco now sells multiyear software as a service (SaS) subscriptions for these top of the line devices. The CEO said the unbilled revenue for SaS subscriptions was their fastest growing revenue line item even though it is not on their books. If someone signs a 3-year service contract, Cisco can only recognize the revenue from the current quarter, and then defers revenue for the rest of the fiscal year. The revenue in future years is not disclosed. Deferred and unbilled revenue was up 28% for the quarter and she said unbilled portion was the largest component.

The reported earnings of 70 cents compared to estimates for 69 cents and earning only 48 cents in the year ago quarter. Revenue rose $700 million to $12.84 billion. Analysts expected $12.77 billion. For the current quarter they guided for 70-72 cents on revenue of $12.74-$12.99 billion. Analysts were expecting 69 cents and $12.58 billion.

I believe Cisco is on the verge of a breakout and a long awaited move higher. Cisco has been dead money all year after a surge in Q3/Q4 last year. This consolidation period may be about over.

Because of the 4.7 billion outstanding shares, the options are inexpensive and we can reach out to 2020 and capture all of the 2019 gains.

Update 9/23: Cisco announced a quarterly dividend of 33 cents payable Oct 24th to holders on Oct 5th. Shares rallied into Friday's close because of the increased weighting in the reformatted XLK ETF after the removal of Google, Facebook and Netflix. Microsoft and Cisco both saw big weighting revisions.

Update 11/18: Cisco reported earnings of 75 cents that beat estimates for 72 cents. Revenue of $12.14 billion missed estimates for $12.86 billion. The company guided for Q4 earnings of 71-72 cents on revenue of $12.48-$12.72 billion. Analysts were expecting 2 cents on $12.54 billion. Shares rallied on the news but fell back with the Nasdaq on Friday.

Update 1/6/19: JP Morgan said that the increase security surrounding Huawei and other Chinese products would be a big plus for Cisco. Multiple countries including the US are considering bans on the use of Huawei equipment for security reasons. This will benefit Cisco because they operate in the same space. Cisco is well positioned to profit from 5G and even more so if Huawei equipment is prohibited.

Update 1/11: Cisco said there are currently 4.8 billion internet users around the world and 29 billion connected devices. More than 80% of internet traffic is video. Cisco said with the advent of 5G internet traffic could triple by 2022. Cisco switches power 54.4% of internet traffic and 42.7% of enterprise routers and services. If traffic is going to triple, Cisco is in the driver's seat. They are currently rolling out their 400G products. This is the fastest switches available. Infrastructure carriers just upgraded to 100G (gigabit) a couple years ago but the rapid increase in data volume is making them obsolete even before the system wide roll out is complete. Nobody likes a slow internet so carriers will be forced to upgrade again to this faster product.

Position 8/27/18:
Long Jan 2020 $50 Call @ $3.25, see portfolio graphic for stop loss.

DELL - Dell Technologies - Company Description


No specific news. New closing high.

Original Trade Description: Jan 27th.

Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.

Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.

Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.

Since the new Dell shares have only been around a month, they are definitely not over-owned.

Earnings March 14th.

Update 2/10: Dell is considering selling its 85% ownership position in security firm SecureWorks (SCWX). Analysts believe the stake is worth $2 billion even though the market cap is only $254 million. Dell is trying to pay down its $50 billion in debt. Dell paid $612 million in 2011 and then floated the stock in 2016. Shares are up 64% since the IPO.

Position 1/28/19:
Long Jan 2020 $50 call @ $5.30, see portfolio graphic for stop loss.

HD - Home Depot - Company Description


No specific news. Four month closing high.

Original Trade Description: Oct 21st.

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also 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 do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 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 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

Home Depot shares have been crushed by the six consecutive months of declining home sales. The rising mortgage rates are also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while. I cannot quantify the numbers attributable to both scenarios but they are probably not far off. We saw this in the last housing downturn when those not moving decided to remodel instead because it was cheaper.

Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.

Support at $172 is solid. If I knew without a shadow of a doubt I would just say enter the position at $172. Unfortunately, nobody knows if that level will be tested again. I am going to recommend we enter now and then add to the position it we reach $172.

Update 10/26: HD continued to decline and closed at critical support at $172 on Friday. In the play description I said we would add to this position if HD reached $172. I do not want to blindly catch a falling knife but this is pretty strong support. Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.

Update 11/18: The company reported earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75. Shares will recover.

Position 10/22/18:
Long Jan 2020 $190 LEAP Call @ $14.76, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $5.54, see portfolio graphic for stop loss.
Net debit $9.22.

Position 10/29/18:
Long Jan 2020 $190 LEAP Call @ $11.70, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $4.27, see portfolio graphic for stop loss.

Average costs:
$190 Call = $13.25
$220 Call = $ 4.90
Net debit = $8.35

IBM - IBM Inc - Company Description


No specific news. Lots of product news as IBM continues to promote the future. New 4-month closing high.

Original Trade Description: Nov 4th.

International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. This 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 finance, procurement, talent and engagement, and industry-specific 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. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. International Business Machines Corporation was founded in 1911 and is headquartered in Armonk, New York. Company description from FinViz.com.

IBM announced last week they were acquiring Red Hat (RHT) for $34 billion. Shares were crushed and fell to $115 and a 9-year low. "They paid too much," "what were they thinking?" They were thinking about changing the playing field for cloud computing.

Some analysts praised the deal saying "this is as transformative as it gets." Some analysts warned that IBM could be forced to take on billions in new debt just as interest rates were rising. IBM generates about $12 billion in free cash flow per year and Red Hat also kicks off a lot of cash. IBM alone could fund this deal using only free cash flow in three years. The IBM said the deal would be accretive in year one and would boost free cash flow and margins in year one. IBM also has $15 billion in cash on its balance sheet.

IBM has been penalized for constantly falling revenue for years. The prior IBM business model was producing profits but the decline in hardware costs and move away from single clouds to multiple clouds per enterprise meant a constantly shrinking services base.

To solve this problem they acquired the largest hybrid cloud provider on the planet. Not only that Red Hat dominates the open source software component of the cloud. Red Hat grows revenue each quarter at double digit rates with 85% gross margins and 20% plus operating margins. IBM has flat revenue and 50% gross margins and 20% operating margins. IBM is acquiring a revenue generating machine and they do it at high margins.

More than 90% of Fortune 500 companies are Red Hat users with more than 100,000 Red Hat customers in total. The opportunity to cross sell products in the future is unbelievable. This is a marketing bonanza.

In cloud alone this will boost IBMs regular cloud business. The combination of IBM and Red Hat will eventually take market share from Amazon, Google and Microsoft. With IBM shares trading at a PE of 8 this is a this is an outright bargain. It may take several months for the reality to overcome the acquisition shock but once investors realize IBM is going to be a major power player in the cloud the stock will rise and $150 could be just a pause point.

Update 1/11: IBM announced the first quantum computer for commercial sale at CES 2019. The computer uses quantum particles known as qubits, which can have multiple data states at the same time and they can interact with each other in a process known as entanglement. This first quantum computer is called the IBM Q System One and it is a 20-qubit machine. Google has built a 72-qubit machine at its lab in Mountain View California but it is not for sale. It is for research only into the capabilities of quantum computing. There are no actual uses for a quantum computer at this time because scientists and researchers are still learning how it works. In theory it could be more than 100,000 times faster than a normal PC but researchers have to first create an operating system then write software to run on that system. More than 100,000 researchers and scientists have had access to the Q System One when it was in research mode. Now that these are going to begin appearing in multiple locations the real software development can begin. Skynet is watching.

It you have any geek in you and want to see the future, watch this video from IBM on the quantum computer. Quantum Explanation

Update 1/27: IBM reported earnings of $4.87 that beat estimates for $4.82. Revenue of $21.76 billion edged out estimates for $21.71 billion. They guided for 2019 for earnings of "at least $13.90" and analysts were expecting $13.79. The strong dollar cost IBM $2 billion in revenue in 2018. The cognitive software business which houses AI and Watson, saw revenue of $5.46 billion and beat estimates for $5.25 billion.

Position 11/5/18:
Long Jan 2020 $125 LEAP Call @ $6.85, see portfolio graphic for stop loss.
Long Jan 2021 $125 LEAP Call @ $10.80, see portfolio graphic for stop loss.
IBM shares could be $200 by the time this call expires.

INTC - Intel - Company Description


No specific news. Shares closed at a 6-month high.

Original Trade Description: Nov 18th.

Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

Intel has bucked the trend in the chip sector by beating on earnings and giving decent guidance. Shares have resisted any material decline in November and appear to be poised to break through resistance at $49.

On Thursday Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago Intel had 6.5 billion shares outstanding. If they complete this buyback program they will have just over 4 billion shares outstanding.

Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.

Update 1/27: Intel was the opposite of IBM. The company reported earnings of $1.28 that beat estimates for $1.22. However, revenue of $18.66 billion missed estimates for $19.02. Their biggest problem was guidance for Q1 of 87 cents on $16 billion in revenue. Analysts were expecting $1 on $17.29 billion.

Position 11/19/18:
Long Jan 2020 $55 LEAP Call @ $3.85, see portfolio graphic for stop loss.

KR - Kroger - Company Profile


Kroger announced the company's payment and loyalty card app called Kroger Pay. After you sign up you show a customized QR code on your phone at checkout and it subtracts the bill from your account as well as applies any loyalty discounts and serves up some additional discounts chosen just for the customer based on their buying habits. The app can be linked to your Kroger debit card or any other credit/debit card you set up.

Original Trade Description: Sept 16th.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food products for sale in its supermarkets. The company operates supermarkets, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty care departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys; and convenience stores comprise a limited assortment of staple food items and general merchandise, as well as sells fuel. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of March 8, 2018, the company operated 2,800 retail food stores under various banner names, as well as an online retail store. The Kroger Co. was founded in 1883 and is based in Cincinnati, Ohio. Company description from FinViz.com.

Kroger reported Q2 earnings and beat by a penny but revenue barely missed estimates. Kroger reported earnings of 41 cents compared to estimates for 29 cents. Revenue of $27.9 billion rose 1.8% but was just below estimates for $30.0 billion. Same store sales rose 1.6% but missed estimates for 1.8%. Shares were knocked for a 12% drop. Really, were the results that bad? No.

Kroger is only two quarters into their "Restock Kroger" restructuring program where they are remodeling the majority of the stores, changing the product mix and making the stores more inviting. They are spending a lot of money to prepare for the future.

Here is a key point. Online sales rose 50%. How many other retailers can make that claim? They are now selling their organic Simple Truth brand in Asia through Alibaba's Tmall. They just launched Kroger Ship and expanded their Instacart offering.

They guided conservatively for gull year same store sales to rise 2.0-2.5% and for earnings of $2.00-$2.15. Analysts were expecting $2.12 and that is where the stock crash was created.

For a company that is remodeling 2,800 stores and spending money to improve its future results, I think this decline was overkill.

Fortunately, it deflated the option prices significantly. We can buy a 2020 call for $2.57 that was in the money early last week. Kroger is not a chart ripper and it will not be $50 in January but it could be over $50 in Jan 2020 or higher as these merchandising efforts begin to bear fruit.

Update 1/11: Kroger said it was partnering with Microsoft to test digital shelf technology to speed up shopping. The edge of the shelf will be digital and can point the way to the exact item the customer is looking for. Say you want Jiff peanut butter. You speak that into your phone and get directions to the correct isle and shelf. Your personal icon will be blinking on the edge of the shelf underneath the item. The technology is being testes in Monroe Ohio and Redmond Washington. The shelf edge can also be used for display advertising for customers not using the search technology.

Kroger said it was planning a $1.2 billion debt offering. They will offer two series of notes of $600 million each due in January 2029 and January 2049. They are going to use the proceeds to refinance existing debt.

Position 9/17/18:
Long Jan 2020 $30 LEAP Call @ $2.70, see portfolio graphic for stop loss.
Long Oct $27 put @ 48 cents, see portfolio graphic for stop loss.

MRK - Merck & Co - Company Description


Merck received priority review for Ketruda combination drug for treatment in kidney cancer.

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

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.

Update 2/3/19: Merck reported earnings of $1.04 that beat estimates by a penny. Revenue rose 5% to $10.99 billion and beat estimates for $10.95 billion. Sales of Keytruda rose 66% to $2.15 billion. They guided for 2019 earnings of $4.57-$4.72 on revenue of $43.2-$44.7 billion. Analysts were expecting $4.69 and $44.2 billion.

Position 11/13/17:

Long Jan 2020 $60 LEAP Call @ $3.90, see portfolio graphic for stop loss.

Closed 12/17: Long Jan 2019 $60 LEAP Call @ $2.38, exit $17.02, +14.64 gain.

PAYX - PayChex Inc - Company Description


No specific news. New closing high.

Original Trade Description: Jan 27th.

Paychex, Inc. provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Europe. The company offers payroll processing services; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. It also provides HR outsourcing services, including Paychex HR solutions comprising payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative; and retirement services administration, including plan implementation, ongoing compliance with government regulations, employee and employer reporting, participant and employer online access, electronic funds transfer, and other administrative services. In addition, the company offers insurance services for property and casualty coverage, such as workers' compensation, business-owner policies, and commercial auto, as well as health and benefits coverage, including health, dental, vision, and life; cloud-based HR administration software products for employee benefits management and administration, time and attendance, recruiting, and onboarding solutions; and other HR services and products, such as employee handbooks, management manuals, and personnel and required regulatory forms. Further, it provides various accounting and financial services to small to medium-sized businesses comprising payroll funding and outsourcing services, which include payroll processing, invoicing, and tax preparation; and various services, such as payment processing services, financial fitness programs, and a small-business loan resource center. The company markets its products and services through direct sales force. Paychex, Inc. was founded in 1979 and is headquartered in Rochester, New York. Company description from FinViz.com.

The company reported earnings of 65 cents that rose 20.4% and beat estimates for 63 cents. Revenue of $858.9 million rose 7% and beat estimates for $855 million. Free cash flow from operations was $223.5 million. They paid $201.3 million in dividends in the quarter. The annual dividend is $2.24 or a 3.12% yield.

For 2019 the company guided for 18% to 20% revenue growth in PEO and insurance services and 4% growth in management solutions. Interest on funds held for clients is expected to rise by 20-25%. Earnings are expected to rise 11-12%.

During the quarter they announced a deal to acquire Florida based Oasis Outsourcing for $1.2 billion in cash. That is expected to bolster the company's PEO strategy an expand PEO sales and the client base. PEO stands for professional employer organization. This is where they provide all types of HR solutions to small businesses.

Earnings March 20th.

Shares have moved up steadily from the December low and broke above December 3rd resistance high on Friday. The next target is $75 and the October high. With strong earnings, guidance and dividend, shares should continue to be in favor.

Position 2/11/19:
Long Jan $80 Call @ $2.90, see portfolio graphic for stop loss.

PYPL - Paypal - Company Description


No specific news. New closing high.

Original Trade Description: Jan 20th.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include 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. It also offers gateway services that enable merchants to accept payments online with credit or debit cards. The company has a strategic partnership with American Express Company to improve the digital payments experience for the United States American Express Card members paying with PayPal and Venmo. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California. Company description from FinViz.com.

Earnings February 19th.

Morgan Stanley said Paypal is crushing digital payment competitors in the e-commerce space and extending its lead. The analyst said Paypal is now accepted at 82% of the top 500 US internet retailers compared to only 12% for Amazon Pay. Only 4 accepted Bitcoin. Paypal added another 8 retailers in Q4. Their total payment volume continues to grow at a rate faster than the growth of ecommerce.

Paypal has offered $500 in instant credit to any federal employee impacted by the shutdown. The offer was a $25 million pledge by Paypal to help workers experiencing a hardship. There is no interest and the offer is good until the government reopens.

It is these kinds of marketing opportunities where Paypal excels and this is why their brand is growing. They offer convince of not having to input your payment details in every website you visit. The entire process is super simple, and your privacy is not at risk. I personally purchased 4 items at different websites over the last two weeks on Paypal because of the easier transaction.

The stock had a rough three months from October through December but is now on the verge of breaking out to a new high.

Update 2/3/19: Paypal reported earnings of 69 cents that beat estimates for 67 cents. Revenue rose from $3.69 billion to $4.23 billion and matched estimates. Total payment volume rose from $131 billion to $164 billion. They guided for Q1 for earnings of 66-68 cents and revenue of $4.08-$4.13 billion. Analysts were expecting 68 cents and $4.16 billion. They reaffirmed the full year forecast for $2.84-$2.91 and $17.85-$18.1 billion. They added 13.8 million accounts to end the quarter with 267 million users. This was the strongest growth in their history. The average active account did 36.9 payments on a trailing 12-month period. Venmo, their peer-to-peer product saw payments processed rise from $10 billion to $19 billion.

Position 1/21/19:
Long Jan 2020 $100 call @ $7.90, see portfolio graphic for stop loss.
Optional: Short Jan 2020 $75 put @ $4.09, see portfolio graphic for stop loss.
Net debit $3.81.

QCOM - Qualcomm - Company Profile


Apple said it was resuming sales of iPhones in Germany using Qualcomm chips. Qualcomm won that battle and that could be a preview of things to come. They may not win them all but they are going to be a real problem for Apple for a long time unless they reach a settlement.

Original Trade Description: July 29th

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.

The last 12 months have been turbulent for Qualcomm. First, they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.

Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.

Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.

While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.

The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.

The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.

This suit is expected to be settled later this year. Investors should be looking at Qualcomm as an outstanding investment now that the clouds have cleared.

With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.

Update 1/27: Qualcomm took a serious hit last week after short seller Kerrisdale Capital warned it would lose the FTC case and shares were "teetering on the brink of disaster. Kerrisdale said it would lose the case and shares would be cut in half by the news. They have a price target of $21. If Qualcomm were to lose the FTC case they could also lose 50% of their annual license revenue and that would be traumatic. They would have to renegotiate license royalties on a much cheaper basis and it could take a year before cash flows stabilized.

We bought a Feb $52.50 put three weeks ago just in case the trial went against Qualcomm. It is now in the money, but our 2020 call is almost zero. If Qualcomm were to win the case, we would see a $20 spike very quickly because all the back payments being withheld waiting the trial decision would be immediately due.

Update 2/3: Qualcomm reported earnings of $1.20 that beat estimates for $1.09. Revenue of $4.84 billion missed estimates for $4.90 billion. They guided for Q1 earnings of 65-75 cents compared to estimates for 69 cents. They guided for revenue of $4.5-$5.2 billion compared to estimates for $4.83 billion. Shares spiked briefly then fell back to support while we wait on the outcome of the FTC trial.

Position 7/30/18:
Long Jan 2020 $70 call @ $5.00, see portfolio graphic for stop loss.

Position 12/31/18:
Closed 2/5: Long Feb $52.50 put @ $1.39, exit $2.28, +.89 gain.

SPY - S&P SPDR ETF - ETF Profile


Nice gain for the week. The S&P is approaching very strong resistance at 2,815.

This is a VERY long-term play on the market with a 2020 LEAP.

Original Trade Description: Sept 30th.

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world.

The SPY has pulled back to the 30-day average and actually a steeper decline than the S&P-500. The SPY is near support at the 30-day average.

I believe the market is going to move higher during the Q3 earnings cycle. Even if we do not see a Q3 earnings rally the long-term outlook is positive.

The 12 months after mid-term elections have seen the S&P gain an average of 15% for the last 18 midterms. That is 72 years and the S&P has gone up every time. There are almost no trends in the market that repeat 100% of the time. By recommending this position I have probably jinxed the coming year.

However, with the economy growing at more than 4% GDP, unemployment at record lows and Q3 earnings expected to show 20% growth or better, this should be a good opportunity for the trend to repeat.

If we do get a 15% rally over the next 12 months that would be 45 SPY points. The options are expensive for obvious reasons. I do not want to make it a spread and give up a significant portion of our eventual gains. I am going to recommend an offsetting short put to defray the cost of the call. If you cannot write cash secured puts then you should turn it into a spread by selling the call of your choice.

Position 10/1/18:
Long Jan 2020 $300 Call @ $16.80, see portfolio graphic for stop loss.
Short Jan 2020 $270 Put @ $10.61, see portfolio graphic for stop loss.
Net debit $6.19.

Position 12/24/18:
Long Jan 2020 $300 Call @ $2.05, see portfolio graphic for stop loss.
Average cost of the call position = $9.43.

STZ - Constellation Brands - Company Description


Shares fighting resistance at $175 but no signs of selling.

Original Trade Description: Jan 6th.

Constellation Brands, Inc., together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company sells wine across various categories, including table wine, sparkling wine, and dessert wine. It provides beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, Modelo Chelada, Pacifico, and Victoria brands, as well as Funky Buddha, Obregon Brewery, and Ballast Point brands. The company offers wine under the 7 Moons, Black Box, Clos du Bois, Estancia, Mount Veeder, The Dreaming Tree, Franciscan Estate, Nobilo, The Prisoner, Kim Crawford, Ravage, The Velvet Devil, Kung Fu Girl, Mark West, Meiomi, Robert Mondavi, Ruffino, and Simi brands, as well as Schrader Cellars and Charles Smith brands; and spirits under the Casa Noble, High West, SVEDKA Vodka, Black Velvet Canadian Whisky, Casa Noble Tequila, and High West Whiskey brands. It provides its products to wholesale distributors, retailers, on-premise locations, and state alcohol beverage control agencies. The company was founded in 1945 and is headquartered in Victor, New York. Company description from FinViz.com.

Constellation took a $4.1 billion stake in marijuana company Canopy Growth. Their plan is to market THC infused drinks, snacks, etc, wherever marijuana is legal. That includes all of Canada, multiple US states and more than likely the entire US by the end of this decade. There are multiple countries other than Canada where the plant is legal.

This has significant implications where medical marijuana is legal. Patients who would rather not smoke a joint can drink a beer or other THC infused beverage with the same results. Constellation took a major hit on the announcement because many funds cannot invest in "sin" stocks. Shares fell to a low of $160 in late December with the market crash but are starting to rebound now.

Constellation is a buy just on its regular beverages at this level and the THC drinks are going to add to that valuation in the next couple years.

Earnings are January 9th, so we could get a quick pop on this position. I would wait to sell the put until after the earnings just in case they disappoint.

Update 1/11: That was disappointing! We entered the STZ position on Monday and the stock gapped $20 lower at the open on Wednesday after disappointing on earnings. Obviously, this stopped us out for a loss.

The company reported earnings of $2.37 that beat estimates for $2.06. Sales rose 9% to $1.97 billion and beat estimates for $1.91 billion. Beer sales rose 16% to $1.21 billion to beat estimates for $1.16 billion. Wine and spirit sales rose 0.4% to $762.8 million and beat estimates for $747.8 million.

For 2019 the company cut guidance from $9.60-$9.75 to $9.20-$9.30. Analysts were expecting $9.43. They said beer sales would still rise 9% to 11% but wine and spirit sales were expected to decline in the low single digit range compared to prior guidance for 2% to 4% growth.

Shares were crushed on the guidance. The weaker earnings were due not only to weaker wine sales but acquisition expenses and costs related to product development related to the Canopy Growth investment. The $4.1 billion investment was backed with debt and Constellation said they could see a 25-cent impact from this investment. Canopy reported weaker than expected earnings for Q3 and that caused a $164 million decrease in the fair value of the Constellation investment.

I believe this is all temporary. Constellation still has a great business and beer sales are booming. The company said it was going to reduce their low margin wine business with products under $11 and concentrate on higher dollar wines with higher margins.

Once they begin marketing cannabis infused products, the sales are going to explode. Getting those products through research and development is going to take months but investors should be able to anticipate the profits.

The CEO said Canopy was expected to produce $1 billion in revenue over the next 18 months and that was 56% more than analysts expected. As Canopy begins to report these numbers, Constellation will benefit.

I am recommending we reload this position since the bad news has already been discounted.

Position 1/14/19:
Long Jan 2020 $170 Call @ $13.40, see portfolio graphic for stop loss.
Short Jan 2020 $130 Put @ $6.72, see portfolio graphic for stop loss.
Net debit $6.78.

Position 1/7/19:
Closed 1/9: Long Jan 2020 $180 call @ $14.40, exit $8.40, -6.00 loss.
Closed 1/9: Short Jan 2020 $140 Put @ $7.05, exit 10.00, -2.95 loss.

SWK - Stanley Black & Decker - Company Description


SWK announced a quarterly dividend of 66 cents payable March 19th to holders on March 5th.

Original Trade Description: Feb 3rd.

Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Company description from FinViz.com.

Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.

Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.

Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.

Now is the time to buy the dip on SWK.

Position 2/4/19:
Long Jan $140 Call @ $8.89, see portfolio graphic for stop loss.
Short Jan $110 Put @ $6.77, see portfolio graphic for stop loss.
Net debit $2.12.

TGT - Target - Company Description


No specific news. Resistance is being tested again after the app pricing disaster.

Original Trade Description: Nov 25th.

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

Bloody cleanup isle 5! Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.

They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales. Analysts picked on them for a 17% rise in inventory. Target said with the demise of Toys-R-Us they had stocked up heavily on toys and planned on a big holiday. They want to grab as much of the market share from Toys-R-Us as possible and will be advertising heavily. That will draw more people into the stores and lead to more sales of other merchandise as well. They pointed out that 2018 had the maximum number of sales days on the calendar between Thanksgiving and Christmas.

The guidance was the same as they issued at the end of Q2. They did not back off. The 5.0% same store sales was higher than the 4.4% the street was expecting.

Target has also beefed up their more than a dozen private label brands that have a larger profit margin and that will help in the December quarter. Keybanc estimates the Toys-R-Us exit, Sears bankruptcy and other store closings has put $17 billion in retail market share up for grabs in areas where Target is expected to compete well and add multiple percentage points to their growth. Keybanc maintained their $100 price target. Target shares have fallen to $67 post earnings and are now trading at a PE of 13 compared to 18 for Walmart. That means Target is on sale at the right price.

Update 12/16: Walmart and Target were sued by the New York Attorney General on Thursday over imported toys that contained 10 times the acceptable level of lead. The case centers on Craz-Z-Jewelz jewelry-making kits that were sold in 2016. Both companies immediately stopped selling the toys as soon as they were notified. The AG wants both companies to test toys overseas to make sure they comply with US rules. The AG is also attempting to collect civil penalties ranging from $70 to $6,000 for each kit the retailers attempted to sell in New York. Shares declined on the headline.

Update 1/11: On Thursday, Target said same store sales for the November-December period rose 5.7% thanks to higher store traffic and a minor increase in ticket size. This compares to 3.4% in the same period in 2017. The company affirmed its Q4 guidance for same store sales of 5.0% and full year earnings of $5.30-$5.50. This came on the same day that Macy's warned on earnings and shares fell sharply all across the retail sector. Shares rebounded sharply by almost 2% in a weak market on Friday.

Position 11/26/18:
Long Jan 2020 $75 call @ $5.60, see portfolio graphic for stop loss.

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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.

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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.


China Lift

by Jim Brown

Click here to email Jim Brown
Editors Note:

Headlines suggesting progress in the China talks lifted the markets. The prior week news there would not be a meeting between Trump and Xi roiled the markets. Traders have to be fast to profit from the peaks and valleys.

We have 20 current positions and that is about the most we can carry. There will not be any watch list positions until further notice. I prefer to add the normal weekly play based on conditions that week.

New Watch List Entry:

      No New Watch List Entries

Stocks Dropped from Watch List:

      No Watch List Drops

Active Watch List Play Descriptions:

      No Active Watch List Plays