Option Investor
Newsletter

Daily Newsletter, Monday, 6/24/2019

Table of Contents

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

Leaps Trader Commentary

Quiet Weekend

by Jim Brown

Click here to email Jim Brown
Other than simmering US/Iran tensions the headlines were very calm. The Asian markets were relatively flat and mixed with the average change about 0.12%. That is just noise ahead of the G20 meeting later in the week. Beijing complained that the US added five Chinese companies to a chip blacklist on Friday. The government called on the US to "cancel inappropriate actions" against Chinese companies. By putting these five companies on the blacklist they can no longer buy chips and high-tech parts from US companies.

The Commerce Dept said these companies did not operate in the best interests of the US and chip sales to them were now banned. The goal is to prevent China from using our own technology against us. These companies are developing super computers, AI and numerous military applications. It makes no sense to sell chips to China's military to be used in military satellites, missiles and military equipment. US technology is the highest in the world and that gives us an edge over hostile powers without it.

The ban prevents Intel and AMD from selling high performance multicore processors to entities building super computers to simulate nuclear explosions and military simulation activities. Since 2015 China's National University of Defense Technology (NUDT) has been blacklisted for these reasons. The US recently discovered that NUDT had been using four separate companies and different shipping addresses to circumvent the ban.

The Commerce Dept said the companies added to the list "pose a significant risk of being or becoming involved in activities contrary to the national security and foreign policy interests of the US." Chip stocks declined again after the announcement.

Analysts could not decide if this was a permanent move or just another ploy to pressure China back to the negotiating table. While it will not delay the meeting later this week between President Trump and President Xi, it is further evidence that the US is trying to retard China's rise as a technology power. China's stated aim is to be the dominant world power in technology before 2030.

Iran warned that it could have shot down a Navy P-8 surveillance aircraft with 35 people aboard but decided to let it pass. Had they shot down that plane the US would be at war with Iran. They got away with shooting down a drone but they will not get away with killing Americans. Hopefully they are rethinking their recklessness. Analysts are calling for elimination of their navy if there are any further attacks on shipping.

The coming conflict with Iran will raise oil prices and should the conflict be significant there is no doubt that Iran will try to close the Strait of Hormuz where 20% of the world's daily oil supply moves. We could see $75 oil in a heartbeat if this happens.

Analysts believe far too many bridges were burned in the negotiations between the US and China when they walked away from the table in May. While President Trump and President Xi will meet next week at the G20 there is not likely to be a deal. Even if both agreed to move forward it would still take weeks to put the deal on paper and then have a big signing party in a neutral location.

Analysts believe that regardless of the outcome of the meeting, Trump will increase tariffs on Chinese goods in order to apply more pressure. China will retaliate. Since agreeing to a deal after the imposition of new tariffs would look like Xi caved into pressure from the US, this would be shaky ground for Trump to cross.

IF, they do decide to begin talks again the meeting will probably break up with both sides proclaiming common ground and progress in the ongoing trade talks. Since Trump needs a quick resolution and a deal he can use in his reelection campaign, he may be more interested in getting something accomplished than coming out a big winner. If he gets any deal now, he can always come back again in 2021 and apply pressure again.

Unless the meeting ends in another walkout, the market will likely see the results as optimistic and indexes rise. A positive comment would be Trump saying we made good progress and there is no need for additional tariffs. An outstanding event would be Trump agreeing to cancel existing tariffs because of good progress. Nobody expects that to happen. Trump will want to keep the pressure on until a deal is signed.

Trump is also meeting with President Vladamir Putin at the G20. Nothing is expected to develop from that visit.

This is the risk for the market next week. Since the G20 meeting is Friday and Saturday for the heads of state, the market will trade on expectations or lack thereof all week. The speech by Powell on Tuesday will also be a pivotal point. If he tries to walk back some of the dovish comments the market could react negatively.

The S&P closed only 5 points over the May 3rd high of 2,945. This could be seen as strong resistance until we move significantly higher. Support is well below at 2,872 so there is a wide range for the index to run without impacting overall market direction. Volume is expected to be weak ahead of the July 4th holiday but once the bulls begin to stampede, anything is possible.


The Dow is struggling to close at a new high. The index traded over the 26,828 level on Friday with a brief print over 29,000 but then closed -182 points below the intraday high. The index was up +154 at the high of the day.

There were only a handful of stocks with moves over $1 with the rest of the components only fractionally changed. Most of the movement was more than likely related to option expiration.


The Nasdaq remains about 135 points below the May high at 8,164. The big cap techs were slightly negative overall but were helped by big gains in Google and Bookings. That kept the Nasdaq 100 to only a loss of 9 points.

The FAANG stocks were all positive for the week and that helped produce the 3% gain in the Nasdaq 100. Facebook was a big contributor with the Libra announcement. With a weak chip sector and big gains in June, the Nasdaq is going to have a tough road higher.


The Russell was again the weakest index. After failing at the 10% resistance level at 1,566 on Thursday the index retraced its gains with nearly a 1% decline on Friday. Fund managers are still not convinced they should be buying small caps ahead of the summer doldrums and potential G20 disaster.


A couple weeks ago the PMI Services for May came in at 50.9. That is the lowest level since February 2016. That is a 39-month low. The Manufacturing PMI came in at 50.5 and a 117-month low. New orders were in correction under 50 and at ten-year lows.

While the normal weekly data is choppy and declining slightly, the longer-term data is in a very bearish trend. The trade war and tariffs are the cause of this deceleration. Whether or not the Fed can reverse this trend with another round of rate cuts is unknown.

The calendar for next week has an eclectic mix of data. Home sales are back again as well as the GDP and several regional Fed reports. The biggest item on the calendar is the G20 meeting and the potential for either an end to the trade war with China or an acceleration into a new round of tariffs. The new market highs would evaporate instantly if that was the case.


First quarter earnings are over. There are still three companies that have not reported but the early reporters for Q2 are already lining up. Earnings growth ended Q1 at 1.6% with 5.6% revenue growth.

There have been 82 earnings warnings for Q2 and nearing that critical 20% threshold. There have been 24 guidance upgrades. There are 12 S&P companies reporting next week. The expected earnings growth for Q2 is only 0.2% but early estimates are normally low. In Q1 the forecast fell to -2.0% but we ended the quarter positive.

Fedex is going to be important because the last two quarters they warned about a slowdown in global shipments. This is expected to have continued. Micron will be important because of the five additional Chinese companies that were blacklisted last week. Nike reports on Thursday and they are tariff bait. They have a lot of exposure to China. Constellation Brands reports on Friday and could take a hit from its exposure to Canopy Growth.


We have had a great run in June after a terrible May. That is a trend that repeats quite often. However, there is another trend and that is the summer doldrums when the market suffers from lack of interest. Investors do not want to be heavily invested while they are on vacation. Volume tends to die and were it not for the Q2 earnings in late July, the market would be a ghost town. I continue to recommend not being overly long ahead of the G20 showdown. We could more 5% in either direction after the event. Given the strong gains in June, the path of least resistance is lower.

Enter passively and exit aggressively!

Jim Brown

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Portfolio

Testing, Testing

by Jim Brown

Click here to email Jim Brown


Current Position Changes


LK - Luckin Coffee
The long position was entered at the open on 6/19.


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

Unfair Comparison

by Jim Brown

Click here to email Jim Brown


KR - Kroger - Company Description

The Kroger Co. operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; and multi-department stores provide apparel, home fashion and furnishings, outdoor living, electronics, automotive products, and toys. The company's marketplace stores offer full-service grocery, pharmacy, health and beauty care departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys; and price impact warehouse stores provides grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. It also manufactures and processes food products for sale in its supermarkets; and sells fuel through 1,537 fuel centers. As of March 7, 2019, the company operated 2,764 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 shares tanked on Friday after reporting earnings of 72 cents that beat estimates by a penny but also declined a penny from the year ago quarter. Revenue declined slightly from $37.72 billion to $37.25 billion but still beat estimates for $37.19 billion.

Investors should not have reacted negatively. This quarter reflected the 2018 sale of their convenience store business and the resulting loss of revenue. The $2.15 billion sale of 762 stores in 18 states removed $4 billion in annual revenue and expenses related to the 11,000 employees. Kroger used $1.2 billion of the proceeds to repurchase 36.1 million shares. The sale closed in April 2018.

Comparing Q1 2018 revenue to Q1 2019 is apples and oranges. I believe investors should have been excited that revenue only declined about $480 million despite a loss of $4 billion in convenience store revenue. That suggests they had a great quarter. Same store sales rose 1.5% and online sales rose a whopping 42%. They guided for the full year for same store sales of 2.00-2.25% and earnings of $2.15-$2.25. Now that they are free from those comparisons, I would expect good news on the next earnings report.

I would not normally recommend a position on the day the stock tanked. I would look for some rebound before taking the plunge. I am making an exception. We can buy a 2021 LEAP for $2.50 and have 18 months for the stock to recover the prior highs.

They have a computerization project underway where the shelves will be computerized and recognize you from your smartphone and your loyalty card. You will receive discounts and suggestions different from everyone else based on your prior buying habits. Shoppers will also be able to say "raisins" into their phone and be given the isle and direction to keep you from wandering up and down multiple isles searching for them.

I believe Kroger is poised for a major rebound now that future quarterly comparisons will be apples to apples without the lagging convenience store overhead.

Buy Jan 2020 $25 call, currently $2.50, no initial stop loss.




Play Updates

Anticipation

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors are eagerly awaiting the results of the G20 meeting. The S&P rallied to a new high and other indexes are trying. However, Friday saw a market fade with decliners 2:1 over advancers.

In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.



Original Play Recommendations (Alpha by Symbol)


AAPL - Apple Inc - Company Description

Comments:

Apple is under a lot of pressure to move its Foxconn manufacturing facilities out of China and into Taiwan to escape multiple problems. They would no longer have the Chinese government breathing down their neck and they would not have the threat of tariffs, which could be worse starting next week. Apple has not commented but the president of Foxconn "pleaded" with Apple to move the plants to Taiwan. Unfortunately, that could cause a major diplomatic incident since China still claims Taiwan and could inflame geopolitical tensions over bringing Taiwan back into China.

Cascend Securities reiterated a buy rating and raised their target price from $210 to $240. Deutsche Bank initiated a hold rating and $205 target. JP Morgan reiterated an overweight rating and $233 price target.

Shares are struggling to cross the $200 barrier.

Original Trade Description: May 31st.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers. It also sells various related software, services, accessories, and third-party digital content and applications. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers, as well as iOS, macOS, watchOS, and tvOS operating systems. It also provides iTunes Store, an app store that allows customers to purchase and download, or stream music and TV shows; rent or purchase movies; and download free podcasts, as well as iCloud, a cloud service, which stores music, photos, contacts, calendars, mail, documents, and others. In addition, the company offers AppleCare support services; Apple Pay, a cashless payment service; Apple TV that connects to consumers' TVs and enables them to access digital content directly for streaming video, playing music and games, and viewing photos; and Apple Watch, a personal electronic device, as well as AirPods, Beats products, HomePod, iPod touch, and other Apple-branded and third-party accessories. The company serves consumers, and small and mid-sized businesses; and education, enterprise, and government customers worldwide. It sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, Book Store, and Apple Music. The company also sells its products through its retail and online stores, and direct sales force; and third-party cellular network carriers, wholesalers, retailers, and resellers. Apple Inc. was founded in 1977 and is headquartered in Cupertino, California. Company description from FinViz.com.

Everyone knows the story on Apple. China, China, China. Sales were 16% of Apple's revenue and have been declining steadily. The trade war and the tariffs have also been weighing on Apple's shares. They have declined $40 since the $215 high on May 1st. That is a 19% drop on a multitude of bad headlines and analyst warnings.

I am sure Apple has suffered from the trade war. However, a 19% drop is significantly overdone. Shares have fallen to support at $170-$175. This would be a great bounce point.

Apple CEO Tim Cook will take to the stage at the Worldwide Developers Conference on Monday and outline Apple's future. This could be the headline that turns Apple's shares around. If not, then support at $170 should be solid as we await the normal rally into the September product announcement.

Update 6/9: After the bell on Monday, Broadcom said it had signed a 2-year deal with Apple to supply radio-frequency components for smartphones, tablets and smart watches. Apple said it would rely solely on Broadcom as long as they can maintain the quality and quantity of supply. Shares of Apple rallied higher in afterhours trading.

Position 6/3/19:
Long Jan $185 Call @ $12.15, see portfolio graphic for stop loss.
Short Jan $150 Put @ $5.73, see portfolio graphic for stop loss.
Net debit $5.30.



AMD - Advanced Micro Devices - Company Description

Comments:

AMD shares declined after the government added five Chinese companies to the blacklist that cannot buy chips from the USA.

Original Trade Description: May 12th.

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.

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.

AMD reported Q1 earnings of 6 cents that beat estimates for 5 cents. Revenue of $1.27 billion narrowly beat estimates for $1.26 billion. However, current earnings are not the story.

AMD is already selling processors made on 10 nanometer technology and will have 7 nm processors on the market in Q3. Intel is not expected to have 10 nm PC chips until late 2019 server chips in early 2020. Their 7 nm chips are not expected until late 2021. With AMD leveraging such a commanding lead we should see a tidal wave of market share headed in their direction. They have a two-year lead in technology an that is a lifetime in chip terms.

We were stopped out of AMD a couple weeks ago and I am recommending we reload the position to profit from that coming wave.

Update 5/19: AMD shares rose after news broke that Intel processors were vulnerable to the ZombieLoad attack where sensitive information could be stolen. Virtually every Intel processor made since 2011 has this vulnerability. Intel released yet another patch but every CPU patch over the last five years has caused a serious hit to performance because of the overhead required to constantly check for potential attacks.

Position 5/13:
Long Jan $30 call @ $3.90, see portfolio graphic for stop loss.



CGC - Canopy Growth - Company Profile

Comments:

Canopy Growth reported a 312% rise in revenue to C$94.1 million compared to estimates for C$92.6 million. The company reported a loss before EBITDA of C$98 million and much larger than estimates for a C$64 million loss. Adjusted gross margin was 16% and missed estimates for 24%. The CEO said they expect 40% margins by the end of 2019. They are in extreme growth mode now and are spending huge sums of money on growing space and product development. He said Q1 would be the bottom on margins. They sold 9,326 kg (20,560 pounds) of cannabis in Q1. They now have 600,000 sqft of growing space.

They had previously announced they were acquiring skincare company The Works for C$73.8 million to add beauty and sleep products to their portfolio. They also said they had received shareholder approval for the $3.4 billion acquisition of Acreage Holdings, the largest grower in the US. The deal cannot complete until the federal laws change in the US and they said 2021 is the first chance of that coming to pass. They warned that the acquisitions would cause a materially significant non-cash charge in the current quarter.

Shares declined on the margin miss despite the 300% increase in revenue. This is short sighted in my opinion. I think everyone understands we are moving towards deregulation in the US. More than 30 states now have some form of legal use. Stifel analysts believe the market will reach $28 billion in Canada and $100 billion in the US once legalization occurs. Canopy's revenue in the quarter was only C$98 million (US $75 million). There is an opportunity for extreme growth over the next decade and possibly a lot sooner.

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 5/12: Canopy said their subsidiary Canopy Rivers signed an uptake agreement with PharmHouse for the purchase of an additional 20% of their output once the 1.2 million sqft grow house is completed. Canopy already had a 10% agreement and this raised that total to 30%. PharmHouse will deliver between 25,000-45,000 kilos of cannabis annually to Canopy Rivers. Canopy Rivers owns 49% of the PharmHouse joint venture. PharmHouse has now presold 50% of their expected output and is reserving the remaining 50% for their own products and brands.

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.


CNC - Centene Corp Company Description

Comments:

Centene said it will present at the BMO Capital healthcare conference on Tuesday at 8:40 ET. Shares are finally moving up again and approaching resistance.

Original Trade Description: April 28th.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. The company's Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which covers dually eligible individuals, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray, home-based primary care, transportation assistance, vision care, dental care, telehealth, immunization, specialty pharmacy, therapy, social work, nurse advisory, and care coordination services, as well as prescriptions, limited over-the-counter drugs, medical equipment, and behavioral health and abuse services. This segment also offers various individual, small group, and large group commercial healthcare products to employers and directly to members in the Managed Care segment. Its Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; and vision and dental, and management services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri. Company description from FinViz.com.

Centene has had a rocky six months and shares were recovering in early April until the sector was caught in the Medicare for All downdraft. Since then they reported strong earnings and guidance and are moving up again.

The company reported earnings for $1.39 that beat estimates for $1.35. Revenue rose 40% to $18.44 billion and easily beat estimates for $17.46 billion. Medicare revenue rose 19% to $1.38 billion and commercial policy revenue rose 19% to $3.65 billion.

They raised full year guidance from $4.11-$4.31 to $4.24-$4.44. Revenue guidance rose from $70.3-$71.1 billion to $72.8-$73.6 billion.

Given the decline from the mid $70s in November, our risk should be minimal on an earnings beat and guidance raise. They should outperform the sector. Position 4/29:
Long Jan $60 call @ $4.20, see portfolio graphic for stop loss.



CVX - Chevron Corp - Company Description

Comments:

No specific news. Chevron shares are almost back to resistance at $127.50 on the spike in crude prices. CPChem, a joint venture plastics company between Chevron and Phillips 66 has bid $15 billion to buy Canadian plastic maker Nova Chemicals. Nova is currently owned by the Abu Dhabi sovereign wealth fund. The fund bought the company for $500 million in 2009. Who knew in 1967 when Mr. McGuire was suggesting to Benjamin Braddock, played by Dustin Hoffman in the Graduate, that plastics really were the future.

Original Trade Description: May 5th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com.

Chevron agreed to buy Anadarko Petroleum (APC) for $33 billion a week ago. Shares of Chevron declined on the news. Occidental (OXY) was a frustrated bidder and joined forces with Warren Buffett to offer $38 billion with a slightly sweeter portion of cash than Chevron.

Anadarko agreed to negotiate with Occidental to see if their deal was "superior" to Chevron. Once they issue the formal ruling that it is superior, Chevron has four days to raise their bid.

This weekend Total agreed to buy Anadarko's African assets for $8.8 billion if Occidental is the winner and closes a transaction with Anadarko. That is actually a bargain price and shows the frustration Occidental is experiencing in trying to fashion a financing package to close the deal. Those assets are worth twice that amount or more.

Chevron can sit back and watch all these gyrations all the while deciding if they want to bid more if Anadarko makes the superior claim.

Chevron has far more assets and capabilities than Occidental and significant LNG experience with their $100 billion in projects in Australia. The Mozambique gas discovery is a monster and would be another major windfall for Chevron if they win the deal.

If Occidental wins, Chevron shares will rally because they will not be shelling out tens of billions in cash and stock. If Chevron eventually wins there could be another level down for Chevron shares but the long-term outlook would improve significantly because of the adjoining properties in the Permian and the ability to monetize the Mozambique gas discovery. Either way Chevron shares should rise in the months ahead.

With the S&P futures down -50 points on the China trade blowup, I am going to pick the $120 ATM strike because the Dow futures down -475 suggest all Dow components are going to implode at the open.

Update 5/12: Shares rebounded when Chevron said it would not pursue a higher bid for Anadarko. Occidental raised the bid to $76 and mostly cash. Chevron said it would take the $1 billion breakup fee and use it to accelerate share repurchases by 25% to $5 billion a year.

Position 5/6/19:
Long Jan $120 call @ $6.60, see portfolio graphic for stop loss.



LK - Lukin Coffee - Company Description

Comments:

LK announced that the IPO was oversubscribed, and the underwriters took their full allotment of 4.95 million shares at the IPO price of $17. Shares declined -3% on the news.

Original Trade Description: June 16th.

Luckin Coffee Inc. engages in the retail sale of freshly brewed drinks, and pre-made food and beverage items in the People's Republic of China. It offers freshly brewed drinks, including freshly brewed coffee and non-coffee drinks; and food and beverage items, such as light meals. The company operates pick-up stores, relax stores, and delivery kitchens under the Luckin brand, as well as Luckin mobile app, Weixin mini-program, and other third-party platforms that cover the customer purchase process. As of March 31, 2019, it operated 2,370 stores, including 2,163 pick-up stores, 109 relax stores, and 98 delivery kitchens in 28 cities in the People's Republic of China. The company was founded in 2017 and is based in Xiamen, the People's Republic of China. Company description from FinViz.com.

The company is being called the Starbucks of China because there will be a store on every corner. They expect to grow from 2,400 stores in April to 5,000 stores by the end of 2019.

They sell coffee a lot cheaper than Starbucks and are heavy into spiced teas which are popular in China. The stores are small format and only seat 8-12 people with the idea being that Chinese people are always in a hurry. They do not accept cash. All purchases must be made through their app and that allows the company to constantly push coupons to their customers. Sales are expected to rise 3,000% by 2021. Market share is expected to grow from 1% to 23% over the same period according to Morgan Stanley.

Last week the Qatar Investment Authority disclosed they had acquired a 3.25 million share position post IPO of 8.81%. Capital Group, a unit of Capital research Global Investors disclosed they had acquired a 5.8 million share block or 15.6%. Carob Investments, a unit of Singapore's sovereign wealth fund GIC Private bought a $45 million stake representing a 13.04% ownership position. Hedge funds Melvin Capital acquired a 1.7 million share stake and Darsana acquired a 34.4 million Class A share stake or 11.12%.

With all these large investors buying large positions which will not be traded, it is shrinking the float and could create some volatile moves as other companies try to follow their lead.

No earnings date available.

Needham rates Luckin a buy with a price target of $27. With a shrinking float any positive news can send shares sharply higher. With the China trade agreement likely, Chinese stocks should rally.

No leaps.

Position 6/19:
Long Dec $22.50 call @ $4.32, see portfolio graphic for stop loss.
Short Dec $35 call @ $1.63, see portfolio graphic for stop loss.
Net debit $2.69.



MRK - Merck & Co - Company Description

Comments:

Merck held their first investor day in five years, but analysts went home excited but confused. They wanted to know what was next in the pipeline and who was going to replace CEO Kenneth Frazier, who is planning to exit the company. They did not get answer to either question other than Merck was strongly positioned for the coming year.

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 5/5: Merck reported earnings of $1.22 that easily beat estimates for $1.05. Revenue of $10.816 billion beat estimates for $10.468 billion. Sales of Keytruda rose 55% to $2.269 billion. They raised full year guidance to $4.67-$4.79 and over estimates for $4.68. They guided for revenue of $43.9-$45.1 billion compared to estimates for $44.5 billion. Shares rocketed higher. 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

Comments:

No specific news. PAYX may have topped out ahead of earnings this week. Stock direction will be dictated by the results.

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.

Update 4/1: Shares closed at a new high after earnings. The company reported 89 cents that beat estimates for 88 cents. Revenue of $1.07 billion rose 14% and beat estimates for $1.04 billion. For 2019 they guided for a revenue increase of 6-7% and earnings increase of 11-12%. Analysts were expecting 9.9% and 11.8%. Shares rose anyway.

Update 5/5: Shares closed at a new high after the company bumped its quarterly dividend from 56 cents to 62 cents. The dividend is payable on May 30th to holders on May 15th.

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


QCOM - Qualcomm - Company Description

Comments:

The FTC objected when Qualcomm tried to use internal Apple documents in the antitrust case. The documents detailed the plan to create leverage against Qualcomm by initiating claims in multiple jurisdictions and causing them financial problems. If the documents can be entered into evidence then Qualcomm can call prior Apple employees as witnesses against all the dirty tricks Apple pulled around the world against Qualcomm.

Original Trade Description: May 26th.

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, long term evolution, and/or fifth generation 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.

Qualcomm shares were punished again when US District Court Judge Lucy Koh ruled erroneously that Qualcomm was monopolistic and unfair in their patent strategies. Shares collapsed. It was the end of the world for Qualcomm, except that it wasn't. Only those who did not have an understanding of the problem were predicting gloom and doom.

First, the ruling was very shallow, and no evidence was presented that any consumers were harmed. There was no weighing of potential harm against potential benefits, like having a phone at all since Qualcomm's patents make the phones possible. There was no economic analysis at all. Lawyers claim those two points make the ruling very likely to be voided on appeal.

Lastly, this only involved the Standard Essential Patents (SEPs) and does not apply to the non-standard essential patents or NSEPs. These are the vast majority of Qualcomm's patents. The SEPs only account for about $7.50-$13.00 on a smart phone. Even if the verdict stood the financial impact to Qualcomm would be minimal since they will still be able to collect a reduced price on the SEPs after renegotiation.

Last month Apple testified that this technology was needed, Qualcomm had the best technology in these areas and that the SEP licensing was mutually beneficial and the licensing model was entirely legal.

Qualcomm is going to request a stay to halt the process from moving forward while they request an expedited appeal, which they will most likely win. Under the most favorable circumstances the appeal is not likely to be decided within 18 months. Since Qualcomm's 5G technology is going to be even more in demand with the ousting of Huawei, we could even see the White House get involved to limit any negative consequences for Qualcomm.

This dip should be buyable since there is no financial impact for at least two years, and it could all be erased on appeal.

We were stopped out of our profitable position on the court news. We now have an opportunity to establish a longer dated position after a monster drop back to $65.

Options are expensive so I am using a combination position. If you don't want to sell the put then buy a higher strike call.

Update 5/31: FTC Commissioner, Christine Wilson, wrote an op ed in the WSJ saying the verdict against Qualcomm was wrong and was likely to be reversed on appeal. She said a company does not have a "duty to deal" with competitors. A company can or cannot sell products to anyone of its choosing. The judge in the case misinterpreted the Aspen Skiing case in 1985 that forced a long-time partnership to continue after the minority partner with the ski runs wanted to cancel the deal and go it alone. The judge in that case said the company had to continue the partnership or the other party would have gone out of business. This was interpreted as a duty to deal even if you did not want to sell their product to the other company.

Position 5/28/19:
Long Jan 2021 $70 Call @ $8.33, see portfolio graphic for stop loss.
Optional: Short Jan 2021 $50 put @ $4.20, see portfolio graphic for stop loss.
Net debit $4.13.



UNH - UnitedHealth - Company Description

Comments:

UNH to buy healthcare payments specialist company Equian for $3.2 billion. The company would be merged into UnitedHealth's Optum division.

Original Trade Description: April 14th.

UnitedHealth Group Incorporated operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight, and OptumRx. The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health and well-being services to individuals age 50 and older, addressing their needs for preventive and acute health care services, as well as services dealing with chronic disease and other specialized issues for older individuals; and Medicaid plans, Children's Health Insurance Program, and health care programs; and health and dental benefits. The OptumHealth segment provides access to networks of care provider specialists, health management services, care delivery, consumer engagement, and financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The OptumInsight segment offers software and information products, advisory consulting arrangements, and services outsourcing contracts to hospital systems, physicians, health plans, governments, life sciences companies, and other organizations. The OptumRx segment provides pharmacy care services and programs, including retail network contracting, home delivery, specialty and compounding pharmacy, and purchasing and clinical, as well as develops programs in areas, such as step therapy, formulary management, drug adherence, and disease/drug therapy management. UnitedHealth Group Incorporated was founded in 1974 and is based in Minnetonka, Minnesota. Company description from FinViz.com.

UnitedHealth, Anthem, etc were all crushed last week when Bernie Sanders resurrected his Medicare for All proposal. In theory this would end corporate and private health insurance and significantly reduce government reimbursements. Traders ran to the exits. UNH fell $30, ANTM fell $40.

This is completely unrealistic. First, Sanders has little or no chance of being elected. Second, even if he was elected the House and Senate would have to have strong democratic socialist majorities, not just a democrat majority. There are plenty of democrats that can do basic math and this proposal in its pure form would cost about $3.3 trillion and do irreparable harm to the healthcare sector as it currently functions. Three, assuming the first two items came to pass it would be at least 2022 before any changes could occur or nearly four years from now.

That means the panic from last week was completely unreasonable. The decline was also blamed on potential changes to Obamacare now that a court has ruled it to be unconstitutional. President Trump has said he did not want to deal with it until after the election and that puts any changes to that program at least two years into the future and would require a republican majority in the House.

Clearly, there is no immediate danger to UnitedHealth and this is a buying opportunity.

There is one danger. Earnings are Tuesday. While I seriously doubt they are going to post a big miss, even if they did would it mean a further decline after a $30 drop over the last two days? What if they beat? That could cause some significant short covering.

Position 4/15/19:
Long Jan $250 Call @ $10.39, see portfolio graphic for stop loss.
Short Jan $290 Call @ $2.50, see portfolio graphic for stop loss.
Net debit $7.89.




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by Jim Brown

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Editors Note:

Time is short for President Trump to ink a deal with China and keep that problem from killing his reelection. The markets are testing new highs and that is not where we should be entering new long-term positions. We should see an opportunity this summer.

We have 10 current positions. 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:


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Active Watch List Play Descriptions:


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