The tight range exploded into a -2.5% market decline on Friday and there may be more to come. Fear of the Fed and portfolio restructuring began to take their toll with a weak day on Thursday but that turned into a complete rout on Friday. We only lost two positions but everything moved significantly lower.
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)
AKAM - Akamai Technologies - Company Profile
No specific news. A $3 decline for the week.
Original Trade Description: August 21st.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers performance and security solutions designed to help Websites and business applications operate while offering protection against security threats. It also provides media content delivery solutions that are designed to deliver movies, television shows, live events, games, social media, software downloads, and other content on the Internet in fixed line and mobile networks; adaptive delivery solutions for streaming video content; and download delivery solution that offers accelerated distribution for large file downloads, including games, progressive media files, documents, and other file-based content.
If you have a large amount of content on the web that is routinely downloaded by thousands or even millions of people around the world, Akamai has the solution. Assume you are a streaming media company with 20,000 downloadable movies. If all those downloads were streamed out of one location to thousands of customers around the world, the bandwidth and server horsepower required at the host location would be enormous. Delays would result when everyone started downloading movies after dinner in the evening.
Akamai solves this problem by cloning your download library and spreading copies around in multiple locations around the world. When a customer clicks on a movie to download, that movie is sent from the location closest to him. In the Internet world distance is time. The farther you are from the website location the longer the downloads will take because they have to pass through dozens of "pipes" and "routers" as they make their way to your. By putting heavily used content in major geographic locations, Akamai shortens the distance for those in that area. Akamai also provides security and redundancy for the companies providing the source data.
In the Q2 report, Akamai reported earnings of 64 cents on a 6% rise in revenue of $572 million. Analysts were expecting 64 cents and $575 million. The cloud security solutions unit saw revenue rise +42% to an annualized rate of $360 million. International revenue rose 25% to $177 million.
The problem came from the USA where revenue declined -1%. Two of the company's largest customers, Facebook and Amazon, began remotely hosting more of their own content and that reduced revenue. Those two companies were previously 12% of Akami revenue and they declined to 5%. The company guided for Q3 earnings of 59-62 cents on revenue of $566-$578 million. Analysts were expecting 66 cents on revenue of $590 million.
The key point here is that overall revenues rose 6% despite the sharp decline in revenue from Facebook and Amazon. The second point is that now they are only 5% of total revenue and they cannot decline much farther. Akamai said those two customers were building their own "content distribution network" or CDN, which is a very expensive undertaking and the vast majority of Akamai customers could not afford to do that. Obviously Amazon has AWS with massive datacenters all around the world so it only makes sense for them to clone their own content into multiple locations. That is the same with Facebook. They have hundreds of thousands of servers in secure locations all around the world and no longer need Akamai to handle the bulk of their data delivery.
With Akamai continuing to grow even when 7% of their prior revenue base went away, it shows how strong the business really is today. The rapidly growing cloud security solutions business and the international growth will continue to accelerate.
Akamai shares fell from $58 to $48 on the lowered guidance. After trading sideways for two weeks with no further declines, Wells Fargo upgraded them from neutral to buy on August 11th. I believe they will move well over their pre earnings level of $58, which just happened to be an eight-month high.
Earnings are October 25th.
Long Jan 2018 $60 LEAP Call @ $6.05, see portfolio graphic for stop loss.
Short Jan 2018 $80 LEAP Call @ $1.65, no stop loss.
Net debit $4.40.
ATVI - Activision Blizzard - Company Profile
The new expansion pack for World of Warcraft continued getting great reviews. The Call of Duty fan fest was a great success with the team of EnVyUs winning $800,000 in the contest. Shares declined only slightly in the weak market.
Original Trade Description: May 22nd.
Activision Blizzard designs, developes and publishes online, personal computer, video game console, handheld, mobile and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products.
At the end of Q1 ATVI had 544 million monthly active users thanks to the acquisition of King Digital. King had a very diverse network of 463 million global game players. Activision said the acquisition will be accretive to 2016 revenues and earnings by 30% and significantly accretive to free cash flow per share. It also brings 463 million players into the Activision Blizzard massive multiplayer PC games like World of Warcraft that have monthly subscription fees.
Activision actually has a World of Warcraft movie premiering on June 10th. If you go to the movie you will get a copy of the PC game World of Warcraft free. The movie characters have custom weapons that will be available to players after the movie debut.
The new game "Overwatch" has been played by 9.7 million people in the open beta phase where it is released to the public in order to get the bugs out of it. It is a good bet the majority of those players will be buyers when the game launches on May 24th. The Star Wars Battlefront game had 9 million players in beta and has now sold 14 million copies.
Activision said they were working with Twitch and Instagram and would be producing a lot of content on Facebook live. They are planning on launching live streams of E-Sports programming to all of Facebook's 1.6 billion users. E-Sports provides live competition by gamers for millions of dollars in prizes as other gamers watch. Activision just launched its MLG.tv live streaming platform where gamers can watch others play in real time.
Webush believes ATVI could earn $3 per share by 2018 with $2 per share in 2016. The company reported 23 cents for Q1 on record revenue of $1.46 billion. Those numbers were up from 16 cents and $1.28 billion. Analyst estimates were for 12 cents and revenue of $823 million. The company raised guidance for Q2 and for the full year. They are guiding for earnings of 38 cents in Q2, up +192% on revenue of $1.38 billion, up +81%. For the full year they guided to earnings of $1.78, up +35% and revenue of $6.28 billion, up +36%.
Adding to earnings were continued sales of Call of Duty: Black Ops 3 and Candy Crush Jelly Saga.
In other news researchers found that 43% of Overwatch players have already made purchases inside the game to improve their experience. Getting players to put down that first $50 to purchase the game is only the beginning. Future purchases inside the game is a completely separate revenue stream. Some players make continuous purchases to improve their capabilities. This is the cash cow nobody talks about.
Update 8/7/16: Activision reported record Q2 earnings of 45 cents compared to estimates for 42 cents. Revenue rose 50% to $1.57 billion and easily beat estimated for $1.45 billion. The new Overwatch game has more than 15 million players and more than 500 million hours of play in the quarter. That is the fastest ramp of any game to the 15 million player mark. The game brought in more than $500 million in revenue. The Blizzard segment now boasts more than 33 million active players. The Activision segment had 49 million active users and the King Digital segment had 409 million users. The company guided for $1.49 billion in revenue and 6 cents in earnings, unadjusted, for Q3. Shares spiked on the news but fell back on the unadjusted earnings guidance.
I am proposing we buy the 2018 LEAP to give this acquisition of King Digital time to mature. We are probably going to see some retracement of the post earnings gains but I expect that to be light. Support is $34 and shares closed at $37.50 on Friday.
Long Jan 2018 $40 LEAP call @ $6.00. No initial stop loss.
EMR - Emerson Electric - Company Profile
Emerson shares were stagnant at support most of the week but Friday's market crash knocked them for a 4% decline. Earlier in the Emerson was awarded the contract for the Shell Prelude Floating LNG facility 300 miles offshore Western Australia. The floating LNG facility will convert natural gas collected from subsea wells.
Original Trade Description: August 7th.
Emerson Electric designs and manufactures products and provides services to industrial, commercial and consumer markets worldwide. They cater to all areas of industry with electrical measurement and control products, power generation products and automation of critical energy infrastructure.
In the Q2 earnings cycle the company reported earnings of 80 cents that missed estimates for 84 cents. Revenue declined 7% to $5.126 billion compared to estimates for $5.309 billion. The major reason for the weakness is the continued decline in the oil and gas sector. However, we are approaching the point in the energy cycle where oil prices will rise late in 2016 an even higher in 2017 as demand catches up with production. We are already seeing a large number of rigs go back to work with more than 50 oil rigs reactivated in the last six weeks.
The CEO said Europe was flat but better than it was just a few months ago and the rest of the world met expectations. The U.S. remained a trouble spot in certain segments.
The company is preparing to spin off its network power segment saw rising demand from data centers and telecom spending. He predicted the overall order book would turn positive when capex spending returned to the energy sector.
Emerson is a solid company. They are not growing earnings significantly because of the energy sector but they are still tending to business. The spinoff of the network power division will provide a boost to the stock and allow Emerson to focus on the more profitable process management and power generation side of the business. The spinoff is expected to be completed by September 30th. The spin will provide cash to Emerson and allow them to put that cash to work in other areas and buyback stock. The CEO said, while they continue to proceed on the spinoff they are also talking to interested parties about an outright sale that would provide even more cash and flexibility. They are also in talks to sell the motors, drives and power generation business, which will further improve the company focus.
They announced the sale of $5.2 billion in noncore assets in a restructuring they have been working on for a year. This is in addition to the spinoff of the network power division previously announced. This is a large step forward in improving their profitability and reducing costs. It will also provide significant liquidity for capex spending and stock repurchases.
The company declared a quarterly dividend of 47.5 cents payable Sept 9th to holders on August 12th.
The company is a steady performer with a lot of headline events coming over the next six months. These sales events will provide cash and improve profitability.
Shares declined from $56 back to support at $52.50 after earnings and buyers were waiting. Options are inexpensive and the spin/sales events should power the stock higher. I expect the shares to break through resistance at $56 in a positive market.
Update 8/22/16: Emerson crashed on Friday after the company said it was buying Pentair's (PNR) valves and controls business for $3.15 billion in cash. Credit Suisse immediately downgraded the company from outperform to neutral. Emerson had either completed or announced sales of $5.5 billion in noncore assets in its recent restructuring effort. Analysts criticized the Pentair deal because the valve business depends on the oil and gas sector for much of its revenue. Emerson said they were buying the bottom of the cycle and the business should grow from here. Analysts were not quick to agree the bottom was behind us in the oil sector.
Position 8/8/16 with an EMR trade at $54.25
Long Jan 2018 $57.50 call @ $3.60, initial stop loss $49.25.
IWM - Russell 2000 ETF ETF Profile
The Russell has risen about 15 points since we put on these puts. The $100 strike for January is not likely to ever be in the money. It would take some kind of black swan event to remove 25 points from the ETF. In order to recover our money I am recommending we turn this into a spread by selling the January $115 puts currently $4.01.
This was a hedge against our long positions rather than an attempt to make money on a put. Now we need to recover our investment.
Sell short Jan $115 puts, currently $4.01, no stop loss.
Close the Jan $85 short put, entry $2.00, currently .40
Original Trade Description: March 27th
I am picking the Russell 2000 ETF for multiple reasons. The first is that the Russell has rebounded the least of the major indexes. The high on the Russell 2000 was 1,296 in June of last year. The Russell declined to 943 at the low in February for a -27% drop. The rebound from that February low to Thursday's close at 1,079 has been 14%. However, the index has gone sideways for the last three weeks while the large cap indexes moved higher. The Russell failed to reach critical resistance at 1,120 and a 50% retracement of 10-month decline. There is significant resistance at 1,120 and again at the 61.8% retracement at 1,162.
The Russell is weak for multiple reasons. Financials make up the largest sector in the index with health care and energy also major components. Those sectors have been under extreme pressure so far in 2016. There is a rising call on the political front to break up the big banks and introduce price controls on drugs that will severely damage health care and biotech stocks. The energy sector has actually provided some lift in the last two months but the price spike to $41 in WTI is not likely to last.
I believe the rebound to 1,100 in March could be another lower high and the setup for a lower low in the months ahead. In an election year, the market is typically pressured by candidates on the campaign trail. They throw out dozens if not hundreds of things wrong with the economy and what they are going to do to fix it. Of the two major candidates, analysts believe Clinton would be less damaging to the market than a loose cannon like Trump. They have no political history for Trump and some of the things he says he will do, like tariffs on China and Mexico would cause an instant recession.
As we move out of the primary cycle in June and the leaders begin mudslinging towards each other the tone of the debate is going to become increasingly ugly. Normally that weighs on consumers and on the equity markets. There is always the potential for riots surrounding the conventions and that is market negative. If we head into October with a candidate unfavorable to the market in the lead, we could see significant declines.
Add in the potential for further ISIS attacks in Europe and the USA and that is another problem for the market to digest. Economically the economy is worsening. The Q4 GDP was revised up to 1.39%, which is barely growth at all, and the Q1 GDP is now forecast at 1.4% and declining. The Fed, despite Janet Yellen's calming words, appears desperate to hike rates in April. No less than four Fed heads made those claims last week. If the market believes the Fed is going to accelerate its rate hike cycle the market will decline. Earnings are now forecast to decline -8.7% in Q1.
There are lots of potentially negative factors to consider and very few if any positive factors. All the future market catalysts are negative. That could change at any time but that is the outlook today.
I am recommending we buy the January $100 LEAP put, currently $5.92. I would recommend launching this position at $110 and adding to it at $115 on the IWM. This will lower our overall cost in the position. Also, you could sell short a January $85 put, currently $2.31 to reduce the initial net debit in the total position.
The S&P futures are up slightly on Sunday night. I am expecting the market to rally on Mon/Tue as fund managers window dress their portfolios.
Position 3/29/16 with an IWM trade at $110
3/29 - With IWM trade at $110, Long Jan $100 put @ $4.93, no initial stop loss.
4/27 - With IWM trade at $115, Long Jan $100 put @ $3.50, no initial stop loss.
Short Jan $85 put @ $2.00, no initial stop loss.
Net initial debit $2.93.
JACK - Jack in the Box - Company Profile
We entered the JACK position at the open on Tuesday and were stopped out on Friday after a $6 decline in two days. I want to get back into the position but I am hesitant at what level. The Friday close was initial support but depending on what the market does on Monday we could see lower lows. I am going to put it on the watch list with a $90 target. If the market rebounds before that is hit I will revise the entry.
Original Trade Description: September 2nd.
Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of August 10, 2016, it operated and franchised approximately 2,250 Jack in the Box restaurants in 21 states and Guam; and approximately 600 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951.
Jack shares are up 29% year to date after the company reported Q2 earnings of $1.07 that beat estimates by 20 cents. Revenue rose +2.6% to $368.9 million. Same store sales rose 1.1% and the average check rose 3.5%.
They will end 2016 with an additional 20 Jack in the Box stores and 50-60 new Qdoba locations. The company is refranchising many of its stores and believes it can raise earnings by 65-78 cents through cost reductions achieved by shifting company owned stored to new franchisees. Management expects same store sales o rise 2.5% to 3.5% for Jack stores and 4% to 5% for Qdoba stores.
Earnings Nov 21st.
Shares rallied to $99 and the 2015 high on the Q2 earnings. They have held at that level for four weeks. The positive market on Friday allowed JACK shares to break over $100 and start a new leg higher. Apparently, the post earnings consolidation has ended.
JACK does not have LEAPS so I am using the March $105 call, which is the longest dated option series available.
Closed 9/9/16: Long March $105 call @ $6.90, exit $4.98, -1.92 loss.
Closed 9/9/16: Short March $120 call @ 1.90, exit $2.05, -.15 loss
Net loss $2.07
JUNO - Juno Therapeutics Company Profile
Shares were up on Thursday on positive CAR-T data from a phase-one dose-finding trial of JCAR014. "JCAR014's hallmark is its use of a one-to-one ratio of helper (CD4+) and killer (CD8+) CAR T cells, which join forces to kill tumor cells that produce CD19, a molecule found on the surface of many blood cancer cells, including lymphoma and leukemia," Juno said in its press release. "By controlling the mixture of T cells that patients receive, the researchers can see relationships between cell doses and patient outcomes that were previously elusive."
Shares were down again on Friday with the market. Support remains $27.
Original Trade Description: July 11th.
Juno Therapeutics, Inc. is a biopharmaceutical company that engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its clinical stage CD19 product candidates include JCAR015 that is in Phase II clinical trials for adult patients with relapsed/refractory B cell acute lymphoblastic leukemia (r/r ALL); JCAR017, which is in Phase I/II trials for pediatric patients with r/r ALL; and JCAR014 that is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies. The company's additional product candidates comprise CD22, a cell surface protein expressed on B lymphocytes; CD171, a cell-surface adhesion molecule to treat neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; and WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers.
Shares of Juno Therapeutics (JUNO) were crushed on Friday for a 32% loss after a pivotal study on the chemotherapy drug JCAR015 was halted. This is a chemotherapy drug for acute lymphoblastic leukemia. The FDA put a clinical hold on the study after two patients died. The FDA wants Juno to submit a new Complete Response (CR) to the clinical hold as well as a revised patient informed consent form, a revised investigator brochure, a revised study protocol. Juno intends to present all the requested documents next week. The company said plans for its other CAR-T cell products candidates, including JCAR017 were not affected by the clinical hold.
The JCAR015 drug is one of Juno's most advanced pipeline candidates. RBC Capital, Michael Yee, said the stock would recover because the halt was temporary and the drug had passed earlier trials. He said shares were trading as though JCAR015 was dead and it is not. JP Morgan was not as optimistic and they cut Juno from overweight to neutral.
Earnings are August 8th.
Since this is a temporary halt and the trial is expected to resume in a few weeks I expect Juno shares to rebound from the 32% decline. This was a knee-jerk reaction and it will pass. I am putting an entry trigger on the position just over the afternoon high from Friday.
Position 8/29/16 with a JUNO trade at $32.19:
Long Jan 2018 $35 call, entry $7.66, see portfolio graphic for stop loss.
Short Jan 2018 $55 call, entry $3.79, see portfolio graphic for stop loss.
Net debit $3.87.
LL - Lumber Liquidators - Company Profile
Lots of news, all positive but not stock related. Shares held up well in the weak market.
Original Trade Description: June 19th.
Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.
LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.
On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.
The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.
The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.
LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.
LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.
Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.
While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.
The shares were up $2.50 on Friday and I would not normally recommend an entry on a gain like that. However, as the news becomes common knowledge the shares should continue higher. We may see a small retracement or maybe not. I am sure the Friday move was short covering. The actual investing buyers will not appear for days or weeks.
Earnings July 27th.
Long Jan 2018 $20 call, entry $2.50, see portfolio graphic for stop loss.
MLNX - Mellanox - Company Profile
No specific news. The rebound from the INFN drop collapsed over the last three days as tech stocks were sold. We are back to support at $41 again.
Original Trade Description: July 24th.
Mellanox Technologies, Ltd. is a fabless semiconductor company that designs, manufactures, and sells interconnect products and solutions. The company's products are used for computing, storage, and communications applications in the high-performance computing, storage, financial services, enterprise data center, and cloud markets. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems. The company offers 40/56/100Gb/s InfiniBand solutions, including switch and gateway integrated circuits (ICs), adapter cards, cables, modules, and software, as well as switch, gateway, and long-haul systems; 10/40/56Gb/s Ethernet solution for use in EDC, HPC, embedded environments, hyperscale Web 2.0, and cloud data centers; and 10/25/40/50/56/100Gb/s Ethernet NICs. It also provides adapters to server, storage, communications infrastructure, and embedded systems original equipment manufacturers (OEMs) as ICs or standard card form factors with PCI express interfaces; and switch ICs to server, storage, communications infrastructure, and embedded systems OEMs to create switching equipment.
Mellanox is the leader in their area. While Intel has been having trouble with a 100Gbs communications product, Mellanox is preparing to market 200gbs and 400gbs products early in 2017. With larger volumes of data being transmitted over the internet and from server to server to cloud and to backup systems, the need for ever faster communications products will only grow faster.
I added a separate cloud backup application several weeks ago to backup a backup server with 9.3 million files and 3.5 terabytes of data. I have a relatively slow 25 megabyte per second uplink speed from this particular backup server. This cloud backup has been running for 3 weeks and has 22 days to go to complete the first full backup. After that it will only take an hour of so per day to update the files that have changed. Now multiply this by the millions of other users who are doing the same thing every day. The need for superfast computer-to-computer communications in the datacenters is going to continue to grow exponentially. Mellanox is the bleeding edge technology in this sector.
For Q2 the company reported earnings of 87 cents and revenue of $214.8 million. That was growth of 16% and 23% respectively. Analysts were expecting 83 cents and $212.9 million. They guided for Q3 to revenue of $221-$227 million and analysts were expecting $225.8 million.
Shares plunged -10% because InfiniBand revenue declined -3% to $111 million but Ethernet sales rose 126% to $88.1 million as their new products gained market share in that area. InfiniBand sales were pressured by competition from Intel. The Intel product is inferior so they have to discount it compared to the Mellanox product to protect their market share. That reduces the revenue for Mellanox because they are competing on price with Intel for the older technology products.
When they debut their new 200gbs and 400gbs products early in 2017 there will be no material competition. Summit Redstone analyst Srini Nandury said the Intel threat is "overblown" and Intel faces a relentless uphill battle because of the pace of Mellanox innovation. "This is an inherent disadvantage for Intel. Intel is forced to use pricing to maintain market share." Nandury reiterated his $65 price target on MLNX.
Shares crashed from $52 to $45 on the earnings and worry about Intel discounting their competitive products. Because Mellanox has these fast products in the pipeline, I doubt the shares will remain at this level for long. I am going to put an entry trigger on the play at $46.65. If shares continue lower, I will adjust that trigger and the strike price in future newsletters. If they continue lower, it would be nice to enter a position at support at $41.
Some of our best positions come from buying headline related dips. I believe this will be one of those positions.
Position 7/27/16 with a MLNX trade at $46.65
Long Jan 2018 $50 call @ $6.70. See portfolio graphic for stop loss.
RH - Restoration Hardware - Company Profile
RH reported earnings of 44 cents that beat estimates for 29 cents. Revenue of $543.4 million beat estimates for $511.4 million. Shares spiked from $35 to $39 on the news but they gapped higher on Friday into a terrible market and gave up most of their gains.
Original Trade Description: July 5th.
Restoration Hardware Holdings, Inc., together with its subsidiaries, engages in the retail of home furnishings. It offers products in various categories, such as furniture, lighting, textiles, bathware, dÃ©cor, outdoor and garden, tableware, and child and teen furnishings. The company sells products through its stores and catalogs, as well as through its Websites, such as restorationhardware.com, rh.com, rhbabyandchild.com, rhteen.com, and rhmodern.com. As of January 30, 2016, it operated 69 retail galleries that include 53 legacy galleries, 6 larger format design galleries, 4 next generation design galleries, 1 RH modern gallery, and 5 RH baby & child galleries, as well as 17 outlet stores throughout the United States and Canada.
RH surprised investors in early June when they reported an unexpected loss. Shares fell from $36 to $25 as investors panicked. The luxury retailer reported a loss of 5 cents compared to estimates for a 5-cent profit. The CEO said the company "was being pressured by the continued retail headwinds in a market impacted by energy, currencies and a general slowdown in the luxury consumer market." In addition, "the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to impact fiscal 2016 earnings by $.90 to $1.00." However, he said all these factors are short term and performance will improve in Q4 and accelerate into 2017.
Earnings September 8th.
Last week the shares rallied 10% after a BB&T analyst said the company should sell itself or merge with Williams Sonoma (WSM). Several other analysts picked up the thread and agreed it would be a good move. While CEO Gary Friedman may not be ready to join forces, the weak luxury retail market may force him to consider the option. The constant talk could also provide an incentive to other potential acquirers to come knocking on his door. The RH business is a good business. They are evolving and they will be stronger in 2017.
I was looking at RH as a potential play before the WSM comments appeared. Shares had sold off significantly from their $106 high back in November. When it appeared they had found a bottom at $25 I was willing to take a shot. The WSM news spiked the option premiums but it also reminded a lot of investors that RH was at an attractive level. They could easily be back at $40-$45 by January.
Long Jan $35 call @ $2.51, no initial stop loss.
SBUX - Starbucks - Company Profile
Shares continued to fall on the EU tax attack on U.S. companies. Friday's close was just over support. I lowered the stop loss to stay under that level.
This is a 2018 LEAP position and there is strong support at $54.
Original Trade Description: July 31st.
Starbucks Corporation, incorporated on November 4, 1985, is the roaster, marketer and retailer of specialty coffee. The Company purchases and roasts coffees that it sells, along with coffee, tea and other beverages, and a range of fresh food items, through Company-operated stores. The Company also sells a range of coffee and tea products and licenses its trademarks through other channels, such as licensed stores, grocery and national foodservice accounts and online. The Company operates through four segment: Americas, which includes the United States, Canada, and Latin America; Europe, Middle East, and Africa, China/Asia Pacific, and Channel Development. In addition to its Starbucks Coffee brand, it also sells goods and services under the Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange and Ethos, Starbucks VIA, Seattle's Best Coffee, Frappuccino, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks Discoveries Iced Cafe Favorites brand names. As of March 2016, it operated 23,921 stores.
We have played Starbucks before with mixed results. The company has everything going for it but shares turned down last November and spent the last 8 months moving sideways in a consolidation pattern. After their recent earnings I am willing to give them another shot. Shares have found support at $55 and appear to be attempting a new move higher.
In their Q2 earnings, they reported 49 cents on a 7% rise in revenue to $5.33 billion and analysts were expecting exactly those numbers. They guided for full year earnings of $1.88-$1.89 with the current quarter at 54-55 cents.
The problem that tripped up the stock price was same store sales growth at +4% when analysts were expecting 5.7%. CEO Howard Schultz admitted the change to the loyalty card program was the problem. They changed from a credit for every visit/sale to credits based on your total purchases. Some customers were gaming the system by asking for their coffee and food to be rung up separately to simulate two visits. Many customers were irate at the change and sales slowed. Their normally busy Frappuccino holiday promotion fell flat because of the change in the loyalty card. However, Schultz said the change has already been forgotten and business is rising again. He also said, "In Starbucks' 24 years of public life, I can't recall a quarter quite like Q3 of 2016, when a confluence of social and political turmoil at home, weakening consumer confidence, increasing global uncertainty, and the launch of one of our most significant long-term initiatives of all-time all occurred within a single earnings period."
Starbucks has opened 730 new stores in the last 12 months. The company said it has locked in coffee prices for all of 2016 and has more than 50% of expected 2017 demand already committed.
Goldman Sachs added Starbucks to their Conviction Buy list after the earnings, saying "Starbucks is not broken."
I believe the consolidation is about over and we should take advantage of the cheap options before the stock develops any positive momentum.
Long Jan 2018 $60 calls @ $5.50, see portfolio graphic for stop loss.
Short Jan 2017 $55 put @ $2.25, see portfolio graphic for stop loss.
Net debit $3.25.
SWKS - Skyworks Solutions - Company Profile
Skyworks cratered after the Apple press conference and the debut of the iPhone 7. Analysts are worried Apple will not sell as many phones as the already weakened estimates.
Original Trade Description: Aug 28th.
Skyworks Solutions, Inc., designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications.
In other words, Skyworks chips are in quite a few devices in the Internet of Things (IoT). The stock has been punished by investors because of the decline in expectations for Apple iPhone sales. That is a big business for Skyworks but fare from their only business. They also produce chips for phones like the Samsun Galaxy that is taking market share away from Apple. They are losing share for one customer and gaining share at another plus they sell chips for hundreds of other products not related to smartphones.
They reported earnings of $1.24 compared to estimates for $1.21. Revenue of $751.7 million also beat estimates for $750.1 million. They guided for revenue in the range of $831 million for the current quarter and earnings of $1.43.
Earnings Nov 3rd.
CLSA upgraded the stock from underperform to outperform saying the bad news on worried about Apple's sales is already priced in and the CEO gave conservative guidance that should be easy to beat. The company said its flagship smartphone chipset sales were expected to grow 20% in 2016. The analyst raised the target price to $77.
Shares broke over resistance at $72 and a break over the $79 level would target the old highs. There is a congestion zone from $80-$90 but a positive year-end market could easily overcome that resistance. The double bottom at $58 provided a launch point and shares are rebounding despite the drag from Apple.
Long Jan 2018 $80 LEAP Call @ $10.10. See portfolio graphic for stop loss.
Short Jan 2018 $100 LEAP Call @ $3.60. See portfolio graphic for stop loss.
Net debit $6.50.
UTX - United Technology - Company Profile
No specific news. Shares crashed below support at $105 to stop us out.
Original Trade Description: Aug 7th.
United Technologies Corporation provides technology products and services to building systems and aerospace industries worldwide. Its Otis segment is the world's leading manufacturer, installer and maintainer of elevators, escalators and moving walkways. The UTC Climate, Controls & Security segment is a leading provider of advanced commercial and technical solutions, for safer, smarter and sustainable buildings. The Pratt & Whitney segment supplies aircraft engines for commercial, military, business jet, and general aviation markets; and provides aftermarket maintenance, repair, and overhaul, as well as fleet management services. The UTC Aerospace Systems segment is one of the world's largest suppliers of advanced aerospace components and systems for commercial, military and space customers. UTX employs more than 200,000 workers and had sales of $56 billion in 2015.
In their Q2 earnings cycle they reported earnings of $1.82 that beat estimates for $1.68. Revenue of $14.9 billion beat estimates for $14.7 billion. Pratt & Whitney had 4% organic growth and the aerospace sector 2% growth. The commercial division saw orders from China decline -14% but still did well globally.
The company raised guidance for all of 2016 for revenues in the range of $57-$58 billion, up from the prior $56-$58 billion forecast. They raised earnings guidance by 15 cents to $6.45-$6.60 per share. In comparison competitor Honeywell cut full year guidance and GE maintained a flat outlook for 2016 and warned it could extend into 2017.
The CEO, Gregory Hayes, said orders for the new geared turbofan jet engine has 8,200 orders because "operators love the engine." The engine uses 16% less fuel, has 50% lower emissions and 75% less noise. "It cost us $10 billion to develop it but that is paying off now." They cost buyers roughly $12 million each and there are 8,200 backorders. Hayes said he does not see any significant impact from Brexit because most of their business is primarily long cycle orders. Items are ordered a year or two in advance and sometimes even longer. The company announced a $1.5 billion cost reduction program in late 2015 and they are well on the way to achieving that goal.
I am recommending the 2018 $110 call with UTX at $107.74. Unfortunately, it is expensive because it is close to the stock price and there is a lot of time before expiration. I do not like to buy that close to the stock price in a LEAP but I do not want to use the $115 call because a stock split causes weird option strikes. I prefer even numbers so a 2:1 split produces a common strike price post split. With 18 months to run and the stock just under $110 there could easily be a split before we exit this position.
We could sell a short put but the margin would be steep because of the high stock price. For instance, if we sold a 2018 $85 put for $3.90 to reduce our net debit in the position to $3.70 the margin would be $1,275 plus the premium received. If you have a lot of excess margin capability in your account then that is a drop in the bucket and the position is profitable over $113.70. If you are already leveraging all the margin in your account, then paying the full premium of $7.60 means you are profitable over $117.60. If the stock runs to $130 you would make roughly $400 more per contract if you sold the put.
Morningstar had a nice article on why UTX was going higher. Read it here
Earnings Oct 25th and we will not exit.
Closed 9/9/16: Long Jan 2018 $110 call @ $7.90, exit $5.85, -1.85 loss
Closed 9/9/16: Short Jan 2018 $85 put @ $4.05, exit 4.65, -.60 loss.
Net loss $2.45.
XOM - Exxon Mobil Corp - Company Profile
No specific news. Shares were little changed despite the drop in oil prices.
Original Trade Description: August 14th.
Exxon Mobil Corporation explores for and produces crude oil and natural gas in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products; and transports and sells crude oil, natural gas, and petroleum products. As of December 31, 2015, the company had approximately 35,909 gross and 30,114 net operated wells. Exxon Mobil Corporation was founded in 1870.
Exxon is the largest public oil and gas exploration and development company in the world. Their earnings are never in doubt and their production dwarfs the other energy majors. However, Q2 was an uncharacteristically bad quarter. Oil prices remained at low levels and prices received for oil and gas worldwide were the lowest in years. Even the downstream refining division lost money because of low fuel prices.
Earnings fell 60% from the year ago quarter to 41 cents. That missed consensus estimates by 16%. Revenue fell -22% to $57.7 billion and 5% below estimates. The E&P segment produced a 16-cent decline per share and refining removed another 4 cents. The chemical segment was the only profit center adding 2 cents per share. Operating cash flow of $4.5 billion was well below estimates for $6.5 billion due to the low prices received.
On the positive side they reduced their development costs per barrel to $8, which is very low compared to the other producers. Exxon has 10 major projects coming online in 2016 of which only two have begun production. This will rapidly boost production and add to cash flow since the developmental dollars have already been spent. Now they are just cleaning up loose ends required to begin production.
Exxon is far from destitute. They have paid dividends for more than 100 years and have increased their dividend for 34 consecutive years, including a 2.7% increase in 2016. They have far more assets and liquidity than any other energy company and the stock is on sale.
The sudden chatter about OPEC implementing a production freeze at the end of September has caught fire and oil prices are rebounding strongly. If we see a couple more comments out of OPEC members in the week ahead we could see +$50 oil very quickly. If the chatter fades, we could see sub $40 oil in Sep/Oct but I suspect OPEC members realize this and will do what they can to keep the headlines coming even if there is no hope of an actual agreement.
Earnings Oct 28th.
The deep in the money puts are still expensive and we have the opportunity to sell a $70 put to reduce our net cost to $2.70. Exxon has only traded under $70 for 1 day since 2011. This would be a very safe put to sell. This would make us 100% profitable at $93 with 18 months until expiration.
Long Jan 2018 $90 call @ $6.53, no initial stop loss.
Short Jan $2018 $70 put @ $3.60, no initial stop loss.
Net debit $2.93.
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