The sideways market began to weaken and the FBI news on Friday pushed several indexes to new short-term lows. The market internals are fading and we could be setting up for a material decline ahead of the election. The political uncertainty is keeping portfolio managers on the sidelines and volume is very weak.
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)
APA - Apache Corp - Company Profile
No specific news. Shares are holding at the recent highs despite the weak market and stagnant oil prices. Earnings on Thursday.
Original Trade Description: October 2nd
Apache Corporation, an independent energy company, explores, develops, and produces natural gas, crude oil, and natural gas liquids. It operates onshore and offshore assets primarily in the Permian Basin, the Anadarko basin in western Oklahoma, the Texas Panhandle, and Gulf Coast areas of the United States, as well as in Western Canada and Gulf of Mexico. The company also operates assets in Egypt and the United Kingdom in the North Sea. As of December 31, 2015, it had total estimated proved reserves of 794 million barrels of crude oil, 198 million barrels of natural gas liquids, and 3.4 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.
While that company description was valid six months ago the picture has changed for Apache. In early September Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. The "Alpine High" as they are calling it, "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The Alpine High play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage, they drilled 19 wells to prove out the reserves. Previously oil industry experts thought the area to be unfit for fracking because of an abundance of clay. Therefore, nobody was interested in this remote corner of the Delaware Basin inside the Permian. Apache said the amount of clay was significantly less than previously thought.
Compare the size of the discovery with the proved reserves in the company description. This one discovery is several times the size of the entire company six months ago.
Apache said it was raising capex by $200 million to $2 billion to reflect their anticipated activity in this area. They are going to allocate 25% of their capex budget to this discovery. Well costs are $4-$6 million for 4,100 foot laterals. They are going to start development with a 3-5 rig program and they have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone. The only drawback to the position is the lack of infrastructure, which Apache will have to build out along with its wells. The company will not be able to sell production until the second half of 2017 when they anticipate the first level if infrastructure will be completed. Volume production will not begin until 2018.
The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.
Apache is going to be getting a lot of attention over the next several months as portfolio managers reevaluate them as a potential investment. By more than tripling the company's reserves in one discovery the company has a lot of profitable work ahead for the next decade.
They were very smart to keep the discovery quiet until they had locked nearly every single acre in the entire discovery for very low prices.
Earnings Nov 3rd.
I have been waiting for the initial stock surge on the news of the discovery to fade to give us a better entry point. However, it never came and now with the OPEC production cut headlines we may never see the stock back below $60. I would rather buy a stock that is rising than wait forever for a dip that never comes.
I am not going to spread this LEAP because shares could run to $100 if the OPEC production cut actually occurs. We can spread out to exit the play on the backend.
Long 2018 $70 call @ $7.70, no initial stop loss.
You could sell a put to offset the call premium because I seriously doubt this stock is going significantly lower unless oil prices implode.
ATVI - Activision Blizzard - Company Profile
No specific news. Shares faded with the market ahead of earnings next Thursday.
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.
Update 10/21/16: CBS approved a TV game show version of Candy Crush to be distributed by CBS and Lionsgate. Candy Crush is one of the top 10 grossing mobile games in the U.S. with more than 18 billion game rounds played every month.
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. See portfolio graphic for stop loss.
BMY - Bristol-Myers Squib - Company Profile
BMY reported earnings of 77 cents compared to estimates for 65 cents. Revenue of $4.92 billion beat estimates for $4.75 billion. They guided for full year earnings of $2.80-$2.90, up from the prior forecast of $2.55-$2.65. For 2017 they guided for $2.85-$3.05 per share. The CEO was very upbeat about the BMY portfolio and pipeline and shares spiked $4 on the news. This should have finally killed the Opdivo headlines.
Original Trade Description: August 8th.
Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers chemically-synthesized drugs or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that targets and blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung cancer, renal cell cancer, and melanoma; Sprycel, a multi-targeted tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for the treatment of patients with metastatic melanoma; Abilify, an antipsychotic agent for adult patients with schizophrenia, bipolar mania disorder, and major depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation, and the prevention and treatment of venous thromboembolic disorders. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor that is in regulatory review for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer.
BMY is NOT a one-drug company. On August 5th, the stock fell from $75 to $62 on news a clinical trial on Opdivo for lung cancer without chemotherapy had ended without the desired results. More than $20 billion in market cap was erased from the stock because of one trial on a drug that is already successful in lung cancer with chemotherapy and in treating renal cell cancer.
This was not a case where all the patients in the trial died. It was simply a trial that did not work. Specifically this particular trial was hoping to prove the drug would be successful in patients with more than 5% of the PD-L1 protein in the tumors and had not received chemotherapy. This is a very broad trial. They hoped to be able to avoid the expensive chemotherapy process and the very painful side effects. It did not work in that application BUT it has already been approved for use with chemotherapy. The competitor drug from Merck, Keytruda, was tested in a smaller subset of patients with more than 50% of the PD-L1 protein. If BMY had copied that trial for Opdivo, the drug may have worked.
Bristol-Myers has a very strong portfolio of cancer drugs, HIV drugs, etc. Revenue is NOT going to change because the drug had never been prescribed for this specific patient demographic. Nothing changed financially for BMY. They had hoped a successful test would have added billions to annual revenue several years into the future but that was just wishful thinking.
There is an existing Phase 3 trial with Opdivo in conjunction with the drug Yervoy for PF-L1 positive patients. If that trial is successful, the Checkmate-026 trial will be immediately forgotten.
BMY is a good company. There is no material reason for a $20 billion market cap haircut. I have change the recommendation to buy a dip to strong support at $50. The decline is continuing and any further market weakness could give us a great entry point.
Position 10/10/16 with a BMY trade at $51.00
Long Jan 2018 $55 LEAP Call @ $4.00. see portfolio graphic for stop loss.
CLVS - Clovis Oncology - Company Profile
Chardan Capital Markets initiated coverage with a sell rating and $15 price target. Shares declined sharply on that news on Tuesday. On Friday the entire sector crashed and we were stopped out.
Original Trade Description: September 18th.
Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.
Clovis is on a rocket ride higher as its cancer drugs progress through the various trials. Several are expected to prove worthy and make it to actual drug status with billions a year in revenue. There are more than 250 types of cancer. It is the leading killer because most cancers are not diagnosed until they have already taken root and become tougher to combat.
I believe Clovis will be acquired by Gilead Sciences (GILD) when their shopping spree begins. Gilead has amassed $29.5 billion in cash and they need to buy new drugs that could make it to blockbuster status. Cancer drugs can do that because of the widespread number of patients. The Clovis drugs in trials are just the tip of the iceberg. Once they have a couple drugs that are effective on several types of cancer they will expand the technology to target the other types. Clovis is going to be a cancer drug powerhouse.
Their market cap is just over $1 billion. For a company with $29 billion in cash, this is a slam-dunk to acquire the cancer technology.
Earnings Nov 3rd.
Unfortunately, the availability of options is limited. The 2018 LEAPS only have one strike out of the money at $35 and the premium is $13. That is too high on a $30 stock and there are no higher strikes to enable us to spread it. Also, the bid ask spread is $4.
The April strikes include the $35 and $40 levels but they are $9.60 and 8.00 respectively and the bid ask spread is $2.
We have to drop back to the January 2017 calls and make it a short-term position. If Clovis is going to make an offer, it will happen well before January. We have to buy close to the money to capture any weak acquisition offer. With Clovis at $32.50 today, a $40 offer would not be unreasonable even though I would expect it to be more. That means a $5 premium on a $35 strike is questionable. However, I would expect a price war if they only bid $40 so I am willing to take the risk.
Closed 10/28/16: Long January $35 call @ $6.00, exit $3.01, -2.99 loss.
Closed 10/28/16: Short January $50 call @$2.30, exit .90, +1.40 gain
Net loss -1.59.
HON - Honeywell - Company Profile
Nice gain in a weak market on Friday to close at a three week high. Honeywell said they saw deliveries of 8,600 new business jets valued at $255 billion over the next ten years.
Original Trade Description: October 23rd.
Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. It also offers fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate fertilizers, phenol, specialty films, waxes, additives, fibers, research chemicals and intermediates, and electronic materials and chemicals. Company description from FinViz.com.
On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.
The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.
After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.
The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.
He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.
Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.
On Oct 21st, Honeywell (HON) reported earnings of $1.67 compared to estimates for $1.60. Revenue of $9.80 billion beat estimates for $9.78 billion. The company said it was well positioned for double-digit earnings growth in Q4 and that would push them to 8-9% earnings growth for the full year. For Q4 they guided for $1.74-$1.78 in earnings and analysts were expecting $1.80. They guided for the full year to earnings of $6.60-$6.64 and revenue of $39.4 to $39.6 billion. Analysts were expecting $6.68 and $39.63 billion.
Shares rallied despite the lowered guidance because Honeywell had already warned two weeks earlier and shares were crushed. The company focused on being upbeat about 2017 saying they expect double-digit earnings because of the restructuring they accomplished in 2016. The company laid off 3,017 positions in Q3 as they separated the automation and control solutions business into two new reporting segments. They took a charge of $202 million on the restructuring and layoffs. Because of the big drop in early October, the risk should be reduced for Honeywell shares.
In this market, any company that can produce double-digit earnings in Q4 and give strong guidance for 2017 should find some buyers. I believe the worst is over for the shares and we should see a rebound back to the highs, possibly before year-end.
Long Jan 2018 $115 call @ $6.25, see portfolio graphic for stop loss.
After HON rises some we can turn it into a spread and reduce the premium.
INTC - Intel - Company Profile
No specific news. Approaching decent support at $34.
Original Trade Description: October 9th.
Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Software and Services, and All Other segments. The company's platforms are used in various computing applications comprising notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices, and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use, and other market segments. It offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip products that integrate its central processing units with other system components onto a single chip. The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers, and power management integrated circuits; and tablet, phone, and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions, and interoperability tests, as well as home gateway and set-top box components. In addition, it offers security solutions for computers, mobile devices, and networks, as well as software and services for technology integration; NAND flash memory products, which are used in solid-state drives; and custom foundry services, including custom silicon, packaging, and manufacturing test services. Company description from FinViz.com.
Yes, Intel. The father of modern computers, servers and everything chip related. They have a lot of competition today but Intel is still a chip behemoth. They rule the PC and server processor space with new developments faster than other chip makers can even conceive of them, with the exception of Nvidia, which is giving Intel a tough battle. There is enough market share for everyone so nobody is going to be squeezed out of the market.
I am not going to go into a lot of detail on Intel because everyone knows who they are and what they do. I believe this is the right time to play Intel because more than one company, including Intel, has said they underestimated PC demand over the last quarter.
The main reason behind the PC surge is Windows 10. The Window's Vista and Window's 8 problems have been forgotten because Microsoft went back to what worked and what customers wanted. Now that Windows 10 has been accepted by the mainstream consumer, the long awaited upgrade cycle is underway. That means tens of millions of PCs are being replaced with new models. Add in the millions of new tablets and servers and Intel should be doing well.
Their earnings are October 18th. I rarely suggest adding a new position only a week before earnings but the options are cheap and I expect Intel to beat the estimates and guide higher. I could be wrong but we have 14 months to be right.
Intel shares closed at a new 15-year high on Friday and just over $38. Intel is breaking out and shares could easily run to $50 over the next year. As a big cap tech with relatively little volatility, fund managers should be throwing money at the stock over the next three weeks.
Long Jan 2018 $40 LEAP Call @ $2.79, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF ETF Profile
Support at $119 failed and any further decline will force corrective action on our part.
We turned this position into a narrow spread on 9/12 to guarantee a gain.
With our average cost on the long puts at $4.22, a $1.65 gain on the short Jan $85 put and our premium received on the sale of the Jan $115 puts at $3.95, we will end up with a gain if the IWM closes above our strikes. The best expiration close would be $114.75 in January.
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, see portfolio graphic for stop loss.
4/27 - With IWM trade at $115, Long Jan $100 put @ $3.50, see portfolio graphic for stop loss.
Short Jan $115 put, entry $3.95, see portfolio graphic for stop loss.
Closed 9/12/16: Short Jan $85 put @ $2.00, exit .35, +1.65 gain.
JACK - Jack in the Box - Company Profile
Goldman Sachs initiated coverage with a sell rating and a price target of $88. Shares tanked to stop us out at $92.85 on Tuesday.
Original Trade Description: September 18th.
We were stopped out of JACK on the big market crash on September 9th. I put it back into the watch list and we were triggered on 9/23 with an upside trigger at $101.50.
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 held at that level for four weeks. The market crash on Sept 9th pushed the shares down to $96. I am targeting a new entry at $91.
JACK does not have LEAPS so I am using the March $100 call, which is the longest dated option series available.
Position 9/23/16 with a a JACK trade at $101.50
Closed 10/15/16: Long March $110 call @ $5.00, exit $1.85, -3.15 loss
Closed 10/15/16: Short March $120 call @ $2.24, exit $1.30, +.94 gain >br>
Net loss $2.21
LL - Lumber Liquidators - Company Profile
No specific news. Earnings are Monday.
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.
Update 10/25/16: They changed the earnings date to Oct 31st. The lawyers announced a settlement in the class action suit with shareholders. Plaintiffs, anyone that held stock when it crashed, will receive 67 cents and 0.03 shares of stock for every share they owned when it crashed on the China flooring news. This was a win for LL and the settlement amount is simply pocket change.
Earnings July 27th.
Long Jan 2018 $20 call, entry $2.50, see portfolio graphic for stop loss.
NBIX - Neurocrine Biosciences - Company Profile
No specific news. Earnings are Wednesday.
Original Trade Description: September 18th.
Neurocrine Biosciences, Inc. discovers and develops pharmaceuticals for the treatment of neurological and endocrine-related diseases and disorders in the United States. The company's products in clinical development stage include elagolix, which is in Phase III study for endometriosis and uterine fibroids; Vesicular Monoamine Transporter 2 Inhibitor (VMAT2) that is in Phase III study for tardive dyskinesia, as well as in Phase II study for tourette syndrome; and NBI-640756, which is in Phase I study for essential tremor. Its research programs comprise Corticotropin-Releasing Factor Receptor1 Antagonist for congenital adrenal hyperplasia; VMAT2 Inhibitors for movement disorders, bipolar disorders, and schizophrenia; and G Protein-Coupled Receptors and Ion Channels for epilepsy, essential tremor, pain, and other Indications. It has collaborations with AbbVie Inc. to develop and commercialize elagolix and GnRH antagonists for women's and men's health; Mitsubishi Tanabe Pharma Corporation to develop and commercialize valbenazine for movement disorders in Japan and other Asian markets; The Mount Sinai School of Medicine of the City University of New York to develop and commercialize licensed products worldwide; and Dainippon Sumitomo Pharma Co. Ltd. Company description from FinViz.com.
This is another potential takeover target for Gilead Sciences. NBIX has a large portfolio of potential drugs in the pipeline and several are very close to approval. They are developing a drug with AbbVie (ABBV) for endometriosis and uterine fibroids. The drug is called Elagolix and it is expected to be a multibillion dollar blockbuster. Endometriosis can also be associated with chronic non-menstrual pelvic pain and about 50% of infertility in women. Some 6% to 10% of women worldwide, about 176 million, suffer from this condition with monthly pain associated with their monthly cycles.
The company just submitted a New Drug Application last week for valbenazine in treating tardive dyskinesia. This is an orphan drug and there is currently no known treatment for the disease. This is a once daily dosing that relieves the symptoms of involuntary, repetitive movements of the face: lip smacking, grimacing, tongue protrusion, facial movements or blinking, puckering and pursing of the lips, or the extremities.
Earnings Nov 2nd.
NBIX does not have LEAPS. I am recommending the February call. If there is going to be an acquisition offer it should happen before year-end. NBIX broke above recent resistance on Friday and could be headed to new highs on the strong drug pipeline.
Long February $60 call @ $4.10, see portfolio graphic for stop loss.
NVDA - Nvidia - Company Profile
No specific news. Shares hit a new high on Wednesday.
Original Trade Description: September 18th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Update 10/3/16: Nvidia announced a new chip code-named Xavier that is specifically designed for self driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.
Q2 earnings were a blowout and shares rocketed to a new high. We closed the prior position at $63.11 and I am putting a $56 entry trigger of this Watch List recommendation. We may never get triggered but it we do it should be a winning position.
Breakout entry point.
Position 9/19/16 with a NVDA trade at $63.50
Long Jan 2018 $70 LEAP Call @ $9.40, see portfolio graphic for stop loss.
Short Jan 2018 $90 LEAP Call @ $3.73, see portfolio graphic for stop loss.
Net debit $5.67.
SBUX - Starbucks - Company Profile
No specific news. Earnings on Thursday.
This is a 2018 LEAP position and there is strong support at $53.
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."
Update 10/25/16: Starbucks announced plans to open up to 1,000 of its premium "Reserve" stores. Originally, they were only targeting 500. The Reserve stores are smaller than the new "Roastery" stores that are its largest concept store with premium everything and a giant lounge area to congregate that is roughly 9 times the floor space of a regular Starbucks. The company also said it was hoping to have 5,000 stores open in China by 2021.
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
No specific news. JP Morgan initiated coverage at neutral with an $88 price target. Shares declined on Friday with the market/sector. It was not related specifically to SWKS.
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.
XOM - Exxon Mobil Corp - Company Profile
Exxon (XOM) reported earnings of 63 cents of $2.65 billion, down from $1.01 and $4.24 billion in the year ago quarter. Revenue was $58.7 billion. Analysts were expecting 58 cents and $60.4 billion. Exxon cut capex spending by 45% to $4.2 billion. Production fell -3% to 3.8 million boepd. Shares fell -2.5% on the report.
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, see portfolio graphic for stop loss.
Short Jan $2018 $70 put @ $3.60, see portfolio graphic for stop loss.
Net debit $2.93.
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