The market rebounded from the North Korean missile dip on Tuesday and never stopped. Let's hope we have a repeat performance this Tuesday when it is likely to open lower again.
In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. The rebound continued with ABBV soaring to a new high.
Original Trade Description: June 4th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
Estimated earnings date is July 28th.
I would not normally pick a stock that has had a $5 run over the last three weeks but ABBV is about to break out to a new high and that could kick it into high gear. People love to buy stocks when they first make a new high.
Update 6/23/17: The company received a favorable opinion on MAVIRET, a once daily He-C drug, from the European Medical Agency and the CHMP. This is an 8 week cure for Hep-C that will compete with Gilead's products.
Update 7/28/17: AbbVie reported earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Update 8/5/17: AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Long Jan 2019 $75 call @ $4.70, see portfolio graphic for stop loss.
Previously closed 7/28/17: Short term: Long Jan 2018 $72.50 call @ $2.81, exit $2.63, -.18 loss.
ADBE - Adobe Systems - Company Profile
No specific news. New high on Thursday.
Original Trade Description: June 4th.
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.
Adobe reported earnings of 81 cents that beat estimates by 4 cents. Revenue of $1.77 billion increased sequentially by 5.4% and 26.7% over the year ago quarter. Analysts expected $1.73 billion. Subscriptions accounted for 84% of Q2 revenues, up 36.9% from the year ago quarter. Revenues from digital media solutions rose 29% to $1.21 billion. Annualized recurring revenue rose $312 million to $4.56 billion. Mobile data transactions rose to 57% or all transactions.
Adobe is firing on all cylinders. They ended the quarter with $4.93 billion in cash and $901 million in receivables. They guided for the current quarter to revenue of $1.815 billion and that exceeded estimates for $1.80 billion. They guided for earnings of 72 cents to $1 and analysts were expecting 79 cents.
Expected earnings Sept 19th.
Shares have been in a solid uptrend until the Nasdaq flash crash. They dropped $13 in the crash but quickly recovered it in the earnings rebound. Friday's close was a new high. They should be a favorite for the end of quarter window dressing and with the positive earnings and guidance, they could persevere through any summer weakness.
Unfortunately, options are expensive so this will have to be a spread.
Long Jan $150 call @ $8.59, see portfolio graphic for stop loss.
Short Jan $165 call @ $3.21, see portfolio graphic for stop loss.
Net debit $5.38.
ATVI - Activision Blizzard - Company Profile
No specific news. Destiny 2 launches this week and gamers are waiting anxiously for the release. Activision also releases a beta version of the Call of Duty: WWII Private Multiplayer game. Plenty of new games coming in the months ahead.
Original Trade Description: July 16th.
Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com
Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.
Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.
Earnings August 3rd.
Activision has been beating on earnings and given the success of their last two releases the Q2 earnings should also be a beat. The stock is poised to break out to a new high over $61. I am recommending the 2019 LEAPS ahead of earnings. For those that do not want to hold that long I am also going to list the January 2018 strikes as well.
Update 7/30/17: Blizzard announced that player signing for the professional Overwatch Gaming League will begin on August 1st. All players for the league will become members of the seven teams that have joined the league so far including, Boston, Los Angeles, Miami-Orlando, New York City, San Francisco, Seoul and Shanghai, or for teams that sign on before the player signing period closes Oct. 30. Each player is guaranteed a $50,000 salary or more, lodging and practive facilities, health insurance, a retirement savings plan and 50% of the team's winnings. Each team will have 6-12 players. The total bonuses in Season 1 will add up to $3.5 million with a minimum of $1 million to the winning team. The e-Sports craze is exploding and this will be a money maker for ATVI.
Update 8/5/17: ATVI reported earnings of 55 cents compared to estimates for 30 cents. Revenue of $1.42 billion beat estimates for $1.21 billion. They guided for earnings of 34 cents in the current quarter with full year earnings of $1.94 per share. Shares spiked to a new high close at $64 on Thursday but gave back $2 on Friday.
Long Jan 2019 $65 call @ $8.20, no stop loss until after earnings.
Short Jan 2019 $85 call @ $2.61, no stop loss until after earnings.
Net debit $5.59.
Long Jan 2018 $65 call @ $4.05, no stop loss until after earnings.
BA - Boeing Company - Company Profile
Boeing should spike on Tuesday as a result of the North Korean bomb test. Defense stocks should rally, assuming the market does not tank.
Original Trade Description: May 14th.
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.
Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part.
The temporary dip could be a buying opportunity. Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.
Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.
Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.
All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.
Update 6/9/17: Israel's El Al airlines will take delivery of its first 787 Dreamliner in August. They have 16 on order for $1.25 billion. They expect to save 47% in fuel costs by retiring the 747-400s and 767-300s.
The company finalized the $3 billion order with Iran's Aseman Airlines for 60 planes. This will be 30 737 planes to be delivered in 2019 delivered in the first group with another 30 models yet to be determined in 2020-2021.
Update 6/23/17: Boeing received orders or commitments for 571 planes at the Paris Air Show. This was a record number of orders surpassing the 2011-2015 period where orders were booming. More than 500 of those orders were for the 737 single isle jets. On the final day Boeing announced an order of 125 737-MAX 8s to an unidentified customer. Avolon ordered 75 737 MAX 8s and Lion Air orderes 50 737 MAX 10s. Orders for the 737 MAX 10 that was formerly announced at the show totaled 361 planes.
Update 7/2/17: Boeing said it received orders for more than $40.1 billion at the Paris Air Show.
Last week Boeing announced the startup of Boeing Global Services a new division in Boeing that will focus on the needs of government, space and commercial customers worldwide. They said the services market is worth an estimated $2.6 trillion over the next ten years.
Update 7/17/17: Through July 4th, Boeing has received 381 net firm orders consisting of 438 gross orders and 57 changes or cancellations. This compares to only 276 new orders in the first six months of 2016. It is going to be a good year for Boeing. Hardly a day goes by that they do not announce a new order for a plane, fighter, helicopter, satellite or spacecraft.
Update 7/30/17: Boeing reported earnings of $2.55 that beat estimates for $2.32. Revenue of $22.74 billion missed estimates for $23.01 billion. Operating cash flow of $5 billion was more than twice expectations. They repurchased 13.6 million shares for $2.5 billion and paid out $900 million in dividends. They delivered 226 aircraft in Q2. They added $27 billion in net new orders to lift their backlog to $482 billion. They expect to buy back $10 billion in stock in 2017. They reaffirmed guidance to deliver 760-765 aircraft in 2017 with earnings of $9.80-$10.00, up from $9.20-$9.40. Shares literally exploded to gain $29 for the week and add 198 points to the Dow. Unfortunately, we have a spread position so our gain was limited.
Update 8/5/17: Boeing said they sold 2 747s previously allocated to Russia's Transaero Airlines to the U.S. government for use as the next generation Air Force One. Transaero went bankrupt and the planes were never delivered. They have been in storage since late 2015. The government said they got a really good deal but nobody would release a price. The planes will require extensive conversion work to upgrade them to Air Force One specifications. Even a new plan rolling off the line today would require the same upgrades. Congressional committees approves plans to shift $195 million in previously approved defense funds to the current year to accelerate conversion work on the planes. They will not enter service until 2024.
Update 8/13/17: Boeing said they signed a deal with Air Lease for 12 737 MAX planes. That will be five 737 MAX 7s and seven 737 MAX8s. They also received two new orders for the 787-9 Dreamliner. They also signed a memorandum of understanding with SpiceJet for fourty 737 MAX planes worth $40.7 billion. Another MOU was signed with Tibet Financial Leasing for twenty 737 MAX planes. Another MOU was signed with BOC Aviation Ltd for ten 737 MAX 10 planes worth $1.25 billion. Boeing expects to sell 29,530 single-aisle jets worth $3.2 trillion over the next 20 years. That is a 5% increase from the last guidance.
Boeing said it booked 183 net commercial orders in Q2 compared to 381 net orders in Q1.
Update 8/20/17: Boeing said they were awarded a 4-year, $7.1 billion contract for maintenance and support on the C-17 military aircraft. The company also said it received clearance to sell six additional Apache helicopters for $654.6 million.
Update 8/27/17: Boeing won a $349 million design contract to update the Minuteman III missile system. When the final contract for production is written, it will be from $65 billion to as much as $140 billion. Orbital ATK (OA) and Rocketdyne (AJRD) are expected to be subcontractors for Boeing.
Earnings October 26th.
Shares made a new high on Wednesday at $187 before dropping back to $182 on the temporary flight halt. Options are expensive so I am recommending a spread.
Long Jan $190 call @ $7.80, see portfolio graphic for stop loss.
Short Jan $210 call @ $2.02, see portfolio graphic for stop loss.
Net debit $5.78.
ECA - Encana Corp - Company Profile
No specific news. Shares continue to vacillate with oil prices.
We doubled up on the 2019 calls on Monday with 2 contracts at 50 cents making our adjusted cost in the position 80 cents.
Original Trade Description: May 21st.
Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.
Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.
Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.
They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.
With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.
JP Morgan initiated coverage with an overweight rating and $16 price target.
Earnings August 1st.
I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.
Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.
Encana sold its Permian Basin produced water infrastructure to H2O Midstream. No price was given. This included over 100 miles of interconnected pipeline and 80,000 bpd capacity. H2O plans to double the pipeline to 200 miles and capacity to 140,000 bpd plus adding storage for 2 million barrels of produced water. The produced water can be reused in new fracing projects and reduces the cost of new wells.
Update 7/21/17: Encana reported earnings of 18 cents that beat estimates for 4 cents. Revenue of $1.083 billion beat estimates for $773 million. Production averaged 246,500 Boepd, a 9,200 boepd rise. Condensate rose 14% to 124,900 bpd. The margin per barrel rose 25% to $12.10. Recent wells with the newest fracking technology have been coming with production 20% higher than expected. The company has more than 11,000 "premium" drilling locations and thousands of non-core locations.
Long Jan 2018 $12 call @ $1.50, see portfolio graphic for stop loss.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
Long (2) Jan 2019 $15 calls @ .50.
Adjusted 2019 position (3 contracts) @ 80 cents each.
FB - Facebook - Company Profile
Facebook is rolling out its new YouTube competition called Watch. The new TV hub will be available for users over the next few days and will have live TV shows, scripted content, MLB games and other sports events. It has been tested by a small number of Facebook users over the last several weeks and Facebook is ready to open it up to the general public. Starting this weekend hundreds of shows will be available to a larger group of users.
Original Trade Description: November 13th.
Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.
The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.
Facebook still makes a lot of money and they still have a lot of assets to monetize. They have barely begun to monetize Instagram and WhatsApp. Facebook bought Instagram for $1 billion four years ago and Forbes said it was worth $25 to $50 billion today. Instagram has added 100 million users in the first nine months of 2016 to reach 400 million. They are targeting one billion. Instagram revenue is expected to triple in 2016 to $1.5 billion and then triple again to $5 billion by 2018 according to eMarketer.
Instagram only has 350 employees compared to the 14,500 Facebook employees. Instagram users average 21 minutes a day and upload more than 95 million photos and videos. There is gold in those posts and Facebook is working on finding more ways to monetize the app.
Facebook may expect revenue "growth" to slow but that is different from "decline." It is still a great business and there will be another explosion of growth as Instagram and WhatsApp hit their prime.
Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.
Earnings Oct 25th.
The drop in price after earnings plus the decline in the Nasdaq big caps last week helped to reduce the premiums but they are still expensive and require a spread position to receive maximum benefit at the lowest cost.
Update 7/30/17: Facebook reported earnings of $1.32 compared to estimates for $1.12. Revenue of $9.32 billion rose 45% and beat estimates for $9.19 billion. Mobile advertising revenue was 87% of total revenue. Daily active users rose 17% to 1.32 billion while monthly active users also rose 17% to 2.01 billion. Analysts were falling all over themselves to raise price targets to as high as $210. Shares closed Friday at $172.
Long Jan 2018 $125 call @ $13.10, see portfolio graphic for stop loss.
Short Jan 2018 $150 call @ $5.00, see portfolio graphic for stop loss.
Net debit $8.10
GSAT - GlobalStar - Company Profile
This stock is not likely to produce weekly news. I will only post an update if something important happens. This is a 2019 LEAP. No rush.
Original Trade Description: May 28th.
Globalstar, Inc. provides mobile voice and data communications services through satellite worldwide. The company offers duplex two-way voice and data products, including mobile voice and data satellite communications services and equipment for remote business continuity, recreational, emergency response, and other applications; fixed voice and data satellite communications services and equipment in rural villages, ships, industrial and commercial sites, and residential sites; and satellite data modem services comprising asynchronous and packet data services. It also provides SPOT products, such as SPOT satellite GPS messenger for personal tracking, emergency location, and messaging solutions; SPOT Global phone; and SPOT Trace, an anti-theft and asset tracking device. In addition, the company offers commercial Simplex one-way transmission products to track cargo containers and rail cars, to monitor utility meters, to monitor oil and gas assets, and other applications. Further, it provides engineering services, such as hardware and software designs to develop specific applications; and installation of gateways and antennas. The company primarily serves recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining, and forestry; construction; utilities; and transportation markets. Globalstar, Inc. distributes its products directly, as well as through independent agents, dealers and resellers, independent gateway operators, and its sales force and e-commerce Website. As of December 31, 2016, it served approximately 689,000 subscribers. The company was founded in 2003 and is headquartered in Covington, Louisiana. Company description from FinViz.com.
This is a buy and forget position. Globalstar has a lot of thing currently in the works and is likely to be acquired over the next 18 months. With the 2019 LEAP at $1, we could be well rewarded if we just buy a few contracts and forget them.
You probably saw the bidding war over Straight Path Communications. Verizon won the war with a $3.1 billion bid. Verizon was not buying STRP for its business value. Verizon was buying bandwidth and spectrum. That is the licenses and frequencies that allow a company to transmit conversations and data through the air.
Globalstar has a lot more to offer than Straight Path. Globalstar is a satellite operator and won approval from the FCC in December to use its spectrum for terrestrial wireless. That approval means Globalstar's spectrum would be available to an acquirer for immediate use. Globalstar has spectrum that is perfect for small cell networks where population density is too thin to support a group of major cell towers.
Globalstar has targeted 100 countries in which it will see approval for wireless service. The company said, "At the end of Q1 we have filed for terrestrial authority in countries covering more than 375 million people. If you include the USA the total population covered would be about 700 million.
Analysts believe companies like Facebook, Amazon, Netflix and Google could see this capability as very valuable. The ability to communicate wirelessly with people not already reached with broadband opens up entirely new markets. Google has already tried to reach the masses with Google Fiber but the cost was too expensive and they had to scale back that initiative. Facebook is experimenting with solar powered planes and airships to beam wireless internet to millions of potential customers.
If anyone makes a run at Globalstar, it could turn into another bidding war. If nobody tries to acquire them by the end of 2017 they will have even more assets in the form of operating authority in numerous other countries. The company is an interesting lottery ticket play where we can invest very little but likely be rewarded even if an acquisition does not appear.
Earnings August 3rd but in this position we really do not care what the quarterly reports say. This is a buy and forget position. The chart over the last ten years is ugly. As a satellite company they have failed in generating any material interest. It is the recent approval to use their spectrum for wireless that holds promise for the future.
Long Jan 2019 $2.50 call @ $1.00, see portfolio graphic for stop loss.
HD - Home Depot - Company Description
Shares spiked sharply at the open on Monday and gave us a horrible fill. The gains evaporated on Tuesday when the market crashed at the open but shares are slowly recovering.
HD said they shipped more than 900 truckloads of supplies and equipment to the Houston area over the last week. Much of this came from their pre-positioned warehouses especially for hurricane relief.
Stifel said HD saw a $550 million boost to sales from Hurricane Sandy. This is likely to be similar if not greater because the damage is spread over a wider area.
Original Trade Description: August 27th.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves homeowners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico.
On August 14th, HD reported earnings of $2.25 that beat estimates for $2.21. Record revenue of $28.11 beat estimates $26.47 billion. They raised guidance for the full year for 5.3% revenue growth. They guided for an 11% rise in earnings to $7.15 in May and raised that guidance in this report to 13% and $7.29.
Despite posting record results and raising guidance, the stock was crushed for a major loss. The conference call started with analysts asking how long the good times can continue since the housing market has been strong for so long. HD reps answered the question well then immediately got hit with a bigger bomb. How can your sales continue to rise when you can now buy many of your products cheaper on Amazon. The analysts even asked how much Alexa was hurting HD's business. Every question seemed to be about why Amazon was stealing market share and why HD sales were not falling. Sentiment turned bearish and shares fell $9 over the last four days.
We were stopped out on the big drop. There is nothing wrong with the company. There is strong support at $144.50.
We entered the HD position on a dip in July and with support at in the $144-$146 range, I am recommending we try to buy another dip.
Long Jan 2019 $155 call @ $11.42, see portfolio graphic for stop loss.
Short Jan 2019 $175 call @ $4.52, see portfolio graphic for stop loss.
Net debit $6.90.
IWM - Russell 2000 ETF - ETF Profile
The Russell 2000 has rallied for 7 consecutive days and we were stopped out of the position on Thursday.
Original Trade Description: August 20th.
The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. With this ETF you get exposure to small public U.S. companies, access to 2000 small-cap domestic stocks in a single fund and strong diversification.
The Russell 2000 has been the weakest index over the last several weeks and is now down -5.4% from its high. The index is about to test critical support at 1,340 and a breakdown could see a drop all the way to 1,150. That is $134 and $115 on the ETF.
The small caps rallied significantly post election on expectations for a strong pro business agenda. With that agenda in serious trouble, investors may be taking chips off the table. With the broader market starting to break down there is little sympathetic support for the small caps. They normally lead both up and down and it appears they are currently leading down.
We are in the typically weak Aug/Sep period. Regardless of what happens over the next three weeks, the last three weeks of September have extreme risk for the market. Lawmakers have to pass a highly volatile budget and both sides have said there is no way they will vote for it in the current form. Even if they do vote to pass a budget they still have to pass an increase to the debt ceiling. Democrats have said they would only vote for a clean bill and republicans have said they will not vote for a bill that does not have some spending curbs.
Goldman Sachs said on Friday there is a 50% chance of a government shutdown. The last time that happened the S&P lost 246 points in only 11 days. While there may not be a repeat of that event, there would be a sharp decline before and during the battle in Congress. The more heated it gets, the farther the market will fall.
I am recommending we add some insurance in the form of a short term put on the Russell ETF. We need to protect ourselves through early October so I am recommending the November strike.
Closed 8/31: Long Nov $132 put @ $3.49, exit $1.69, -1.80 loss.
MCD - McDonalds - Company Profile
No specific news. Shares closed at a new high on Thursday.
Original Trade Description: August 27th.
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 6.6%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
Shares have topped out over the last two weeks from their constant new highs. The lethargic market has put a drag on their shares. Given their strong metrics, rapidly rising sales and refusal to sell off from their highs, it suggests they will go higher when the market begins moving up again.
Earnings Oct 24th.
Long Jan 2019 $165 call @ $7.92, see portfolio graphic for stop loss.
Short Jan 2019 $185 call @ $2.49, see portfolio graphic for stop loss.
Net debit $5.43.
MNST - Monster Beverage - Company Profile
New high close on Friday. Multiple analysts speculated Coke might be getting close to acquiring the rest of Monster shares it does not own. Coke has a 16.7% stake in Monster and that is the only portion of the drink business that is growing. Coke's Q2 revenues declined 16% for the 9th consecutive quarterly decline.
Original Trade Description: June 4th.
Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. Its Monster Energy Drinks segment sells ready-to-drink packaged drinks and non-carbonated dairy based coffee energy drinks primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, and the military. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations; and ready-to-drink packaged energy drinks to bottlers and full service beverage distributors. It sells its products under the Monster Energy, Nalu, Monster Rehab, NOS, Monster Energy Extra Strength Nitrous Technology, Full Throttle, Java Monster, Burn, Muscle Monster, Mother, Mega Monster Energy, Ultra, Punch Monster, Play and Power Play, Juice Monster, Gladiator, Ubermonster, Relentless, Samurai, BU, and Mutant Super Soda brands. The company was formerly known as Hansen Natural Corporation and changed its name to Monster Beverage Corporation in January 2012. Company description from FinViz.com.
Monster reported earnings of 33 cents that rose 26.9% and beat estimates by a penny. Revenue of $742.1 million rose 9.1% and beat estimates for $741.4 million. These numbers beat estimates despite a -$3.7 million hit from foreign currency translation. Net sales outside the U.S. rose 28% to $190.9 million. Sales of new products were so strong there was actually a shortage of product.
Earnings August 3rd.
Monster is doing great in a weak retail sector. This proves if you sell something habit forming you will always have a market.
They have multiple initiatives underway to increase global sales and they appear to be overcoming all the daily headaches that impact a retail distribution company. Gross profits rose from 62.2% to 64.8%.
For the last couple of years Monster has been transitioning their distribution into the Coca-Cola network. Coke took a major equity stake in Monster and part of the deal was that Coke would distribute the product globally. That is working out well and giving Monster a wider presence than they could have ever done on their own. Coke has an option to buy more Monster stock, or even the entire company. Given the slowdown in carbonated sugar drinks, Coke could be looking to exercise their option soon.
I am recommending two positions. The first is a Jan-2018 call that will get us through the rest of the year and capture any short-term gains. The second is a Jan-2019 LEAP call that could capture a run to a new high and/or acquisition by Coke. You can do one position or both.
Update 8/13/17: Monster reported earnings of 39 cents that missed estimates for 40 cents. Revenue of $907.1 million beat estimates for $906.6 million.
Position 8/14/17: Long Jan 2019 $55 call @ $6.76, see portfolio graphic for stop loss.
I will turn the 2019 call into a spread once the stock moves higher so we can widen our potential gains.
Previously closed 8/9/17: Long Jan 2018 $55 call @ $2.65, exit $1.95, -.70 loss
Closed 8/9/17: Long Jan 2019 $55 call @ $5.60, exit $5.70, +.10 gain.
NVDA - Nvidia - Company Profile
Walmart chose Nvidia to provide a massive amount of GPUs to power Walmart's new server farm. Walmart is withdrawing from Amazon's cloud after the company bought Whole Foods. Walmart is going to go "full steam" into deep neural networks and AI and build a GPU farm that is about a tenth the size of Amazon's. Walmart and Target both are leaving the Amazon cloud to avoid supporting a competitor.
Nvidia said it would make a presentation on Sept 7th at the Citi Global Technology Conference at 3:50 ET. That should boost the stock.
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 7/30/17: Nvidia has launched the GeForce Now streaming app on Mac and the Windows version is supposed to launch soon. This allows users to stream high performance gaming from the cloud using their purchased software. If their PC is not fast enough for the newer games they can use a virtual PC in the cloud to play their games for free for a limited number of hours per month. If you want to play more than the 8 free hours on a GTX1060 PC or 4 hours on a GTX1080 PC then you can pay $25 a month for 20 hours on a GTX1060 or 10 hours on a GTX1080. Nvidia is not trying to make a lot of money here from their 200 million GeForce installed customers. The idea is to offer a service, users can see the difference in the speed and capabilities of the cards and then decide to buy their own entry level PC with a big Nvidia GeForce card. For people who are not Nvidia customers this gives them a chance to try the product as well. This should be a great advertising tool.
Update 8/13/17: Nvidia (NVDA) reported earnings of $1.01 compared to estimates for 69 cents. Revenue of $2.23 billion also beat estimates for $1.96 billion. They guided for the current quarter for revenue of $2.35 billion and analysts were expecting $2.13 billion. Despite the blowout earnings and guidance, shares fell $9.
Think about this. Revenue rose 56%, net income rose 123%, revenue in the data center segment rose 175%. Revenue from gaming rose 52%. The company has posted total revenue growth of more than 50% in each of the last three quarters and triple digit earnings growth for five consecutive quarters. So why did Nvidia shares crash? Because the stock is up 700% over the last three years and $35 in the last six weeks. Is Nvidia still a great stock? Absolutely, because it is growing faster than any other tech stock in the market and many times faster than any industrial stock. These gains will continue because they keep announcing new chips, new equipment and most importantly new performance standards. They just announced a new chip that is 12 times faster than their current top of the line chip and the current speed leader. Yes, they are replacing the fastest chip available with one that is 12 times faster. What has Intel and AMD done lately that even remotely compares?
When Nvidia fell back to $140 after their last earnings, I was pounding the table on the buying opportunity. While I do not know where this current post earnings drop will end, it is still a new buying opportunity even at the current level. If it declines any further it will just be a better opportunity.
Position 9/19/16 with a NVDA trade at $63.50
Closed 6/14/17: Long Jan 2018 $70 LEAP Call @ $9.40, exit $84.50, +75.10 gain.
Closed 6/14/17: Short Jan 2018 $90 LEAP Call @ $3.73, exit 64.30, -60.57 loss.
Net gain $14.53.
New Position 3/13/17:
Long Jan $120 LEAP Call @ $6.75, see portfolio graphic for stop loss.
OA - Orbital ATK - Company Profile
OA won a $157 million contract from the Navy for converting AGM-88B High Speed Anti-Radiation Missiles into AGM-88E AARGM All-Up-Rounds including 6 training missiles. This supersonic, medium-range, air-launched tactical missiles are being used by U.S. Navy and allied strike aircraft, and are compatible with all variants such as F/A-18, Tornado, EA-18G, F-16, EA-6B and F-35.
Original Trade Description: August 13th.
Orbital ATK, Inc. develops and produces aerospace, defense, and aviation-related products to the U.S. Government, allied nations, prime contractors, and other customers in the United States and internationally. It operates through three segments: Flight Systems Group, Defense Systems Group, and Space Systems Group. The Flight Systems Group segment develops launch vehicles that are used as small-and medium-class space launch vehicles to place satellites into Earth orbit and escape trajectories; interceptor and target vehicles for missile defense systems; suborbital launch vehicles that place payloads into various high-altitude trajectories; rocket propulsion systems for human and cargo launch vehicles; strategic missiles; missile defense interceptors and target vehicles; composite structures for military and commercial aircraft and launch structures markets; and illuminating flares and aircraft countermeasures. The Defense Systems Group segment develops and produces military ammunition; small-caliber commercial ammunition; propulsion systems for tactical missiles and missile defense applications; strike weapons; precision weapons and munitions; high-performance gun systems; aircraft survivability systems; fuzes and warheads; propellant and energetic materials; special mission aircraft; airborne missile warning systems; and defense electronics. The Space Systems Group segment offers small-and medium-class satellites that are used to enable global and regional communications and broadcasting; conduct space-related scientific research; and perform other activities related to national security. This segment also provides human-rated space systems for Earth-orbit and deep-space exploration, including re-supplying the international space station; and spacecraft components and subsystems, as well as specialized engineering and operations services.
Company description from FinViz.com
Orbital is a jack of all trades. If you read the description above, there is very little in defense and aerospace that they do not do. With all the attention on the defense sector, all the defense stocks are soaring. Orbital is the only one with a cheap enough stock price that you can buy that also has a decent chart.
They reported earnings of $1.56 compared to estimates for $1.45. Revenue of $1.12 billion beat estimates for $1.11 billion. They guided for the full year for earnings of $5.95-$6.25 per share and revenue of $4.60-$4.65 billion. That was up from $5.80-$6.20 and $4.55-$4.625 billion.
Revenue and earnings were hampered by a slowdown at the Lake City ammunition plant in Apr/May after an accident that halted assembly lines. Everything is back to full speed.
Order backlogs rose 4% to $15.4 billion. On August 10th, the company approved a quarterly cash dividend of 32 cents payable Sept 21st to holders on Sept 6th.
Expected earnings Nov 2nd.
They do not have LEAPS so I am recommending a February call.
Long Feb $110 call @ $6.20, see portfolio graphic for stop loss.
PGR - Progressive Corp - Company Profile
Shares collapsed from their record high after news broke they could have 500,000 insured cars in the Houston area. We were stopped on the crash.
Original Trade Description: August 6th.
The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com
Progressive reported earnings on July 18th of 59 cents that more than doubled the 29 cents from 2016 but still missed estimates by a penny. Revenue rose 14% to $6.7 billion. Shares spiked at the open then went right back to the steady uptrend.
Expected earnings Oct 17th.
Just a couple days before earnings Raymond James upgraded the stock from outperform to strong buy.
Progressive does not generate a lot of headlines. This is a sleeper stock with steady movement and a lack of material volatility. As we approach the Aug/Sep period, which is normally weak, it could be a good idea to own a low volatility position. The options are cheap so the risk is minimal.
Update 8/20/17: Progressive reported results for July and shares rose to a new high. Premiums written were $2.708 billion, up 19%. Premiums earned were $2.475 billion, up 14%. Income attributable to Progressive was $199.3 million or 34 cents per share, up 170%. Personal policies in force totaled 15,569,200, up 7%. Commercial policies were 630,600, up 4% and business property policies 1,327,800, up 13%.
They do not have LEAPS so I am going with the February call.
Closed 9/1/17: Long Feb $50 call @ $1.05, exit .65, -.40 loss.
PYPL - PayPal - Company Profile
Paypal announced a new cash back MasterCard that returns 2% on every purchase. There is no annual fee, no limit or expiration on rewards earned, no restrictions on purchases, extended warranty protection and zero fraud liability. Shares closed at a new high on Wednesday.
Original Trade Description: July 30th.
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies.
Company description from FinViz.com
PayPal has been on a roll lately. They reported earnings of 46 cents, up from 36 cents and beat estimates for 43 cents. Revenue of $3.14 billion beat estimates for $3.09 billion. Transactions processed rose 23%. They guided for the full year for revenue of $12.78-$12.88 billion with earnings of $1.80-$1.84. Analysts were expecting $12.7 billion and $1.79. Paypal added 6.5 million accounts to total 210 million customers. The company said they were on track to add 25 million new accounts in 2017.
Expected earnings Oct 25th.
The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.
Pacific Crest Securities said their market cap of $71 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.
Update 8/13/17: Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.
Update 8/21/17: Paypal said payment platform Venmo was on track with expectations. The platform processed $8 billion in payment volume, a 103% YoY increase. Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.
Long Jan 2019 $65 call @ $6.27, see portfolio graphic for stop loss.
SLCA - U.S. Silica Holdings - Company Description
No specific news. We turned the position into a spread at the open on Monday and of course shares rallied $2 late in the week to put our short call negative. I am confident oil prices are going to decline further so this rebound is probably temporary.
Original Trade Description: March 19th
U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.
Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.
Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.
Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.
U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.
They were crushed again on the week of Feb 6th when oil prices fell 7% in just two days to the lows for the year.
Oil prices are down on record inventory levels. Inventories at 528.4 million barrels are the highest since record were started. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.
Revised earnings July 31st.
We know oil prices should rise when refiners come back online and the summer. We also know Saudi Arabia needs high oil prices when they try to IPO Saudi Aramco later this year. Rig activations are exploding. For the week of March 17th, there were 21 new rigs. We have almost double the number of rigs operating today than we did last May.
Update 8/6/17: Silica reported earnings of 38 cents compared to estimates for 37 cents. Revenue of $290.5 million rose 148% but missed estimates for $309.8 million. Tons sold were a record 3.638 million, up 63% YoY and 7% QoQ. Frac sand sold was a record 2.745 million tons, up 106%. Earnings were up 1,000% from Q1's 3 cents and well over the Q2-2016 loss of 19 cents. This was a very strong report but shares crashed anyway.
Update 8/20/17: SLCA announced the acquisition of Mississippi Sand LLC, a leading, low-cost frac sand mining and logistics company in St Louis for $95.4 million in cash. The transaction will be immediately accretive. The mine is state of the art with 95% of total capacity in fine grain sand. Customer contracts in place account for a majority of the 1.2 million tons of annual capacity. Basically, they took out another competitor and turned it into another revenue stream and picked up some unused capacity in the process.
Update 8/27/17: I am going to recommend we turn this into a spread. The odds are slim of our $50 calls ending in the money in January. I am recommending we sell the Jan $32 calls. We averaged down on this position in the past so sell an equal number of calls.
Sell short Jan $32 call, currently $1.50.
Long Jan $50 LEAP Call @ $6.93, no initial stop loss.
Position 5/8/17: Long Jan $50 LEAP Call @ $2.30.
Adjusted cost in the position: $4.61.
Doubled down again on 6/26/17: Long 2 contracts at $1.20.
Adjusted cost in the position = $2.33.
Short Jan $32 call, entry $1.50, see portfolio graphic for stop loss.
Closed 5/8/17: Short Jan $65 LEAP Call @ $2.58, exit .80, +$1.78 gain.
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