The China trade worries provided an excuse for traders to take profits. We lost a lot of profitable positions last week but it is better to lose them while they are profitable than risk an even bigger decline and large losses.
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.
Shares declined with the market. Abbvie will present at the Bank of America conference on May 15th. The Parnassus fund bought 1.7 million shares of Abbvie in Q1 as noted in their quarterly SEC filings.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. The company reported Q4 adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.
The company's many new drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.
AbbVie's drug Humira is expected to sell more than $20 billion in 2018 after a $18 billion revenue in 2017. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs. AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams.
AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, women's health and Hepatitis C.
Update 4/28: ABBV reported earnings of $2.14 that beat estimates for $2.06. Revenue of $7.828 billion beat estimates for $7.772 billion. Sales of Humira fell -5.6% to $4.446 billion. This was expected as they had previously warned that competiting biosimilars would erode market share. At the same time ABBV talked up their large portfolio of new drugs that would overcome the Humira deficit in years ahead.
Caterpillar shares crashed on the China trade news on worries they could be a target of retaliation by China. Support at $130 is holding.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986.
Company description from FinViz.com.
CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.
The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.
CAT said sales for Q4 rose 35% on strong global demand for construction equipment. They reported earnings of $2.16 compared to estimates for $1.79. Revenue of $12.9 billion beat estimates for $11.9 billion. The company guided for 2018 earnings of $8.25-$9.16 and analysts were expecting $8.19. The CEO said demand remains strong thanks to rising oil prices, booming construction and a rapidly rising global economy. CAT reported before the open on Thursday and shares were volatile over the last two days. However, despite the volatility shares are only down about $2 from the pre-earnings close.
Given CAT's big rally over the last six months, it was no surprise to see the stock sell off sharply. However, shares found support at $142 and the 100-day average at $144.
Update 4/28: Caterpillar reported earnings of $3.25 that beat estimates for $2.83 but the CAT number had a 31-cent tax windfall, which translates into real earnings of $2.94 and still a beat. Revenue rose from $12.9 billion to $13.5 billion and beat estimates for $13.3 billion. Construction equipment sales rose 3% to $5.677 billion. Resource sales rose 18% to $2.309 billion. Energy and transportation sales were flat. The company raised full year guidance from $11.75-$12.75 to $12.06-$13.06.
Shares fell 4% on worries about the sales slowdown in China with a 4% decline in construction equipment. If you read the details sales were actually flat after accounting for the strong dollar but that was still a disappointment since Asia-Pacific and China is normally their fastest growing region. The good news was a 7% rise in revenue in North America.
Update 5/5: Caterpillar announced a record quarterly dividend of $1.03, a 20% increase payable August 20th to holders on July 22nd. The company said it expects to raise its dividend by high single digit percentages in each of the next four years. This will allow the company to return almost all of its free cash flow to shareholders. They expect to double sales from the $14 billion in 2016 to $28 billion by 2026.
Canopy said their subsidiary Canopy Rivers signed an uptake agreement with PharmHouse for the purchase of an additional 20% of their output once the 1.2 million sqft grow house is completed. Canopy already had a 10% agreement and this raised that total to 30%. PharmHouse will deliver between 25,000-45,000 kilos of cannabis annually to Canopy Rivers. Canopy Rivers owns 49% of the PharmHouse joint venture. PharmHouse has now presold 50% of their expected output and is reserving the remaining 50% for their own products and brands.
This is a 2021 position.
Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana Inc. and changed its name to Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Company description from FinViz.com.
The cannabis sector is on fire and nobody knows how to play it because of the volatility. There will be downs as the rules are drawn and additional countries go all in on recreational use. Canada has approved recreational use starting in October for the entire country. Numerous U.S. states have passed new laws approving the use. Multiple countries have been legal for years but dozens are considering it today.
Tilray (TLRY) has been getting all the news because of its wild swings on only 17.8 million shares outstanding. Tilray is actually the smallest of the big three marijuana producers.
The other two are Canopy Growth (CGC) and Aurora Cannabis (ACBFF). Aurora also traded 15 million shares on Friday but they have 950 million shares outstanding. Canopy traded 11 million against 228 million outstanding.
Aurora is expected to produce 570,000 kilos of weed in 2019 and Canopy is expected to produce more than 500,000 kilos. Tilray said it would only produce 76,000 kilos in 2018 and 150,000 in 2019.
All three of these companies are primarily in weed today but they are rapidly moving to the CBD oils, which have a more mainstream use. Coke is looking at making drinks with CBD oil. Constellation Brands (STZ) is looking at making drinks and edibles with THC, the active ingredient in marijuana. Constellation made a $4.1 billion investment in Canopy with the option to buy more. With big money and big marketing behind Constellation and Canopy I am picking them to be the long term winner.
Look how far the legalization of marijuana has come in just the last two years. Where will the business be two years from now? This is truly a "sky's the limit" potential. The tobacco companies have not yet entered the sector and the most likely entry would be the acquisition of one of these companies. There is eventually going to be a land rush as everyone interested tries to get a piece of this sector starting with the growers.
If you look at the chart it is going to scare you. The recent spike was the $4.1 billion investment by Constellation. I would not be surprised to see the stock pull back to the uptrend around $40 and if it does we will close the short call for a gain.
Because of the interest in the sector, Canopy has LEAPS out in 2021. That is very long-term and should get us past all the initial volatility. Ideally, I would like to eliminate that short call at some point in the future if we see a material decline in the sector.
Update 4/21: Shares spiked after the company agreed to buy Acreage Holdings, the largest marijuana grower in the US for $3.4 billion. The deal has a very big qualification. It does not officially occur until the US legalizes marijuana or the NYSE/Nasdaq allows cannabis stocks in the US. The deal will then trigger with each Acreage share worth 0.5818 Canopy Growth shares. In addition Canopy is paying an up front fee now of $300 million in the form of a dividend to all Acreage Holdings shareholders at $2.55 per share.
Acreage will license the Canopy brands including Tweed and Tokyo Smoke. This allows Acreage to us its shares, which are now a lot more valuable, to make other acquisitions in the US. They are already considering one in Arizona and Pennsylvania. Acreage Holdings has cannabis related licenses across 20 states with 87 dispensaries and 22 cultivation and processing plants.
There is a 90-month sunset clause if the triggering events do not occur the deal can be cancelled.
Update 5/5: Canopy said it acquired Germany's Bionorica SE, C3 cannabinoid compound company. The company is a leader in the medical marijuana field. C3 is a manufacturer and distributor of dronabinol, a registered drug in Germany, Austria, Switzerland and Denmark. Prescriptions of the drug rose 85% in 2018. The drug is for nausea, vomiting and cancer pain. Canopy paid 226 million euros.
Shares were flat to higher for the week since Cigna is not exposed to China.
Cigna Corporation, a health service organization, provides insurance and related products and services in the United States and internationally. It operates through Integrated Medical, Health Services, International Markets, and Group Disability and Other segments. The Integrated Medical segment offers medical, pharmacy, dental, behavioral health and vision, health advocacy programs, and other products and services to insured and self-insured clients; Medicare Advantage, Medicare Supplement, and Medicare Part D plans to Medicare-eligible beneficiaries, as well as Medicaid plans; and health insurance coverage to individual customers on and off the public exchanges. The Health Services segment provides clinical solutions, specialized pharmacy care, home delivery pharmacy, retail network pharmacy administration, benefit design consultation, drug utilization review, drug formulary management drug claim adjudication, digital consumer health and drug information, provider, and medical benefit management services. The International Markets segment offers supplemental health, life and accident insurance products, and health care coverage, as well as health care benefits to mobile employees of multinational organizations. This segment offers health coverage, hospitalization, dental, critical illness, personal accident, term life, and variable universal life products. The Group Disability and Other segment provides group long-term and short-term disability, group life, accident, and voluntary and specialty insurance products and related services; and permanent insurance contracts to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations. The company distributes its products and services through insurance brokers and insurance consultants; and directly to employers, unions and other groups, or individuals. Cigna Corporation was founded in 1792 and is headquartered in Bloomfield, Connecticut. Company description from FinViz.com.
Cigna was hammered last week along with UnitedHealth and Humana. The Medicare for All proposal crushed the insurance companies, drug and biotech sectors. I believe the damage is overdone. Cigna ha earnings on May 2nd and if they have a decent report, investors will forget about the long-term threat of government health care and go back to buying stocks.
Earnings May 2nd.
Multiple fund managers recently added positions in Cigna including Dan Loeb, Jeff Auxier, Larry Robbins, Richard Pzenas, etc.
Update 5/5: Cigna reported earnings of $3.90 that beat estimates for $3.74. Revenue nearly tripled thanks to the Express Scripts acquisition to $33.43 billion but that misses estimates. They guided for full year earnings of $16.25-$16.65, up from $16.00-$16.50. Analysts were expecting $16.48. Enrollment rose by 224,000 patients to 16.99 million customers. Shares fell slightly on the revenue miss.
Citigroup upgraded from neutral to buy with a $69 price target. Two hedgefunds are considering trying to block the CNC acquisition of WellCare for $17 billion. They think WellCare is worth more money.
Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. The company's Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which covers dually eligible individuals, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray, home-based primary care, transportation assistance, vision care, dental care, telehealth, immunization, specialty pharmacy, therapy, social work, nurse advisory, and care coordination services, as well as prescriptions, limited over-the-counter drugs, medical equipment, and behavioral health and abuse services. This segment also offers various individual, small group, and large group commercial healthcare products to employers and directly to members in the Managed Care segment. Its Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; and vision and dental, and management services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri. Company description from FinViz.com.
Centene has had a rocky six months and shares were recovering in early April until the sector was caught in the Medicare for All downdraft. Since then they reported strong earnings and guidance and are moving up again.
The company reported earnings for $1.39 that beat estimates for $1.35. Revenue rose 40% to $18.44 billion and easily beat estimates for $17.46 billion. Medicare revenue rose 19% to $1.38 billion and commercial policy revenue rose 19% to $3.65 billion.
They raised full year guidance from $4.11-$4.31 to $4.24-$4.44. Revenue guidance rose from $70.3-$71.1 billion to $72.8-$73.6 billion.
Given the decline from the mid $70s in November, our risk should be minimal on an earnings beat and guidance raise. They should outperform the sector.
Long Jan $60 call @ $4.20, see portfolio graphic for stop loss.
CVX - Chevron Corp - Company Description
Shares rebounded when Chevron said it would not pursue a higher bid for Anadarko. Occidental raised the bid to $76 and mostly cash. Chevron said it would take the $1 billion breakup fee and use it to accelerate share repurchases by 25% to $5 billion a year.
Original Trade Description: May 5th.
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com.
Chevron agreed to buy Anadarko Petroleum (APC) for $33 billion a week ago. Shares of Chevron declined on the news. Occidental (OXY) was a frustrated bidder and joined forces with Warren Buffett to offer $38 billion with a slightly sweeter portion of cash than Chevron.
Anadarko agreed to negotiate with Occidental to see if their deal was "superior" to Chevron. Once they issue the formal ruling that it is superior, Chevron has four days to raise their bid.
This weekend Total agreed to buy Anadarko's African assets for $8.8 billion if Occidental is the winner and closes a transaction with Anadarko. That is actually a bargain price and shows the frustration Occidental is experiencing in trying to fashion a financing package to close the deal. Those assets are worth twice that amount or more.
Chevron can sit back and watch all these gyrations all the while deciding if they want to bid more if Anadarko makes the superior claim.
Chevron has far more assets and capabilities than Occidental and significant LNG experience with their $100 billion in projects in Australia. The Mozambique gas discovery is a monster and would be another major windfall for Chevron if they win the deal.
If Occidental wins, Chevron shares will rally because they will not be shelling out tens of billions in cash and stock. If Chevron eventually wins there could be another level down for Chevron shares but the long-term outlook would improve significantly because of the adjoining properties in the Permian and the ability to monetize the Mozambique gas discovery. Either way Chevron shares should rise in the months ahead.
With the S&P futures down -50 points on the China trade blowup, I am going to pick the $120 ATM strike because the Dow futures down -475 suggest all Dow components are going to implode at the open.
Long Jan $120 call @ $6.60, see portfolio graphic for stop loss.
DELL - Dell Technologies - Company Description
Minor dip with the market but remained above support.
Original Trade Description: Jan 27th.
Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports information technology (IT) products and services worldwide. It operates through three segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment provides traditional and next-generation storage solutions; and rack, blade, tower, and hyperscale servers. It also offers networking products and services that help its business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes; and attached software, and peripherals, as well as support and deployment, configuration, and extended warranty services. The CSG segment offers desktops, notebooks, and workstations; displays and projectors; third-party software and peripherals; and support and deployment, configuration, and extended warranty services. The VMware segment offers compute, management, cloud, and networking, as well as security storage, mobility, and other end-user computing infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally. The company also offers cloud-native platform that makes software development and IT operations a strategic advantage for customers; information security and cybersecurity solutions; cloud software and infrastructure-as-a-service solutions that enable customers to migrate, run, and manage mission-critical applications in cloud-based IT environments; cloud-based integration services; and financial services. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.
Dell was taken private several years ago and disappeared from the market. When they acquired VMWare they had a tracking stock representing their 80% interest in the company under the symbol DVMT. In December they bought back that tracking stock in a complex transaction and then changed the ticker to DELL. Today, this represents all of Dell.
Over the last month Citigroup and Goldman initiated coverage with a buy rating and average target price of $60. Now that Dell is back as an operating company with strong management, we should be seeing a lot of funds and institutional investors moving back into the stock.
Dell has 145,000 employees. It is not a small company and it is a leader in the PC/Server sector and of course VMWare is a major component of the cloud.
Since the new Dell shares have only been around a month, they are definitely not over-owned.
Earnings March 14th.
Update 2/10: Dell is considering selling its 85% ownership position in security firm SecureWorks (SCWX). Analysts believe the stake is worth $2 billion even though the market cap is only $254 million. Dell is trying to pay down its $50 billion in debt. Dell paid $612 million in 2011 and then floated the stock in 2016. Shares are up 64% since the IPO.
Update 3/3: Dell reported a loss of $287 million on revenue increase of 9% to $23.84 billion. They did NOT supply an earnings per share number with the release but in documents supplied later the earnings came out to about $1.86 per share. Analysts had expected $1.81 in adjusted earnings and a GAAP loss of $45 million on revenue of $23.83 million. Revenue in the infrastructure group rose 10% to $9.9 billion with servers and networking revenue rising 14% to $5.3 billion. They guided for full year earnings of $6.05-$6.70 and missed estimates for $6.81.
Long Jan 2020 $50 call @ $5.30, see portfolio graphic for stop loss.
HD - Home Depot - Company Description
No specific news. Shares fell $10 in the weak market to stop us out.
Original Trade Description: Oct 21st.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.
Home Depot shares have been crushed by the six consecutive months of declining home sales. The rising mortgage rates are also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while. I cannot quantify the numbers attributable to both scenarios but they are probably not far off. We saw this in the last housing downturn when those not moving decided to remodel instead because it was cheaper.
Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.
Update 2/27: The company reported earnings of $1.52 that missed estimates for $2.16. Revenue rose 10.9% to $26.5 billion and missed estimates for $26.578 billion. Same store sales rose 3.7% and missed estimates for 4.3%. The company took a charge of 16 cents that impacted results but said the overall weakness was strictly weather related. The wet/cold weather caused homeowners to put off outside projects. There was also a $400 million windfall from the 2017 quarter because of hurricanes making Q4-2018 comps nearly impossible to hit.
The company increased their dividend 32% to $1.36 and announced a new $15 stock buyback. Given those two items, HD is still a buy at this level because they would not be going out on that cash return limb if they were not confident about 2019. Since 2011 they have bought back 30% of their stock and increased earnings by 330%.
Long Jan 2020 $190 LEAP Call @ $14.76, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $5.54, see portfolio graphic for stop loss.
Net debit $9.22.
Long Jan 2020 $190 LEAP Call @ $11.70, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $4.27, see portfolio graphic for stop loss.
$190 Call = $13.25
$220 Call = $ 4.90
Net debit = $8.35
Closed 5/7: Long Jan 2020 $190 LEAP Call @ $13.25, exit $16.00, +2.75 gain.
Closed 5/7: Short Jan 2020 $220 LEAP Call @ $4.90, exit $5.60, -.70 loss.
Net gain $2.05.
IBM - IBM Inc - Company Description
IBM sold $20 billion in debt to help fund its acquisition of RedHat (RHT). The US has approved the acquisition but IBM is still waiting on the EU approval.
Original Trade Description: Nov 4th.
International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. This segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. International Business Machines Corporation was founded in 1911 and is headquartered in Armonk, New York. Company description from FinViz.com.
IBM announced last week they were acquiring Red Hat (RHT) for $34 billion. Shares were crushed and fell to $115 and a 9-year low. "They paid too much," "what were they thinking?" They were thinking about changing the playing field for cloud computing.
Some analysts praised the deal saying "this is as transformative as it gets." Some analysts warned that IBM could be forced to take on billions in new debt just as interest rates were rising. IBM generates about $12 billion in free cash flow per year and Red Hat also kicks off a lot of cash. IBM alone could fund this deal using only free cash flow in three years. The IBM said the deal would be accretive in year one and would boost free cash flow and margins in year one. IBM also has $15 billion in cash on its balance sheet.
IBM has been penalized for constantly falling revenue for years. The prior IBM business model was producing profits but the decline in hardware costs and move away from single clouds to multiple clouds per enterprise meant a constantly shrinking services base.
To solve this problem they acquired the largest hybrid cloud provider on the planet. Not only that Red Hat dominates the open source software component of the cloud. Red Hat grows revenue each quarter at double digit rates with 85% gross margins and 20% plus operating margins. IBM has flat revenue and 50% gross margins and 20% operating margins. IBM is acquiring a revenue generating machine and they do it at high margins.
More than 90% of Fortune 500 companies are Red Hat users with more than 100,000 Red Hat customers in total. The opportunity to cross sell products in the future is unbelievable. This is a marketing bonanza.
In cloud alone this will boost IBMs regular cloud business. The combination of IBM and Red Hat will eventually take market share from Amazon, Google and Microsoft. With IBM shares trading at a PE of 8 this is a this is an outright bargain. It may take several months for the reality to overcome the acquisition shock but once investors realize IBM is going to be a major power player in the cloud the stock will rise and $150 could be just a pause point.
Update 4/21: IBM disappointed again but the earnings were not bad. They reported $2.25 and analysts expected $2.22. Revenue of $18.18 billion declined -4.7% and missed estimates for $18.46 billion. The cloud segment saw revenue decline -1.5% to $5.04 billion but easily beat estimates for $4.18 billion. This was not a bad report. The company said sales of its mainframe computers had slowed but other segments were growing.
Update 5/5: IBM said it was raising the quarterly dividend by 3.2% or 5-cents to $1.62 per share. That means the yield on IBM shares is now 4.66% and a good investment for long-term holders. Shares continue to hold over $139 post earnings.
Long Jan 2020 $125 LEAP Call @ $6.85, see portfolio graphic for stop loss.
Long Jan 2021 $125 LEAP Call @ $10.80, see portfolio graphic for stop loss.
IBM shares could be $200 by the time this call expires.
INTC - Intel - Company Description
Intel crushed the chip sector on Thursday after the company lowered guidance for the next three years. The company said to expect single-digit earnings as revenue growth as they work through some manufacturing problems and deal with a memory glut that has lowered prices.
CLOSE THIS POSITION
Original Trade Description: Nov 18th.
Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.
Intel has bucked the trend in the chip sector by beating on earnings and giving decent guidance. Shares have resisted any material decline in November and appear to be poised to break through resistance at $49.
On Thursday Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago Intel had 6.5 billion shares outstanding. If they complete this buyback program they will have just over 4 billion shares outstanding.
Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.
Update 4/28: Intel reported earnings of 89 cents that missed estimates for $1.01. Revenue of $15.6 billion missed estimates for $16.86 billion. The company guided for the full year for earnings of $4.35 on revenue of $69 billion. Analysts were expecting $4.50 on $71.04 billion.
The CEO warned that the decline in memory pricing had intensified. The consolidation of a large capital expenditure spending spree for computer equipment over the last year has not run its course. Enterprise environments still have unused hardware that they bought in 2018 as a result of the new changes to the tax law. The CEO said this consolidation was more pronounced than they expected. He said we were headed into a more cautious IT spending environment. However, conversations with customers suggest demand will return in the second half of 2019.
As a result of these headwinds datacenter revenue declined -6% to $4.9 billion. Analysts were expecting a -2.5% decline to $5.1 billion. Traditional PC revenue rose 4% to $8.6 billion and analysts were expecting 1.9% and $8.38 billion. Memory revenue declined 12% to $915 million and more than the 9.4% decline analysts expected.
The CEO said they had decided over the "last couple weeks" to exit the 5G smartphone business because they did not see a path to profits. They do plan on being a leader in 5G for the networking sector and for IoT devices. They are planning on selling their 5G phone business and estimates are $2 billion. There are rumors that Apple could buy it. However, there are also rumors that talks have already ended. This could have been a big factor in the settlement with Qualcomm.
Intel shares fell -9% on Friday and erased 34 points off the Dow. The rest of the chip sector declined on Intel's commentary about weak IT spending.
Long Jan 2020 $55 LEAP Call @ $3.85, see portfolio graphic for stop loss.
Long Jan 2020 $55 LEAP Call @ $2.87, see portfolio graphic for stop loss.
Average cost $3.36.
MRK - Merck & Co - Company Description
No specific news. The prior week rebound stalled in a weak market.
Original Trade Description: November 12th
Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey.
Company description from FinViz.com
Merck reported earnings of $1.11 compares to the $1.03 that analysts expected. Revenue of $10.33 billion beat estimates. The company guided for full year earnings of $1,.78-$1.84 up from $1.60-$1.72. Revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion.
Shares were crushed after the company said it had pulled its European application for the cancer drug Keytruda. Sales of the drug nearly tripled to $1.05 billion where it has already been approved and are expected to continue to grow to $5 billion over the next two years.
The reason they pulled the European application was to modify a phase III trial to focus on "overall survival" or OS rather than short-term "progression free survival" or PFS. This pushed the trial end date out to early 2019. Overall survival is the holy grail of any cancer drug. It is one thing for cancer to grow slower and let the patient live a longer life but gaining another 6-12 months of life is a fleeting goal. Living out your normal life span is the target all drugs shoot for. By modifying the trial to focus on longer term benefits, the eventual drug approval will be worth more. If the short term drug is worth $10,000 per treatment, a drug that give you upir life back is worth 10 times or even a 100 times that amount.
Merck will refile the application when they have the new data but this is one drug with $3 billion a year in sales compared to their current $40 billion in overall volume. If they get the OS data they want, Keytruda could grow to $10 billion a year by 2022.
I believe this drop is a buying opportunity because the LEAP premiums are miniscule for a company with a $150 billion market cap and $40 billion in annual sales.
Update 5/5: Merck reported earnings of $1.22 that easily beat estimates for $1.05. Revenue of $10.816 billion beat estimates for $10.468 billion. Sales of Keytruda rose 55% to $2.269 billion. They raised full year guidance to $4.67-$4.79 and over estimates for $4.68. They guided for revenue of $43.9-$45.1 billion compared to estimates for $44.5 billion. Shares rocketed higher.
Long Jan 2020 $60 LEAP Call @ $3.90, see portfolio graphic for stop loss.
Closed 12/17: Long Jan 2019 $60 LEAP Call @ $2.38, exit $17.02, +14.64 gain.
MSFT - Microsoft - Company Description
No specific news. Nice rebound on Friday.
Original Trade Description: Feb 27th.
Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. Its company's Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises. The company's Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as provides training and certification to developers and IT professionals on Microsoft products. Its More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising. The company markets its products through original equipment manufacturers, distributors, and resellers; and online and Microsoft retail stores. Microsoft Corporation has collaboration with E.ON; strategic alliance with Nielsen Holdings plc and PAREXEL International Corp.; and a strategic collaboration with Mastercard Incorporated. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.
Microsoft has been slowly checking all the boxes to compete with Google, Facebook, Apple, Android, etc. Since they own the enterprise space with Windows, they have elected to spend their development dollars on cutting edge products that will eventually have consumer applications as well.
One in particular is their Augmented Reality (AR) software and applications. The VR craze has suffered from multiple false starts due to high cost of the headsets and lack of programs that run on the equipment.
Microsoft is trying to build the software and then let the consumer devices grow into it instead of the other way around, which has not yet been successful.
They recently released the HoloLens 2, a new version of a 3-year old "mixed reality" headset, which costs $3,500. Clearly not your consumer headset. It comes with eye-tracking, can be worn over prescription glasses, has iris matching so different people can wear the headset and it remembers who you are and your preferences.
In the Microsoft demo, a participant puts on the headset and is then led through a building process for an ATV. The headset shows you the tool to use, the part to pickup, the method of installation, etc, using pictures, text, arrows pointing to the part, tool, screw hole, etc. Participants said it was like magic because the HoloLens could almost read their mind from the movement of their eyes. Were they confused, did they miss a part or step, need a better explanation, need to go back a step to better understand the job, etc. The device tacks your eyes and hands with 25 points of articulation per hand.
By building the application for enterprise customers, there are thousands of applications where workers need to be guided through a process whether it is medical, manufacturing, teaching, etc. This is the equivalent of putting a video instruction guide in the user's head rather than on a smartphone, tablet or TV. The process is smart and interacts with the environment and users and not just a video. It is like having a trainer or coach sitting right beside you but not calling you stupid when you make a mistake. One reviewer said it was like Google Maps in your mind. Step by step instructions based on what was in front of you and what tools were in your hands.
This is going to be a huge application for Microsoft. When consumer headsets finally reach a cost threshold that normal people can afford the application will be even smarter. Imagine needing to do a brake job on your car. You go to Advanced Auto Parts and rent the headset and brake program for a 2014 Tahoe or whatever car you have. You put the headset on and install your brakes just like your mechanic was sitting next to you.
Better explanation HERE
Obviously, this is not the only item on the Microsoft menu for the future. The current CEO has given the company direction for the future and they have dozens if not hundreds of applications and gadgets that will benefit from their research and planning. Add in the never-ending Windows cash cow, Azure Cloud and more cash streams than I can count and Microsoft is going to be king of the mountain once again.
For us today, the key is Microsoft shares at $112. This is resistance dating back to August. A break over this level could quickly retest the high at $115.61 and once over that level the sky is the limit. Microsoft has been reborn and after four months of consolidation it could be ready to run.
Update 4/28: Microsoft reported earnings of $1.14 that beat estimates for $1.00. Revenue of $30.57 billion beat estimates for $29.88 billion. Cloud revenue rose 41% to $9.6 billion. Azure revenue rose 73%, Dynamic 365 sales rose 43% and Office 365 Commercial sales rose 30%. This was a blowout quarter and shares spiked to another new high. I raised the stop loss.
Bank of America reiterated a buy rating and raised the price target to $155. BMO Capital reiterated a buy rating and $147 target.
Long Jan $120 Call @ $6.60, see portfolio graphic for stop loss.
PAYX - PayChex Inc - Company Description
No specific news. New high despite weak market.
Original Trade Description: Jan 27th.
Paychex, Inc. provides payroll, human resource (HR), retirement, and insurance services for small to medium-sized businesses in the United States and Europe. The company offers payroll processing services; payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. It also provides HR outsourcing services, including Paychex HR solutions comprising payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative; and retirement services administration, including plan implementation, ongoing compliance with government regulations, employee and employer reporting, participant and employer online access, electronic funds transfer, and other administrative services. In addition, the company offers insurance services for property and casualty coverage, such as workers' compensation, business-owner policies, and commercial auto, as well as health and benefits coverage, including health, dental, vision, and life; cloud-based HR administration software products for employee benefits management and administration, time and attendance, recruiting, and onboarding solutions; and other HR services and products, such as employee handbooks, management manuals, and personnel and required regulatory forms. Further, it provides various accounting and financial services to small to medium-sized businesses comprising payroll funding and outsourcing services, which include payroll processing, invoicing, and tax preparation; and various services, such as payment processing services, financial fitness programs, and a small-business loan resource center. The company markets its products and services through direct sales force. Paychex, Inc. was founded in 1979 and is headquartered in Rochester, New York. Company description from FinViz.com.
The company reported earnings of 65 cents that rose 20.4% and beat estimates for 63 cents. Revenue of $858.9 million rose 7% and beat estimates for $855 million. Free cash flow from operations was $223.5 million. They paid $201.3 million in dividends in the quarter. The annual dividend is $2.24 or a 3.12% yield.
For 2019 the company guided for 18% to 20% revenue growth in PEO and insurance services and 4% growth in management solutions. Interest on funds held for clients is expected to rise by 20-25%. Earnings are expected to rise 11-12%.
During the quarter they announced a deal to acquire Florida based Oasis Outsourcing for $1.2 billion in cash. That is expected to bolster the company's PEO strategy an expand PEO sales and the client base. PEO stands for professional employer organization. This is where they provide all types of HR solutions to small businesses.
Earnings March 20th.
Shares have moved up steadily from the December low and broke above December 3rd resistance high on Friday. The next target is $75 and the October high. With strong earnings, guidance and dividend, shares should continue to be in favor.
Update 4/1: Shares closed at a new high after earnings. The company reported 89 cents that beat estimates for 88 cents. Revenue of $1.07 billion rose 14% and beat estimates for $1.04 billion. For 2019 they guided for a revenue increase of 6-7% and earnings increase of 11-12%. Analysts were expecting 9.9% and 11.8%. Shares rose anyway.
Update 5/5: Shares closed at a new high after the company bumped its quarterly dividend from 56 cents to 62 cents. The dividend is payable on May 30th to holders on May 15th.
Long Jan $80 Call @ $2.90, see portfolio graphic for stop loss.
PYPL - Paypal - Company Description
PayPal invested $500 million in Uber at the IPO price in order to be assured of continued payment processor status. They are probably rethinking that decision today. Paypal dipped with the market to stop us out.
Original Trade Description: Jan 20th.
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. It also offers gateway services that enable merchants to accept payments online with credit or debit cards. The company has a strategic partnership with American Express Company to improve the digital payments experience for the United States American Express Card members paying with PayPal and Venmo. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California. Company description from FinViz.com.
Morgan Stanley said Paypal is crushing digital payment competitors in the e-commerce space and extending its lead. The analyst said Paypal is now accepted at 82% of the top 500 US internet retailers compared to only 12% for Amazon Pay. Only 4 accepted Bitcoin. Paypal added another 8 retailers in Q4. Their total payment volume continues to grow at a rate faster than the growth of ecommerce.
Paypal has offered $500 in instant credit to any federal employee impacted by the shutdown. The offer was a $25 million pledge by Paypal to help workers experiencing a hardship. There is no interest and the offer is good until the government reopens.
It is these kinds of marketing opportunities where Paypal excels and this is why their brand is growing. They offer convince of not having to input your payment details in every website you visit. The entire process is super simple, and your privacy is not at risk. I personally purchased 4 items at different websites over the last two weeks on Paypal because of the easier transaction.
The stock had a rough three months from October through December but is now on the verge of breaking out to a new high.
Update 3/17: Bank of America reiterated a buy rating and raised the price target from $102 to $116. Shares spiked to a new high. The company also said it was investing $750 million into Latin American merchant MercadoLibre (MELI) in hopes of spreading the Paypal payment system throughout Latin America.
Update 4/28: PayPal reported earnings of 78 cents that beat estimates for 68 cents. Revenue of $4.13 billion was inline with estimates. However, total payment volume of $161 billion missed estimates for $163 billion. Paypal added 9.3 million accounts to bring its total up to 277 million. They said Venmo had more than 40 million users over the last 12 months. Venmo volume was $21 billion, a 73% increase.
They raised full year guidance from $2.84-$2.91 to $2.94-$3.01.
The company said it was going to invest $500 million in Uber at the IPO price because it was important to both companies for the SuperApp to include a payment platform.
Closed 5/7: Long Jan 2020 $100 call @ $7.90, exit $15.70, +$7.80 gain
Optional: Short Jan 2020 $75 put @ $4.09, exit $1.32, +$2.27 gain.
Net gain $$10.07.
QCOM - Qualcomm - Company Profile
Qualcomm announced a quarterly dividend of 62 cents, payable June 27th to holders on June 6th. Qualcomm employees are getting stock bonuses now that the battle with Apple is over. The CEO received $3.5 million in shares. The company said R&D and SG&A expenses to rise 6% this quarter as a result of the employee bonuses.
Original Trade Description: July 29th
QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.
The last 12 months have been turbulent for Qualcomm. First, they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.
Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.
Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.
While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.
The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.
The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning, companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.
This suit is expected to be settled later this year. Investors should be looking at Qualcomm as an outstanding investment now that the clouds have cleared.
With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.
Update 4/7: Qualcomm continues to be a leader in 5G technology with multiple manufacturers signing new deals. Apple is the holdout and Apple is the only large manufacturer without 5G prototypes or forecasts. They are not likely to have a 5G phone until late 2020 if they continue to wait on Intel. This means Apple will be handicapped in the Q4 phone race in 2019. I would not be surprised to see a sudden announcement of a deal between Apple and Qualcomm in the coming months that puts their battles behind them.
Update 4/15: The four-week trial between Apple and Qualcomm begins on Monday and the outcome is worth up to $30 billion for Qualcomm. Apple and four of its suppliers are suing Qualcomm saying its royalties are too high. Apple told the suppliers to stop paying the royalties in 2017 and filed suit against Qualcomm. Both parties have won some points in the preliminary rounds, but this is for all the marbles. Qualcomm is seeking $7 billion in overdue payments from Apple and its suppliers and billions of dollars in damages. While the trial may take four-weeks the decision could be months away because of the complexity of the case. Apple has not announced a supplier for a 5G modem for its 2020 iPhones and Intel is not expected to have a working version until early 2020. It normally takes 10-12 months for manufactures to produce a phone after the choices are made. This means Apple is facing the possibility of not having a 5G phone in 2020 unless it goes with Qualcomm. This further complicates Apple's dilemma.
Update 4/21: Qualcomm won the patent war and Apple agreed to settle with a large lump sum payment and cessation of all US and international suits. They also signed a six-year chip supply agreement. Qualcomm said this would be worth about $2 a year in annual earnings.
Stifel upgraded from hold to buy with $100 price target.
JP Morgan upgraded from neutral to overweight and $88 target.
Update 5/5: Qualcomm (QCOM), reported earnings of 77 cents that beat estimates for 71 cents. Revenue of $4.98 billion beat estimates for $4.8 billion. The company guided for the current quarter for earnings of 70-80 cents and revenue of $4.7-$5.5 billion. Analysts were expecting $5.08 billion. They guided for revenue from patent licensing in the current quarter from $1.23-$1.33 billion and analysts were expecting $1.01 billion.
The company said it expects to receive $4.5-$4.7 billion in revenue from Apple in the current quarter as a resolution of the various legal issues. Qualcomm gave some cautionary guidance about the weak smartphone market but suggested it was just a pause before the flood of 5G phones begin hitting the market later in the year. They predicted chip set sales of only 50 million units for the rest of 2019 due to smartphone weakness. Shares closed at a new high on Friday.
Canaccord raised their target from $89 to $105. Cowen raised from $91 to $100. Bank of America upgraded from neutral to buy. Raymond James upgraded from outperform to strong buy and raised the price target from $85 to $115.
Long Jan 2020 $70 call @ $5.00, see portfolio graphic for stop loss.
Closed 2/5: Long Feb $52.50 put @ $1.39, exit $2.28, +.89 gain.
SPY - S&P SPDR ETF - ETF Profile
The S&P crashed back to 2,825 to stop us out of the SPY position.
Original Trade Description: Sept 30th.
The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world.
The SPY has pulled back to the 30-day average and actually a steeper decline than the S&P-500. The SPY is near support at the 30-day average.
I believe the market is going to move higher during the Q3 earnings cycle. Even if we do not see a Q3 earnings rally the long-term outlook is positive.
The 12 months after mid-term elections have seen the S&P gain an average of 15% for the last 18 midterms. That is 72 years and the S&P has gone up every time. There are almost no trends in the market that repeat 100% of the time. By recommending this position I have probably jinxed the coming year.
However, with the economy growing at more than 4% GDP, unemployment at record lows and Q3 earnings expected to show 20% growth or better, this should be a good opportunity for the trend to repeat.
If we do get a 15% rally over the next 12 months that would be 45 SPY points. The options are expensive for obvious reasons. I do not want to make it a spread and give up a significant portion of our eventual gains. I am going to recommend an offsetting short put to defray the cost of the call. If you cannot write cash secured puts then you should turn it into a spread by selling the call of your choice.
Long Jan 2020 $300 Call @ $16.80, see portfolio graphic for stop loss.
Short Jan 2020 $270 Put @ $10.61, see portfolio graphic for stop loss.
Net debit $6.19.
Long Jan 2020 $300 Call @ $2.05, see portfolio graphic for stop loss.
Average cost of the call position = $9.43.
Closed 5/7: Long Jan 2020 $300 Call @ $9.43, exit 8.71, -.72 loss.
Closed 5/7: Short Jan 2020 $270 Put @ $10.61, exit 9.00, +1.61 gain
Net gain 89 cents.
STZ - Constellation Brands - Company Description
No specific news but shares declined $15 from the high to stop us out. We will be reloading this position on a bigger dip.
Original Trade Description: Jan 6th.
Constellation Brands, Inc., together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company sells wine across various categories, including table wine, sparkling wine, and dessert wine. It provides beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, Modelo Chelada, Pacifico, and Victoria brands, as well as Funky Buddha, Obregon Brewery, and Ballast Point brands. The company offers wine under the 7 Moons, Black Box, Clos du Bois, Estancia, Mount Veeder, The Dreaming Tree, Franciscan Estate, Nobilo, The Prisoner, Kim Crawford, Ravage, The Velvet Devil, Kung Fu Girl, Mark West, Meiomi, Robert Mondavi, Ruffino, and Simi brands, as well as Schrader Cellars and Charles Smith brands; and spirits under the Casa Noble, High West, SVEDKA Vodka, Black Velvet Canadian Whisky, Casa Noble Tequila, and High West Whiskey brands. It provides its products to wholesale distributors, retailers, on-premise locations, and state alcohol beverage control agencies. The company was founded in 1945 and is headquartered in Victor, New York. Company description from FinViz.com.
Constellation took a $4.1 billion stake in marijuana company Canopy Growth. Their plan is to market THC infused drinks, snacks, etc, wherever marijuana is legal. That includes all of Canada, multiple US states and more than likely the entire US by the end of this decade. There are multiple countries other than Canada where the plant is legal.
This has significant implications where medical marijuana is legal. Patients who would rather not smoke a joint can drink a beer or other THC infused beverage with the same results. Constellation took a major hit on the announcement because many funds cannot invest in "sin" stocks. Shares fell to a low of $160 in late December with the market crash but are starting to rebound now.
Constellation is a buy just on its regular beverages at this level and the THC drinks are going to add to that valuation in the next couple years.
Earnings are January 9th, so we could get a quick pop on this position. I would wait to sell the put until after the earnings just in case they disappoint.
Update 1/11: That was disappointing! We entered the STZ position on Monday and the stock gapped $20 lower at the open on Wednesday after disappointing on earnings. Obviously, this stopped us out for a loss.
The company reported earnings of $2.37 that beat estimates for $2.06. Sales rose 9% to $1.97 billion and beat estimates for $1.91 billion. Beer sales rose 16% to $1.21 billion to beat estimates for $1.16 billion. Wine and spirit sales rose 0.4% to $762.8 million and beat estimates for $747.8 million.
For 2019 the company cut guidance from $9.60-$9.75 to $9.20-$9.30. Analysts were expecting $9.43. They said beer sales would still rise 9% to 11% but wine and spirit sales were expected to decline in the low single digit range compared to prior guidance for 2% to 4% growth.
Shares were crushed on the guidance. The weaker earnings were due not only to weaker wine sales but acquisition expenses and costs related to product development related to the Canopy Growth investment. The $4.1 billion investment was backed with debt and Constellation said they could see a 25-cent impact from this investment. Canopy reported weaker than expected earnings for Q3 and that caused a $164 million decrease in the fair value of the Constellation investment.
I believe this is all temporary. Constellation still has a great business and beer sales are booming. The company said it was going to reduce their low margin wine business with products under $11 and concentrate on higher dollar wines with higher margins.
Once they begin marketing cannabis infused products, the sales are going to explode. Getting those products through research and development is going to take months but investors should be able to anticipate the profits.
The CEO said Canopy was expected to produce $1 billion in revenue over the next 18 months and that was 56% more than analysts expected. As Canopy begins to report these numbers, Constellation will benefit.
I am recommending we reload this position since the bad news has already been discounted.
Update 2/27: Constellation guided for a 10-cent hit to earnings because of its investment in Canopy Growth and shares imploded on the 21st. The guidance came during a conference presentation. They said the Canopy earnings would grow by 10% annually over the next three years but this quarter would see a hit to earnings. They also said they were going to sell some inexpensive wine brands and concentrate on high end products. Shares fell $12 on the news. This should be temporary.
Update 4/7: Constellation Brands reported earnings of $1.84 that beat estimates for $1.72. Revenue of $1.797 billion beat estimates for $1.732 billion. They guided for the full year for earnings of $8.50-$8.80 excluding any impact from their holdings in Canopy Growth (CGC). Analysts were expecting $9.36 but that included Canopy earnings. Beer sales rose 11.6% to $5.202 billion. Wine and spirit sales declined -0.2% to $2.914 billion.
The company said it was going to sell about 30 wine brands to Gallo for $1.7 billion. The average selling price for a bottle of the brands being sold was $11. Shares were up sharply on expectations for the Canopy business. The company has 35 patents and 195 patent applications. They plan to launch cannabis beverages in Canada this year. Constellation expects continued losses in its Canopy investment in 2019 but a run rate of $1 billion next year and significant profits in 2020. Shares spiked sharply from $178 to $193.
Closed 5/9: Long Jan 2020 $170 Call @ $13.40, exit $40.30, +$26.90 gain.
Closed 5/9: Short Jan 2020 $130 Put @ $6.72, exit $1.40, +$3.70 gain.
Net gain $30.60.
Closed 1/9: Long Jan 2020 $180 call @ $14.40, exit $8.40, -6.00 loss.
Closed 1/9: Short Jan 2020 $140 Put @ $7.05, exit 10.00, -2.95 loss.
SWK - Stanley Black & Decker - Company Description
Seven month high the prior week followed by a $16 drop to stop us out.
Original Trade Description: Feb 3rd.
Stanley Black & Decker, Inc. provides tools and storage, engineered fastening and infrastructure, and security solutions worldwide. The company's Tools & Storage segment offers professional products, including corded and cordless electric power tools and equipment, drills, impact wrenches and drivers, grinders, saws, routers, and sanders, as well as pneumatic tools and fasteners, including nail guns, nails, staplers and staples, and concrete and masonry anchors; and consumer products, such as lawn and garden products comprising hedge and string trimmers, lawn mowers, and edgers and related accessories, as well as home products, such as hand-held vacuums, paint tools, and cleaning appliances. It also offers hand tools, including planes, hammers, demolition tools, clamps, vises, knives, chisels, and industrial and automotive tools, as well as measuring, leveling, and layout tools; power tool accessories; and storage products. The company's Industrial segment sells engineered fastening products and systems, which include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners; sells and rents custom pipe handling, joint welding, and coating equipment; provides pipeline inspection services; and sells hydraulic tools and accessories. Its Security segment provides alarm and fire alarm monitoring, video surveillance, systems integration, and system maintenance solutions; sells healthcare solutions, which include asset tracking, wander and fall management, and emergency call products, as well as infant, pediatric, and patient protection products; and sells automatic doors. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut.
Company description from FinViz.com.
Earnings were not kind to Stanley Black & Decker (SWK). On Tuesday the company reported earnings of $2.11 that edged out estimates by a penny. Revenue of $3.63 billion barely edged out estimates for $3.62 billion. The problem came in the guidance. The company predicted earnings for fiscal 2019 of $8.45-$8.65 and analysts were expecting $8.79. The company is in the middle of a large $250 million restructuring program that is impacting costs in the short term.
Analysts were quick to moan about the falling housing market and how it was impacting this sector. However, about 90% of home improvement sales come from consumers not selling their homes. Investors were quick to dump Home Depot thinking weakness at SWK meant weakness at Home Depot since they are their biggest customer.
Investors need to focus. Revenue hit the target, restructuring costs are impacting earnings, Home Depot has not reported any sales declines. Unfortunately, SWK shares fell $21 on the news.
Update 4/28: Stanley blew away estimates for $1.10 with earnings of $1.42. Revenue of $3.33 billion narrowly beat estimates for $3.31 billion. They saw organic growth of 5% and 7% growth in tools and storage.
Closed 5/7: Long Jan $140 Call @ $8.89, exit $14.30, +5.41 gain.
Closed 5/7: Short Jan $110 Put @ $6.77, exit $2.60, +4.17 gain.
Net gain $9.58.
TGT - Target - Company Description
No specific news. Shares declined in a weak market to stop us out.
Original Trade Description: Nov 25th.
Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota.
Company description from FinViz.com.
Bloody cleanup isle 5! Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.
They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales.
Analysts picked on them for a 17% rise in inventory. Target said with the demise of Toys-R-Us they had stocked up heavily on toys and planned on a big holiday. They want to grab as much of the market share from Toys-R-Us as possible and will be advertising heavily. That will draw more people into the stores and lead to more sales of other merchandise as well. They pointed out that 2018 had the maximum number of sales days on the calendar between Thanksgiving and Christmas.
The guidance was the same as they issued at the end of Q2. They did not back off. The 5.0% same store sales was higher than the 4.4% the street was expecting.
Target has also beefed up their more than a dozen private label brands that have a larger profit margin and that will help in the December quarter. Keybanc estimates the Toys-R-Us exit, Sears bankruptcy and other store closings has put $17 billion in retail market share up for grabs in areas where Target is expected to compete well and add multiple percentage points to their growth. Keybanc maintained their $100 price target. Target shares have fallen to $67 post earnings and are now trading at a PE of 13 compared to 18 for Walmart. That means Target is on sale at the right price.
Update 3/10: Target reported earnings of $1.53 that edged estimates for $1.52. Revenue of $22.98 billion narrowly beat estimates for $22.92 billion. Same store sales rose 5.3% and online sales rose 31%. The CEO said traffic and same store sales was the strongest in over a decade. They guided for Q1 earnings of $1.32-$1.52 and bracketing estimates for $1.43. Shares spiked $4 on the news.
Closed 5/10: Long Jan 2020 $75 call @ $5.60, exit $5.75, +.15 gain.
UNH - UnitedHealth - Company Description
No specific news. Shares closed at the high for the week since UNH has no China exposure.
Original Trade Description: April 14th.
UnitedHealth Group Incorporated operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight, and OptumRx. The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health and well-being services to individuals age 50 and older, addressing their needs for preventive and acute health care services, as well as services dealing with chronic disease and other specialized issues for older individuals; and Medicaid plans, Children's Health Insurance Program, and health care programs; and health and dental benefits. The OptumHealth segment provides access to networks of care provider specialists, health management services, care delivery, consumer engagement, and financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The OptumInsight segment offers software and information products, advisory consulting arrangements, and services outsourcing contracts to hospital systems, physicians, health plans, governments, life sciences companies, and other organizations. The OptumRx segment provides pharmacy care services and programs, including retail network contracting, home delivery, specialty and compounding pharmacy, and purchasing and clinical, as well as develops programs in areas, such as step therapy, formulary management, drug adherence, and disease/drug therapy management. UnitedHealth Group Incorporated was founded in 1974 and is based in Minnetonka, Minnesota.
Company description from FinViz.com.
UnitedHealth, Anthem, etc were all crushed last week when Bernie Sanders resurrected his Medicare for All proposal. In theory this would end corporate and private health insurance and significantly reduce government reimbursements. Traders ran to the exits. UNH fell $30, ANTM fell $40.
This is completely unrealistic. First, Sanders has little or no chance of being elected. Second, even if he was elected the House and Senate would have to have strong democratic socialist majorities, not just a democrat majority. There are plenty of democrats that can do basic math and this proposal in its pure form would cost about $3.3 trillion and do irreparable harm to the healthcare sector as it currently functions. Three, assuming the first two items came to pass it would be at least 2022 before any changes could occur or nearly four years from now.
That means the panic from last week was completely unreasonable. The decline was also blamed on potential changes to Obamacare now that a court has ruled it to be unconstitutional. President Trump has said he did not want to deal with it until after the election and that puts any changes to that program at least two years into the future and would require a republican majority in the House.
Clearly, there is no immediate danger to UnitedHealth and this is a buying opportunity.
There is one danger. Earnings are Tuesday. While I seriously doubt they are going to post a big miss, even if they did would it mean a further decline after a $30 drop over the last two days? What if they beat? That could cause some significant short covering.
Long Jan $250 Call @ $10.39, see portfolio graphic for stop loss.
Short Jan $290 Call @ $2.50, see portfolio graphic for stop loss.
Net debit $7.89.
VIPS - Vipshop Holdings - Company Description
No specific news. Shares down on China worries.
Original Trade Description: April 7th.
Vipshop Holdings Limited operates as an online discount retailer for various brands in the People's Republic of China. It operates in two segments, Vip.com and Internet Finance Business. The company offers women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories that include belts, jewelry, watches, and glasses for women and men. It also provides handbags, which comprise purses, satchels, duffel bags, and wallets; apparel, gears and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers; sports apparel, sports gear, and footwear for tennis, badminton, soccer, and swimming; and consumer electronic products, including computers, mobile handsets, digital cameras, and home appliances. In addition, the company offers skin care and cosmetic products, such as cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish; and home furnishings comprising bedding and bath products, home decors, dining and tabletop items, and small household appliances. Further, it provides designer apparel, footwear, and accessories; and snacks and health supplements, and occasion-based gifts. Additionally, the company offers Internet finance services, which comprise consumer and supplier financing, and wealth management services. It provides its branded products through its vipshop.com, vip.com, and lefeng.com online platforms, as well as through its cellular phone application. Additionally, the company offers warehousing, logistics, procurement, research and development, consulting, and software development and information technology support services. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.
Earnings May 22nd.
In late February, the company reported earnings of 19 cents that beat estimates for 18 cents. However, revenue of $3.80 billion missed estimates for $3.96 billion. The 8.1% rise in revenue was down from a 16.4% rise in the prior quarter. The CEO said the weak quarter was the result of the company shifting some low margin categories from the "first-party business" and into the "marketplace platform." He said the move would result in a positive improvement in earnings beginning next quarter. For the current quarter they were only targeting 1-5% revenue growth and analysts were expecting 11.6%. The CEO cautioned that revenue growth was not the metric to worry about. The company is now focused on increasing profits rather than increasing revenue at any cost.
Zacks reiterated a buy rating saying earnings estimates had risen 5.9% over the last 60 days which includes the post earnings commentary. VIPS only has a 9.7 PE compared to 29.4 for the rest of the industry.
After the Zacks comments on the 25th the stock began escalating sharply and closed at an 8-month high on Friday. The stock is now over the 50, 100 and 200 day averages.
Long Jan $10 Call @ $1.15, see portfolio graphic for stop loss.
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