The Dow lost -3% and we only lost one position. It was only because we lost 12 in the prior three weeks. We have slimmed down to only 12 positions and I am closing two more this week. We will then begin adding new 2021 positions as we take advantage of the market decline.
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. AbbVie shares are simply not performing and there is only a slim chance for a recovery. I am recommending we close the position.
Original Trade Description: February 11th.
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.
Long Jan 2020 $100 call @ $7.70, see portfolio graphic for stop loss.
Short Jan 2020 $90 call @ $2.40, see portfolio graphic for stop loss.
Dropped 12/9/18: Long Jan 2019 $120 LEAP Call @ $8.50, expiring.
Long Jan 2019 $120 LEAP Call @ $3.30.
Adjusted cost now $5.90. expiring -5.90 loss.
ADP - Advanced Data Processing - Company Description
No specific news. Still holding at the highs.
Original Trade Description: May 19th.
Automatic Data Processing, Inc. provides business process outsourcing services worldwide. It operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers various human resources (HR) outsourcing and technology-based human capital management solutions. Its offerings include payroll, benefits administration, talent management, HR management, time and attendance management, insurance, retirement, and compliance services. This segment provides a range of solutions, which businesses of various types and sizes can use to activate talent, as well as recruit, pay, manage, and retain their workforce. It serves approximately 630,000 clients through its cloud-based strategic software as a service offering. The PEO Services segment provides HR outsourcing solutions through a co-employment model. This segment offers HR administration services, including employee recruitment, payroll and tax administration, time and attendance management, benefits administration, employee training and development, online HR management tools, and employee leave administration. It also provides employee benefits that enable eligible worksite employees with access to a 401(k) retirement savings plan, health savings accounts, flexible spending accounts, group term life and disability coverage, and an employee assistance program, as well as group health, dental, and vision coverage. In addition, this segment offers employer liability management services comprising workers' compensation program, unemployment claims management, safety compliance guidance and access to safety training, access to employment practices liability insurance, and guidance on compliance with the United States federal, state, and local employment laws and regulations. The company was founded in 1949 and is headquartered in Roseland, New Jersey. Company description from FinViz.com.
Bill Ackman praised ADP in his annual Pershing Square shareholder letter. Shares rallied to a new high. Link
For Q1, ADP reported earnings of $1.77 that rose 14% and beat estimates for $1.69. Revenue of $3.85 billion rose 4% but missed estimates for $3.90 billion due in part to currency translation issues.
Employer services new business bookings rose 10%. PEO services revenues rose 6%. Funds held for clients rose 4% to $30.0 billion. Interest on client funds rose 24% to $187 million.
They guided for full year revenue growth of 6-7% with earnings growth of 22-23% from $4.45 in 2018. They expect 5-6% revenue growth in Employer Services and 9-10% revenue growth in the PEO segment.
Shares are right at the breakout point of $162 after an $8 decline post earnings. ADP is a solid company with no exposure to China and with unemployment at 60-year lows their business is only going to get better.
I am going to recommend a combination play with a short put. Some readers have requested other options because they cannot sell puts. You could turn this into a call spread to reduce the premium but in order to get a significant offset in premium you have to sell the short call very close to the long call and that will reduce your potential gains. For instance the $170/$185 call spread has a $4.75 net debit with a $15 spread. Your maximum gain is $10.25. That would be a great position over the next 7 months. By selling the $140 put and buying the $165 call, the net debit is $6.10 but there is no limit to the gains. If ADP goes to $200 the $165 call would be $35. You have to decide what works for your account.
Long Jan $165 call @$8.85, see portfolio graphic for stop loss.
Short Jan $140 put @ $3.95, see portfolio graphic for stop loss.
Net debit $4.90.
AMD - Advanced Micro Devices - Company Description
AMD shares exploded higher on Monday after some new product announcements at Computex last weekend. Unfortunately, the chip-wreck continued to pull the sector lower and AMD gave back its gains.
Original Trade Description: May 12th.
Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. The company's products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. In addition, it provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products. It serves original equipment and design manufacturers, datacenters, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Santa Clara, California. Company description from FinViz.com.
AMD was always the red-headed stepchild that Intel kept around to prevent Intel from being called a monopoly. They let them have just enough business to keep them going. After decades of picking up Intel's scraps, the company has finally come of age and has announced multiple processor families that are more technological advanced than Intel's chips and they are 12-18 months ahead of Intel's first foray into this level of manufacturing.
Cloud operators are taking notice of the faster, cooler, cheaper processors and this sector buys hardware by the truckload. AMD is stealing market share from Intel and this is likely to accelerate as these new processor families flood the market before Intel can catch up.
AMD's president and CEO, Dr Lisa Su, gave the keynote address at CES 2019 on Wednesday. She announced the fastest GPU video card they have ever produced running on a 7nm process. The card has 60 compute units, 3840 stream processors, 16gb of ultra-fast HBM2 memory with a 1 TB memory bandwidth for stunning high-speed graphics on 4K and 8K monitors.
AMD reported Q1 earnings of 6 cents that beat estimates for 5 cents. Revenue of $1.27 billion narrowly beat estimates for $1.26 billion. However, current earnings are not the story.
AMD is already selling processors made on 10 nanometer technology and will have 7 nm processors on the market in Q3. Intel is not expected to have 10 nm PC chips until late 2019 server chips in early 2020. Their 7 nm chips are not expected until late 2021. With AMD leveraging such a commanding lead we should see a tidal wave of market share headed in their direction. They have a two-year lead in technology an that is a lifetime in chip terms.
We were stopped out of AMD a couple weeks ago and I am recommending we reload the position to profit from that coming wave.
Update 5/19: AMD shares rose after news broke that Intel processors were vulnerable to the ZombieLoad attack where sensitive information could be stolen. Virtually every Intel processor made since 2011 has this vulnerability. Intel released yet another patch but every CPU patch over the last five years has caused a serious hit to performance because of the overhead required to constantly check for potential attacks.
Long Jan $30 call @ $3.90, see portfolio graphic for stop loss.
CGC - Canopy Growth - Company Profile
Shares declined in a weak market after FDA chief warned about "real risks" in CBD products.
This is a 2021 position.
Original Trade Description: Sept 23rd.
Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana Inc. and changed its name to Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Company description from FinViz.com.
The cannabis sector is on fire and nobody knows how to play it because of the volatility. There will be downs as the rules are drawn and additional countries go all in on recreational use. Canada has approved recreational use starting in October for the entire country. Numerous U.S. states have passed new laws approving the use. Multiple countries have been legal for years but dozens are considering it today.
Tilray (TLRY) has been getting all the news because of its wild swings on only 17.8 million shares outstanding. Tilray is actually the smallest of the big three marijuana producers.
The other two are Canopy Growth (CGC) and Aurora Cannabis (ACBFF). Aurora also traded 15 million shares on Friday but they have 950 million shares outstanding. Canopy traded 11 million against 228 million outstanding.
Aurora is expected to produce 570,000 kilos of weed in 2019 and Canopy is expected to produce more than 500,000 kilos. Tilray said it would only produce 76,000 kilos in 2018 and 150,000 in 2019.
All three of these companies are primarily in weed today but they are rapidly moving to the CBD oils, which have a more mainstream use. Coke is looking at making drinks with CBD oil. Constellation Brands (STZ) is looking at making drinks and edibles with THC, the active ingredient in marijuana. Constellation made a $4.1 billion investment in Canopy with the option to buy more. With big money and big marketing behind Constellation and Canopy I am picking them to be the long term winner.
Look how far the legalization of marijuana has come in just the last two years. Where will the business be two years from now? This is truly a "sky's the limit" potential. The tobacco companies have not yet entered the sector and the most likely entry would be the acquisition of one of these companies. There is eventually going to be a land rush as everyone interested tries to get a piece of this sector starting with the growers.
If you look at the chart it is going to scare you. The recent spike was the $4.1 billion investment by Constellation. I would not be surprised to see the stock pull back to the uptrend around $40 and if it does we will close the short call for a gain.
Because of the interest in the sector, Canopy has LEAPS out in 2021. That is very long-term and should get us past all the initial volatility. Ideally, I would like to eliminate that short call at some point in the future if we see a material decline in the sector.
Update 5/12: Canopy said their subsidiary Canopy Rivers signed an uptake agreement with PharmHouse for the purchase of an additional 20% of their output once the 1.2 million sqft grow house is completed. Canopy already had a 10% agreement and this raised that total to 30%. PharmHouse will deliver between 25,000-45,000 kilos of cannabis annually to Canopy Rivers. Canopy Rivers owns 49% of the PharmHouse joint venture. PharmHouse has now presold 50% of their expected output and is reserving the remaining 50% for their own products and brands.
Long Jan 2021 $50 LEAP Call @ $20.30, see portfolio graphic for stop loss.
Previously closed 11/26/18: Short Jan 2021 $75 LEAP Call @ $14.80, exit $7.30, +7.50 gain.
CI - Cigna - Company Description
No specific news. Shares dipped just enough to stop us out.
Original Trade Description: April 21st.
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.
Closed 5/28: Long Jan $160 Call @ $14.20, exit $10.05, -4.15 loss.
Optional: Closed 5/28: Short Jan $130 put @ $8.00, exit $6.60, +1.40 gain.
Net loss $2.75.
CNC - Centene Corp Company Description
No specific news. Shares closed at a 3-month high in a bad market.
Original Trade Description: April 28th.
Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. The company's Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which covers dually eligible individuals, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray, home-based primary care, transportation assistance, vision care, dental care, telehealth, immunization, specialty pharmacy, therapy, social work, nurse advisory, and care coordination services, as well as prescriptions, limited over-the-counter drugs, medical equipment, and behavioral health and abuse services. This segment also offers various individual, small group, and large group commercial healthcare products to employers and directly to members in the Managed Care segment. Its Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; and vision and dental, and management services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri. Company description from FinViz.com.
Centene has had a rocky six months and shares were recovering in early April until the sector was caught in the Medicare for All downdraft. Since then they reported strong earnings and guidance and are moving up again.
The company reported earnings for $1.39 that beat estimates for $1.35. Revenue rose 40% to $18.44 billion and easily beat estimates for $17.46 billion. Medicare revenue rose 19% to $1.38 billion and commercial policy revenue rose 19% to $3.65 billion.
They raised full year guidance from $4.11-$4.31 to $4.24-$4.44. Revenue guidance rose from $70.3-$71.1 billion to $72.8-$73.6 billion.
Given the decline from the mid $70s in November, our risk should be minimal on an earnings beat and guidance raise. They should outperform the sector.
Long Jan $60 call @ $4.20, see portfolio graphic for stop loss.
CVX - Chevron Corp - Company Description
No specific news. Down big on crash in oil prices.
Original Trade Description: May 5th.
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com.
Chevron agreed to buy Anadarko Petroleum (APC) for $33 billion a week ago. Shares of Chevron declined on the news. Occidental (OXY) was a frustrated bidder and joined forces with Warren Buffett to offer $38 billion with a slightly sweeter portion of cash than Chevron.
Anadarko agreed to negotiate with Occidental to see if their deal was "superior" to Chevron. Once they issue the formal ruling that it is superior, Chevron has four days to raise their bid.
This weekend Total agreed to buy Anadarko's African assets for $8.8 billion if Occidental is the winner and closes a transaction with Anadarko. That is actually a bargain price and shows the frustration Occidental is experiencing in trying to fashion a financing package to close the deal. Those assets are worth twice that amount or more.
Chevron can sit back and watch all these gyrations all the while deciding if they want to bid more if Anadarko makes the superior claim.
Chevron has far more assets and capabilities than Occidental and significant LNG experience with their $100 billion in projects in Australia. The Mozambique gas discovery is a monster and would be another major windfall for Chevron if they win the deal.
If Occidental wins, Chevron shares will rally because they will not be shelling out tens of billions in cash and stock. If Chevron eventually wins there could be another level down for Chevron shares but the long-term outlook would improve significantly because of the adjoining properties in the Permian and the ability to monetize the Mozambique gas discovery. Either way Chevron shares should rise in the months ahead.
With the S&P futures down -50 points on the China trade blowup, I am going to pick the $120 ATM strike because the Dow futures down -475 suggest all Dow components are going to implode at the open.
Update 5/12: Shares rebounded when Chevron said it would not pursue a higher bid for Anadarko. Occidental raised the bid to $76 and mostly cash. Chevron said it would take the $1 billion breakup fee and use it to accelerate share repurchases by 25% to $5 billion a year.
Long Jan $120 call @ $6.60, see portfolio graphic for stop loss.
IBM - IBM Inc - Company Description
No specific news. Shares broke support at $131.50. Close the position.
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.
MRK - Merck & Co - Company Description
Merck said the drug Lynparza doubled the time of "progression free survival" for pancreatic cancer patients with the BRCA gene mutation. The average PFS time rose from 3.8 months to 7.4 months.
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. Shares still holding recent gains.
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. Holding at recent highs 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.
QCOM - Qualcomm - Company Description
FTC Commissioner, Christine Wilson, wrote an op ed in the WSJ saying the verdict against Qualcomm was wrong and was likely to be reversed on appeal. She said a company does not have a "duty to deal" with competitors. A company can or cannot sell products to anyone of its choosing. The judge in the case misinterpreted the Aspen Skiing case in 1985 that forced a long-time partnership to continue after the minority partner with the ski runs wanted to cancel the deal and go it alone. The judge in that case said the company had to continue the partnership or the other party would have gone out of business. This was interpreted as a duty to deal even if you did not want to sell their product to the other company.
Original Trade Description: May 26th.
QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, long term evolution, and/or fifth generation standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.
Qualcomm shares were punished again when US District Court Judge Lucy Koh ruled erroneously that Qualcomm was monopolistic and unfair in their patent strategies. Shares collapsed. It was the end of the world for Qualcomm, except that it wasn't. Only those who did not have an understanding of the problem were predicting gloom and doom.
First, the ruling was very shallow, and no evidence was presented that any consumers were harmed. There was no weighing of potential harm against potential benefits, like having a phone at all since Qualcomm's patents make the phones possible. There was no economic analysis at all. Lawyers claim those two points make the ruling very likely to be voided on appeal.
Lastly, this only involved the Standard Essential Patents (SEPs) and does not apply to the non-standard essential patents or NSEPs. These are the vast majority of Qualcomm's patents. The SEPs only account for about $7.50-$13.00 on a smart phone. Even if the verdict stood the financial impact to Qualcomm would be minimal since they will still be able to collect a reduced price on the SEPs after renegotiation.
Last month Apple testified that this technology was needed, Qualcomm had the best technology in these areas and that the SEP licensing was mutually beneficial and the licensing model was entirely legal.
Qualcomm is going to request a stay to halt the process from moving forward while they request an expedited appeal, which they will most likely win. Under the most favorable circumstances the appeal is not likely to be decided within 18 months. Since Qualcomm's 5G technology is going to be even more in demand with the ousting of Huawei, we could even see the White House get involved to limit any negative consequences for Qualcomm.
This dip should be buyable since there is no financial impact for at least two years, and it could all be erased on appeal.
We were stopped out of our profitable position on the court news. We now have an opportunity to establish a longer dated position after a monster drop back to $65.
Options are expensive so I am using a combination position. If you don't want to sell the put then buy a higher strike call.
Long Jan 2021 $70 Call @ $8.33, see portfolio graphic for stop loss.
Optional: Short Jan 2021 $50 put @ $4.20, see portfolio graphic for stop loss.
Net debit $4.13.
UNH - UnitedHealth - Company Description
No specific news. Shares broke over initial resistance but stalled at $250. This is temporary.
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.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.