The market surprised everyone last week when it deviated from its alternating gains and losses and triple digit moves. Is the bull coming back to life?
I would not bet on traders successfully giving CPR to the bull but there is still some life left in a few stocks. As the earnings cycle continues we are finding out who has earnings and who has excuses. The banking sector has emerged as a winner but banking stocks are still not high on everyone's list. Last week's upgrades may have been a signal that the dry spell is over and it is time to add quality names to the portfolio.
Disney has been left for dead on the roadside as Q3 road kill after ESPN revenues declined. However, the news of their passing has been greatly exaggerated.
Stocks Dropped from Watch List:
SBUX - Moved to active play list
NFLX - Moved to active play list
Active Watch List Stocks:
NKE - Nike
Unopened with entry trigger at $62.25. High on Friday was $62.16.
New Watch List Entry:
JPM - JP Morgan
JP Morgan is the largest U.S. bank with assets in excess of $2.3 trillion. It calls itself a financial services firm that operates in four segments. Those are consumer & community banking, corporate & investment banking, commercial banking and asset management. The bank earned $22.41 billion in 2015 on revenue of $89.72 billion.
For Q4 the bank reported earnings of $1.32 that beat estimates for $1.30. Revenues were $22.89 billion. Earnings were held back because of a 21% decline in profits in commercial banking because of energy loans. The CFO said we are ready to increase loan loss reserves as needed if the energy sector remains weak for a long period.
Legal expenses declined from $1.1 billion to $606 million in Q4 as they wind down all the remaining problems left over from the financial crisis. JP Morgan would have been rock solid but they were pressured by the Fed into taking over Bear Stearns and Washington Mutual at the height of the financial crisis. Most of their legal settlements over the last five years came from loans sold by those two firms and JP Morgan inherited those problems when they agreed to acquire them.
The bank is so strong they were able to digest more than $6 billion in losses caused by a rogue trader nicknamed the London Whale. That turned out to be just a blip in their financials where it could have caused serious harm to a lesser firm. They still produced record profits in that year despite the loss.
On January 26th the bank entered into an agreement with Ambac Financial Group to pay $995 million to resolve the last of their claims from the financial crisis. With this agreement, Ambac will drop objections to the $4.5 billion agreement between Blackrock and Pimco for faulty home loans in 2008.
JP Morgan continues to confound the experts and grow despite the long list of legal problems they inherited in 2008. Now that those problems are mostly behind them the bank is free to concentrate on increasing profitability. As interest rates rise their massive loan and deposit base will make them even more profitable.
JPM has an investor day on February 23rd. Earnings are April 13th.
JPM shares found support in the January sell off around $56 although they dipped to $54 on the January 25th market crash. The influx of acquisition cash on the 29th caused a +$2.22 gain to $59. I expect that gain to fade and give us a better price on the LEAP call when we are finally triggered. I am putting an entry point over $60 just to make sure we do not get trapped in any post Friday decline. My ideal entry target would be a dip back to $58.
I am recommending a breakout trigger and a buy the dip trigger. Use the one that is hit first but not both.
With JPM trade at $60.25
Buy Jan $65.00, currently $2.95, initial stop loss $54.25
With JPM trade at $58.00
Buy Jan $62.50, currently $3.85, initial stop loss $54.25
DIS - Disney
Disney has been pummeled since its $120 high in November. The problem for Disney was comments that ESPN subscribers are declining. This was attributed to cord cutting from the cable companies as consumers move to sites like Netflix and Amazon for streaming downloads. This is not the case although I am sure there are some losses for that reason.
However, Disney said there was a lack of a large number of major sporting events in 2015 that would keep ESPN subscribers happy. Disney said the 2016 Olympics would help bring those subscribers back. ESPN is only one of dozens of Disney networks and the rest are doing just fine.
In case you missed it Star Wars: The Force Awakens has earned over $2 billion worldwide and still going strong. This compares to only $572 million for Episode VI the Return of the Jedi that was the most popular movie in the prior seven movies. Merchandise sales are approaching $1 billion. This is a cash printing machine and it is only going to get better from here.
Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.
Disney Movie Schedule
Jan 29th, 2016 - "The Finest Hours"
Mar 4th, 2016 - "Zootopia"
April 15th, 2016 - "The Jungle Book"
May 6th, 2016 - "Captain America: Civil War"
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"
We should not overlook their theme parks, which are also doing great. Disney said they are considering a tiered pricing for tickets with high volume attenfance dates costing more. The three levels for the season pass holders would be gold, silver and bronze. Gold passes could be used any day at any time and would obviously be the most expensive. Silver would only be good for off peak days and not valid for holidays. Bronze would be the cheapest and would only be valid on certain off peak periods. Currently discounted tickets for those customers spending multiple days and with children under the age of ten begin around $100.
Shanghai Disney will open on June 16th and they expect 40-60 million people in the first year. At $100 or more per ticket the revenue is astromonical. The park is located within 4 hours drive time of 330 million people.
Don't forget their theme cruises. Disney is not having any problems filling up their cruise ships and prices have remained strong.
The only real challenge to Disney today would be a slowdown in consumer spending. The company said they are not seeing any decline despite the drop in retail sales numbers over the last several months. Consumers are just spending their money on diffrent things like cable movies, theme parks and iPhones.
Disney has earnings on February 9th. Normally I would not recommend a stock ahead of earnings but this could be a blowout given the unbelievable cash flow from Star Wars. Even if they disappoint there is decent support at $90 and profits are only going to rise in subsequent quarters from the items mentioned above.
Shares have found support in the $92-$93 range despite the recent market volatility. I expect shares to rise as we approach earnings. I am putting an entry trigger just slightly above $96 just to make sure we have upward movement after Friday's big gain. If shares decline again I would be thrilled to enter the position at $92.
Use the first entry point that is triggered, not both.
With DIS trade at $96.75
Buy Jan $105 LEAP call, currently $5.45, no initial stop loss.
With DIS trade at $92.00
Buy Jan $100 LEAP Call, currently $7.35, no initial stop loss.
Active Watch List Play Descriptions:
NKE - Nike
Nike split 2:1 on December 23rd at $132 and the stock went straight down from there. When a stock is a major fund holding and it splits, there is a rush to the exits by some funds. They can sell the new shares nearly tax-free when it is classed as a stock dividend and they still have the same number of shares in the original position. Some funds have restrictions on the number of shares they can hold in any single position. A stock split doubles the number of shares and sometimes puts them over the limit and they sell the extras. These factors cause what is called "post split depression." Nike shares have now experienced that depression.
Shares declined from the $66 level the day of the split to $56 last week on fears the holiday retail selling may have been weak. Given Nike's predominant position in athletic leisure apparel they will always be the dominant seller compared to Under Armour and LuluLemon.
The reported earnings in late December of 90 cents, that rose +22% and beat estimates for 85 cents. Revenue rose +4% to $7.686 billion but missed estimates for $7.808 billion because of the strong dollar. Excluding the dollar impact revenues rose +12% and well over $8 billion.
The company guided for earnings growth in the "mid teens percentages" and said there was no weakness in China. They announced a $12 billion stock buyback program in November and raised their dividend by +14%.
Nike is targeting $50 billion in annual revenue by 2020 with online direct ecommerce sales of $7 billion, up from $1 billion in 2015. Online sales rose +51% in 2015.
Competitor Under Armour is targeting total sales of $8 billion by 2018 to put that aggressive Nike target into perspective.
Nike plans to begin selling in Mexico, Chile and Turkey in 2016. Nike began e-commerce sales to Canada, Switzerland and Norway in the last quarter.Sales in China rose +28% despite the economic downturn. North American sales rose +10% with futures orders up +14%.
Earnings are March 22nd.
I am recommending we buy the $65 LEAP with a Nike trade at $62.25 to confirm the rebound from the lows last week.
With NKE trade at $62.25
Buy January 2017 $65 LEAP Call, currently $4.80, stop loss $56.25 and under the Wednesday crash low.
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