Every weekend I scan my prescreened list of about 850 stocks and look at every single chart. Fortunately, with Qcharts that only takes about two hours. I develop a list of about 100 stocks that could be potential plays and then refine the list further by looking at earnings dates, news headlines, option prices and spreads. A few get eliminated because their option prices are too expensive like PANW or the spreads are too wide. If the bid is $2.25 and the ask $3.75 there is no way we are going to play that stock. I remove that stock from the larger screen so I will not look at it again in the future. Some market makers are just ridiculous in how they determine a market.
For the stocks that are left I go through the news articles for the last month looking for abnormalities, opportunities and items that other investors may be overlooking.
At the end of the process I normally end up with about 10 stocks that fit all the right criteria and I select the plays from that list. Unfortunately, I cannot predict market reactions to things like a Mario Draghi comment that knocks -300 points off the market intraday or a analyst downgrade that knocks 10% of a stock in one day. The downgrade does not even have to be on a stock in the portfolio but one in the same sector. An example would be Tableau Software (DATA) on February 4th that cut that stock in half and the rest of the stocks in the sector by 25% or more.
I am explaining this today because I received an email last week saying "I am a new subscriber and a lot of your positions were stopped out in January and February. Is this normal?" I replied respectfully that most experienced investors understand that stocks will be volatile when they go into a correction like they did in January and again in February. Positions will be stopped out in volatile markets.
I do not just scan a few headlines and pick a few symbols to use as plays. Each recommendation is as carefully reviewed as possible with the best expectations for a successful play. Unfortunately, I cannot make the market cooperate on a consistent basis and "stuff" will happen. I welcome any comments readers would like to make and I am always open to suggestions on how to improve the newsletter.
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As a bonus for reading my explanation I am going to list the "runners up" to the plays I chose for this weekend. These are not official recommendations and will not be followed in the newsletter. However, if you are looking for additional positions I would start here.
Symbol, Earnings, Strike, Premium
URI - 4/27 - Apr $62.50 - $2.00
HCA - 4/28 - Apr $75.00 - $2.45
BEN - 4/28 - Apr $40.00 - $0.65
CRM - 5/18 - Apr $72.50 - $2.38
SWK - 4/28 - Apr $100.0 - $2.75
GNRC - 5/17 - Apr $35.00 - $1.85
MDSO - 5/11 - Apr $40.00 - $0.65
SLAB - 5/04 - Apr $45.00 - $2.25
ADSK - 5/26 - Apr $57.50 - $2.21
BABA - 5/05 - Apr $75.00 - $2.50
CPRT - 5/26 - Apr $40.00 - $1.30
GIMO - 4/21 - Apr $30.00 - $1.55
SPLK - 5/26 - Apr $50.00 - $2.00
ENDP - 5/09 - Apr $40.00 - $1.55 Put
NEW DIRECTIONAL CALL PLAYS
KR - Kroger - Company Description
Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.
While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.
They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.
Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.
While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.
At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.
Shares declined from $43 in early January to $36 on the Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.
In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.
The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.
Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.
I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.
Buy July $40 call, currently $1.55, no initial stop loss
NTAP - NetApp - Company Description
NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.
JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.
NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.
Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.
Earnings May 25th.
Buy May $28 call, currently 99 cents, no initial stop loss.
NEW DIRECTIONAL PUT PLAYS
No New Bearish Plays