A sudden flood of $54 billion in cash from closed acquisitions did wonders for a lackluster market.
Berkshire Hathaway closed the $37 billion cash buyout of Precision Cast Parts (PCP) on Friday and Avago completed the acquisition of Broadcom (BRCM) with another $17 billion in cash. All that money needed to be reinvested and the Dow soared +396 points. It was a short covering frenzy as that cash started to push prices higher.
We could see some spill over into Monday because I am sure not all $54 billion was reinvested on Friday.
The Dow and S&P are approaching significant resistance at 16,600 and 1,950. That is where I would expect sellers to appear in the equivalent of a goal line stand.
Current Position Changes
STZ - Constellation Brands
New stop loss.
LULU - LuluLemon
New stop loss.
AMBA - Ambarella
The Ambarella put remains unopened.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
Original Call Recommendations (Alpha by Symbol)
IWM - Russell 2000 ETF - ETF Description
I made a mistake in the Thursday newsletter. I mentioned that I had changed my mind multiple times about closing this position. In these comments, I said I finally decided to close it but I did not follow through on the notations in the portfolio graphic. It should have been closed at the open on Friday.
In retrospect I should have left it open but the chart was pointing to a breakdown on Thursday. The headlines on Friday caused a monster short squeeze and I am hoping at least a few subscribers ignored my recommendation when they saw the big gap higher.
Original Trade Description: January 20th
The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.
Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.
Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.
Position 1/21/16, closed 1/29/16:
CLOSED: Long March $102 call @ $2.76, exit $2.46, -.30 loss.
KR - Kroger - Company Description
Kroger exploded out of the starting gate on Friday and put its basing pattern behind. Let's hope this trend continues.
Original Trade Description: January 28th
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 Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.
Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.
Earnings March 3rd. We will exit before earnings.
Long April $40 call, entry $1.05. No stop loss because of the cheap option.
LULU - LuluLemon
LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description
LULU finally sprinted over the resistance at $60 thanks to the positive market. No specific news. I raised the stop loss tp $57.85.
Original Trade Description: January 22nd
LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.
Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.
Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.
It is amazing what a little positive guidance can do for Street ratings.
Earnings are March 9th.
Long March $60 calls @ $2.90, see portfolio graphic for stop loss.
STZ - Constellation Brands - Company Description
Another new high for STZ but we have now reached uptrend resistance at $153. I raised the stop loss to $144.45 and will probably raise it again next week.
Original Trade Description: January 14, 2016:
STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.
STZ is in the consumer goods sector. According to the company,
"Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."
STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.
This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance.
Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.
STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.
Original Put Recommendations (Alpha by Symbol)
AMBA - Ambarella - Company Description
The Ambarella trade remains unopened with an entry trigger at $35.75. Shares rebounded again with short covering and the hot market. Resistance is $40 so this week will be the long term key. A move over $40 suggests the selling is over.
Original Trade Description: January 27th
Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.
GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.
GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.
Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.
GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.
With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.
Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.
Earnings March 3rd.
With AMBA trade at $35.75
Buy March $32.50 put, currently $2.45, initial stop loss $40.55
HPQ - Hewlett Packard - Company Description
No specific news. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.
Original Trade Description: January 25th
Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.
Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.
In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.
HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.
Earnings are February 24th.
Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.
JUNO - Juno Therapeutics
Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description
Juno barely posted a gain on Friday in a red hot market filled with short covering. Apparently the JUNO shorts were not interested in covering with expectations of lower lows ahead.
Original Trade Description: January 22nd
Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.
Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.
Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.
Earnings are March 17th.
Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.
VXX - iPath S&P 500 VIX Futures ETN - ETF Description
Finally broke below support and approaching our strike price at $23. Eventually the volatility will ease. It is only a matter of time.
Original Trade Description: January 16th
At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.
The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.
No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.
Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.
Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.
Long March $23 Put @ $2.41, no stop loss
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