Despite the rebound in oil prices and energy equities, they are still the worst performers. The APA, ECA, SLCA positions are our biggest losers but we still have six months to go and some analysts believe an energy rally will appear.
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)
AAPL - Apple Inc - Company Profile
Apple shares have started their ramp into earnings with a breakout over prior resistance at $147.50. Earnings are expected on August 1st.
The production delay rumors on the iPhone 8 have increased but that no longer seems to be impacting the stock price. If there are problems, Apple will have to update guidance with the earnings and that will be a critical event for the stock.
Original Trade Description: July 2nd.
Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.
Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 where they have been trading for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.
Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will hold through earnings in an effort to capture the ramp into the September product announcement.
Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.
Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.
Long Jan $150 call @ $6.90, see portfolio graphic for stop loss.
Short Jan $165 call @ $2.96, see portfolio graphic for stop loss.
Net debit $3.94.
ABBV - AbbVie - Company Profile
No specific news. Shares have rebounded to erases the decline from the prior week and very close to a new high.
Original Trade Description: June 4th.
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 Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other 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. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
Estimated earnings date is July 28th.
I would not normally pick a stock that has had a $5 run over the last three weeks but ABBV is about to break out to a new high and that could kick it into high gear. People love to buy stocks when they first make a new high.
Update 6/23/17: The company received a favorable opinion on MAVIRET, a once daily He-C drug, from the European Medical Agency and the CHMP. This is an 8 week cure for Hep-C that will compete with Gilead's products.
Fortunately, options are surprisingly cheap.
Short term: Long Jan 2018 $72.50 call @ $2.81, see portfolio graphic for stop loss.
Long term: Long Jan 2019 $75 call @ $4.70, see portfolio graphic for stop loss.
ADBE - Adobe Systems - Company Profile
No specific news. Shares rebounded from support at the 50-day and Friday's close was a new high.
Original Trade Description: June 4th.
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.
Adobe reported earnings of 81 cents that beat estimates by 4 cents. Revenue of $1.77 billion increased sequentially by 5.4% and 26.7% over the year ago quarter. Analysts expected $1.73 billion. Subscriptions accounted for 84% of Q2 revenues, up 36.9% from the year ago quarter. Revenues from digital media solutions rose 29% to $1.21 billion. Annualized recurring revenue rose $312 million to $4.56 billion. Mobile data transactions rose to 57% or all transactions.
Adobe is firing on all cylinders. They ended the quarter with $4.93 billion in cash and $901 million in receivables. They guided for the current quarter to revenue of $1.815 billion and that exceeded estimates for $1.80 billion. They guided for earnings of 72 cents to $1 and analysts were expecting 79 cents.
Expected earnings Sept 19th.
Shares have been in a solid uptrend until the Nasdaq flash crash. They dropped $13 in the crash but quickly recovered it in the earnings rebound. Friday's close was a new high. They should be a favorite for the end of quarter window dressing and with the positive earnings and guidance, they could persevere through any summer weakness.
Unfortunately, options are expensive so this will have to be a spread.
Long Jan $150 call @ $8.59, see portfolio graphic for stop loss.
Short Jan $165 call @ $3.21, see portfolio graphic for stop loss.
Net debit $5.38.
APA - Apache Corp - Company Profile
No specific news. Shares rebounded with crude prices. No surprise there.
Original Trade Description: October 2nd
Apache Corporation, an independent energy company, explores, develops, and produces natural gas, crude oil, and natural gas liquids. It operates onshore and offshore assets primarily in the Permian Basin, the Anadarko basin in western Oklahoma, the Texas Panhandle, and Gulf Coast areas of the United States, as well as in Western Canada and Gulf of Mexico. The company also operates assets in Egypt and the United Kingdom in the North Sea. As of December 31, 2015, it had total estimated proved reserves of 794 million barrels of crude oil, 198 million barrels of natural gas liquids, and 3.4 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.
While that company description was valid six months ago the picture has changed for Apache. In early September Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. The "Alpine High" as they are calling it, "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The Alpine High play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage, they drilled 19 wells to prove out the reserves. Previously oil industry experts thought the area to be unfit for fracking because of an abundance of clay. Therefore, nobody was interested in this remote corner of the Delaware Basin inside the Permian. Apache said the amount of clay was significantly less than previously thought.
Compare the size of the discovery with the proved reserves in the company description. This one discovery is several times the size of the entire company six months ago.
Apache said it was raising capex by $200 million to $2 billion to reflect their anticipated activity in this area. They are going to allocate 25% of their capex budget to this discovery. Well costs are $4-$6 million for 4,100 foot laterals. They are going to start development with a 3-5 rig program and they have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone. The only drawback to the position is the lack of infrastructure, which Apache will have to build out along with its wells. The company will not be able to sell production until the second half of 2017 when they anticipate the first level if infrastructure will be completed. Volume production will not begin until 2018.
The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.
Apache is going to be getting a lot of attention over the next several months as portfolio managers reevaluate them as a potential investment. By more than tripling the company's reserves in one discovery the company has a lot of profitable work ahead for the next decade.
They were very smart to keep the discovery quiet until they had locked nearly every single acre in the entire discovery for very low prices.
Earnings Aug 3rd.
I have been waiting for the initial stock surge on the news of the discovery to fade to give us a better entry point. However, it never came and now with the OPEC production cut headlines we may never see the stock back below $60. I would rather buy a stock that is rising than wait forever for a dip that never comes.
I am not going to spread this LEAP because shares could run to $100 if the OPEC production cut actually occurs. We can spread out to exit the play on the backend.
Update 2/26/17: Apache reported an adjusted loss of 6 cents compared to estimates for a 7-cent profit. Revenue of $1.45 billion also missed estimates for $1.51 billion. Production averaged 420,846 Boepd with 64% liquids. Their average realized price per barrel was $47.39. They spent $112 million on E&P in Q4, down -85% from the $735 million in the year ago quarter. They announced a 2017 capex budget of $3.1 billion, which is light years ahead of that Q4 spending rate. Production is expected to rise 10% in 2017.
Update 3/12/17: I am recommending we average down on this position. If we do that, Apache does not have to return to $70, Just rebounding to $60 would reinflate the LEAP prices and we could be profitable. I would recommend a 2 for 1 ratio. If you own one contract, then buy two new contracts of the same LEAP, currently at 67 cents.
Update 3/26/17: Apache is rumored to be shopping various non-core assets to fund an aggressive drilling program in the Alpine High where Apache believes there is 15 billion barrels of reserves. Once they prove out the field limits they will be drilling thousands of production wells.
Update 5/7/17: Apache reported earnings of 8 cents compared to estimates for 16 cents. Revenues of $1.878 billion beat estimates for $1.486 billion. Production averages 397,792 Boepd. They completed $466 million in non-core asset sales. They reached first production at the new Alpine High discovery, two months ahead of schedule. They raised 2017 production guidance from 256,000 to 264,000 Boepd. They continued test drilling in the Alpine High discovery to delineate the fairway and confirm production expectations. Of the three new test wells drilled, two delivered the highest 24-hour oil production rates and the highest percentage of oil to date in the Woodford and Barnett formations. It was a good report and once oil prices firm, Apache should rise sharply.
Update 5/14/17: On Friday, Apache declared a quarterly dividend of 25 cents payable August 22nd to holders on July 21st. That is not going to make new investors rush into the stock but it may prevent a few from leaving. Shares rebounded nicely on the uptick in oil prices.
Apache said it was going to test loading a super tanker at its Corpus Christi Texas oil terminal. If the test is successful, it will allow Apache to export large quantities of WTI from the Permian. Our shale oil is super light and in high demand in Europe and Asia. U.S. exports are growing rapidly and that is another problem for OPEC oil exports.
Update 7/7/17: Apache said it was exiting Canada with deals for $713 million in three transactions. This weakness is not stock specific. The company had previously budgeted $125 million in capex for Canada in 2017 and 2018. Apache said those funds would be redirected to other projects. One of the transactions closed in late June and the other two are expected to close in August.
Harris Associates, parent of Oakmark Funds and Davis Funds both increased their positions significantly. They are expecting Apache shares to double. They cited Apache's resources in the Permian, Egypt and the North Sea. They also pointed out that Apache achieved gas production from the new Alpine High field two months ahead of schedule. They even speculated that Apache's assets are so strong they could attract a buyer for the company.
Long 2018 $70 call @ $7.70, no initial stop loss.
Long (2) 2018 $70 call @ 82 cents.
Adjusted average price for 3 contracts = $3.18.
BA - Boeing Company - Company Profile
JP Morgan upgraded from neutral to overweight on Friday and upgraded their price target from $205 to $240. I would say they were very late to the party. Through July 4th, Boeing has received 381 net firm orders consisting of 438 gross orders and 57 changes or cancellations. This compares to only 276 new orders in the first six months of 2016. It is going to be a good year for Boeing. Hardly a day goes by that they do not announce a new order for a plane, fighter, helicopter, satellite or spacecraft.
Original Trade Description: May 14th.
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.
Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part.
The temporary dip could be a buying opportunity. Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.
Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.
Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.
All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.
Update 6/9/17: Israel's El Al airlines will take delivery of its first 787 Dreamliner in August. They have 16 on order for $1.25 billion. They expect to save 47% in fuel costs by retiring the 747-400s and 767-300s.
The company finalized the $3 billion order with Iran's Aseman Airlines for 60 planes. This will be 30 737 planes to be delivered in 2019 delivered in the first group with another 30 models yet to be determined in 2020-2021.
Update 6/23/17: Boeing received orders or commitments for 571 planes at the Paris Air Show. This was a record number of orders surpassing the 2011-2015 period where orders were booming. More than 500 of those orders were for the 737 single isle jets. On the final day Boeing announced an order of 125 737-MAX 8s to an unidentified customer. Avolon ordered 75 737 MAX 8s and Lion Air orderes 50 737 MAX 10s. Orders for the 737 MAX 10 that was formerly announced at the show totaled 361 planes.
Update 7/2/17: Boeing said it received orders for more than $40.1 billion at the Paris Air Show.
Last week Boeing announced the startup of Boeing Global Services a new division in Boeing that will focus on the needs of government, space and commercial customers worldwide. They said the services market is worth an estimated $2.6 trillion over the next ten years.
Earnings July 26th.
Shares made a new high on Wednesday at $187 before dropping back to $182 on the temporary flight halt. Options are expensive so I am recommending a spread.
Long Jan $190 call @ $7.80, see portfolio graphic for stop loss.
Short Jan $210 call @ $2.02, see portfolio graphic for stop loss.
Net debit $5.78.
ECA - Encana Corp - Company Profile
Earnings date was revised to July 21st. No other news. Shares rebounded with the spike in oil prices.
Original Trade Description: May 21st.
Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.
Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.
Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.
They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.
With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.
JP Morgan initiated coverage with an overweight rating and $16 price target.
Earnings August 1st.
I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.
Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.
Encana sold its Permian Basin produced water infrastructure to H2O Midstream. No price was given. This included over 100 miles of interconnected pipeline and 80,000 bpd capacity. H2O plans to double the pipeline to 200 miles and capacity to 140,000 bpd plus adding storage for 2 million barrels of produced water. The produced water can be reused in new fracing projects and reduces the cost of new wells.
Long Jan 2018 $12 call @ $1.50, see portfolio graphic for stop loss.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
FB - Facebook - Company Profile
Facebook said it was going to start showing ads in its Marketplace application so there is another revenue stream about to kick into high gear. This is Facebook's competition for Craigslist.com, which is owned by Ebay. They are starting with a test to get the bugs worked out and then they will begin charging for the ad placements.
Facebook's campaign to kill SnapChat is getting nasty. Now the company is giving away free ads on Instagram. Since Instagram has more than twice the users, this is another nail in the SnapChat coffin.
Shares sprinted to a new high.
Original Trade Description: November 13th.
Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.
The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.
Facebook still makes a lot of money and they still have a lot of assets to monetize. They have barely begun to monetize Instagram and WhatsApp. Facebook bought Instagram for $1 billion four years ago and Forbes said it was worth $25 to $50 billion today. Instagram has added 100 million users in the first nine months of 2016 to reach 400 million. They are targeting one billion. Instagram revenue is expected to triple in 2016 to $1.5 billion and then triple again to $5 billion by 2018 according to eMarketer.
Instagram only has 350 employees compared to the 14,500 Facebook employees. Instagram users average 21 minutes a day and upload more than 95 million photos and videos. There is gold in those posts and Facebook is working on finding more ways to monetize the app.
Facebook may expect revenue "growth" to slow but that is different from "decline." It is still a great business and there will be another explosion of growth as Instagram and WhatsApp hit their prime.
Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.
Earnings Aug 2nd.
The drop in price after earnings plus the decline in the Nasdaq big caps last week helped to reduce the premiums but they are still expensive and require a spread position to receive maximum benefit at the lowest cost.
Update 2/6/17: Facebook reported blowout earnings and spiked to $137 in afterhours. However, they repeated the claim they were going to spend more money for the future and that ad sales dollars were declining. They have more ad space to sell with their 1.86 billion active users and to fill up that space the ads are getting cheaper. This is a long story. This is what investors want to see Facebook do. Spend more money creating more content, more opportunities and monetizing spaces that are not yet bringing in the big bucks. Short-term investors were disappointed and shares dropped back to $131 on Friday. The resistance high is $133.28 and I have no doubt shares will move over that level as the year progresses. Facebook is now a giant and it takes longer for changes to be felt. Once enacted the benefits can be enormous.
Update 2/26/17: Facebook reported it earned $4.83 in Q4 for every user and it ended the quarter with 1.86 billion users. That represented $8.81 billion in revenue and $4.57 billion in profit. That per user rate was up 30% from the year ago quarter. The company added 270 million monthly active users in 2016.
Shares finally broke out to a new high after news broke FB was in advanced talks with Major League Baseball to stream one game per week live. This would be great for FB because they could stream ads along with the game and good for MLB because it could attract fans that would not normally watch a game.
Update 3/5/17: Facebook Video is starting to take shape. The company is asking for "TV-like" original scripted shows lasting up to 30 minutes and appearing weekly. The Wall Street Journal said Facebook is willing to pay a "premium digital rate" in the low to mid six figures per episode. The Facebook CFO David Wehner said they are licensing the shows to seed the ecosystem. Facebook Video will be similar to YouTube. Facebook said they want entertainment shows in sports, science, gaming, whatever but no hard news shows. Shares are holding at the recent highs.
Update 3/26/17: Facebook closed at a new high on Friday after multiple headlines about its advertising progress. The company said it now has more than one million advertisers on Instagram, up from 500,000 six months ago and 200,000 last March. That is a major boom and revenue should be shooting higher. Instagram added 100 million users over the last six months to hit 600 million at the end of December. Of those, 400 million are active daily users. Instagram has more than 8 million businesses with active profiles. Since they understand the power of the portal, they are easy converts into advertisers.
Update 4/16/17: Facebook said its new Snapchat message clone called Stories had risen from 150 million daily users in January to more than 200 million in March. That is more users than Snapchat has in the original application. Snapchat only has 161 million daily active users. With SNAP falling 4% last week some analysts are saying SNAP is already a dead app walking.
Update 5/7/17: Facebook reported earnings of $1.04 compared to estimates for 88 cents. Revenue of $8.032 billion rose 50% and beat estimates for $7.849 billion. Instagram now has more than 500,000 advertisers. Monthly active users rose 17% to 1.94 billion and daily active users rose 18% to 1.28 billion. They ended the quarter with $32 billion in cash.
Facebook said it was launching about two-dozen TV shows in June. The content will be in two forms. Some will be 5-10 min in length and others will be traditional TV format shows. Facebook said it was planning on creating an "ecosystem" of professionally produced video content to augment user-generated videos that currently run on Facebook pages. The idea is to attract viewers so they can sell more ads. Facebook is now interviewing for new positions for film producers, creative producers, film engineers and several other producer type roles. Some will be deeply involved with producing original content and some will "oversee" content generation by others, as in Facebook users, companies and aspiring writers/producers. Facebook is well behind Amazon, YouTube and others in this endeavor but they have plenty of cash and they are not afraid to spend it.
Long Jan 2018 $125 call @ $13.10, no initial stop loss.
Short Jan 2018 $150 call @ $5.00, no initial stop loss.
Net debit $8.10
GSAT - GlobalStar - Company Profile
No specific news. This stock is not likely to produce weekly news. I will only post an update if something important happens. This is a 2019 LEAP. No rush.
Original Trade Description: May 28th.
Globalstar, Inc. provides mobile voice and data communications services through satellite worldwide. The company offers duplex two-way voice and data products, including mobile voice and data satellite communications services and equipment for remote business continuity, recreational, emergency response, and other applications; fixed voice and data satellite communications services and equipment in rural villages, ships, industrial and commercial sites, and residential sites; and satellite data modem services comprising asynchronous and packet data services. It also provides SPOT products, such as SPOT satellite GPS messenger for personal tracking, emergency location, and messaging solutions; SPOT Global phone; and SPOT Trace, an anti-theft and asset tracking device. In addition, the company offers commercial Simplex one-way transmission products to track cargo containers and rail cars, to monitor utility meters, to monitor oil and gas assets, and other applications. Further, it provides engineering services, such as hardware and software designs to develop specific applications; and installation of gateways and antennas. The company primarily serves recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining, and forestry; construction; utilities; and transportation markets. Globalstar, Inc. distributes its products directly, as well as through independent agents, dealers and resellers, independent gateway operators, and its sales force and e-commerce Website. As of December 31, 2016, it served approximately 689,000 subscribers. The company was founded in 2003 and is headquartered in Covington, Louisiana. Company description from FinViz.com.
This is a buy and forget position. Globalstar has a lot of thing currently in the works and is likely to be acquired over the next 18 months. With the 2019 LEAP at $1, we could be well rewarded if we just buy a few contracts and forget them.
You probably saw the bidding war over Straight Path Communications. Verizon won the war with a $3.1 billion bid. Verizon was not buying STRP for its business value. Verizon was buying bandwidth and spectrum. That is the licenses and frequencies that allow a company to transmit conversations and data through the air.
Globalstar has a lot more to offer than Straight Path. Globalstar is a satellite operator and won approval from the FCC in December to use its spectrum for terrestrial wireless. That approval means Globalstar's spectrum would be available to an acquirer for immediate use. Globalstar has spectrum that is perfect for small cell networks where population density is too thin to support a group of major cell towers.
Globalstar has targeted 100 countries in which it will see approval for wireless service. The company said, "At the end of Q1 we have filed for terrestrial authority in countries covering more than 375 million people. If you include the USA the total population covered would be about 700 million.
Analysts believe companies like Facebook, Amazon, Netflix and Google could see this capability as very valuable. The ability to communicate wirelessly with people not already reached with broadband opens up entirely new markets. Google has already tried to reach the masses with Google Fiber but the cost was too expensive and they had to scale back that initiative. Facebook is experimenting with solar powered planes and airships to beam wireless internet to millions of potential customers.
If anyone makes a run at Globalstar, it could turn into another bidding war. If nobody tries to acquire them by the end of 2017 they will have even more assets in the form of operating authority in numerous other countries. The company is an interesting lottery ticket play where we can invest very little but likely be rewarded even if an acquisition does not appear.
Earnings August 3rd but in this position we really do not care what the quarterly reports say. This is a buy and forget position. The chart over the last ten years is ugly. As a satellite company they have failed in generating any material interest. It is the recent approval to use their spectrum for wireless that holds promise for the future.
Long Jan 2019 $2.50 call @ $1.00, see portfolio graphic for stop loss.
JPM - JP Morgan Chase - Company Description
JPM reported outstanding earnings with profits of more than $25 billion over the last four quarters. Shares were rejected at resistance at $94 prior to the report. There was a $2.50 drop with the sell on the news event but the bank recovered most of the loss by the close. Who could not love a company with $25 billion a year in earnings?
Original Trade Description: January 29th.
JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds. The Commercial Banking segment offers financial solutions, including lending, treasury, investment banking, and asset management to corporations, municipalities, financial institutions, and nonprofit entities, as well as financing to real estate investors and owners. The Asset Management segment provides investment and wealth management services across various asset classes, such as equities, fixed income, alternatives, and money market funds; multi-asset investment management services; retirement services; and brokerage and banking services comprising trusts, estates, loans, mortgages, and deposits. JPMorgan Chase & Co. was founded in 1799 and is headquartered in New York, New York. Company description from FinViz.com.
I seriously doubt there are any readers who are not familiar with JP Morgan. The 218 year old bank has been around for many generations. They are widely seen as the strongest of the money center banks and they are only going to get stronger. The Fed is likely to raise rates three times in 2017 and every one of those hikes means free money to JPM and the other big banks.
JPM has put all the subprime mortgage suits and probes behind them and paid out billions to settle those problems. The Trump administration is expected to reduce regulation on banks and that will reduce expenses and open up new business opportunities. CEO Jamie Dimon was not a Trump fan before the election. Now he routinely speaks positive about the president and his expectations for the future of the economy.
JPM has already reported stellar earnings and lived through a strong bout of post earnings depression that knocked the stock back to $83. The rebound has been strong and it should breakout to a new nigh soon, market permitting.
Update 2/6/17: JPM said it resolved the final litigation over the Lehman collapse and will pay $797.5 million to end all litigation over the Lehman bankruptcy. The suit by Lehman claimed JPM had used its position as Lehman's largest clearing bank to siphon critical liquidity in the last few days before Lehman filed bankruptcy. JPM was in a position to see the collapse from the inside and sucked out billions of dollars from the cash flow in order to protect themselves from the collapse. Basically they raised minimum balance and margin requirements to reduce risk but that put a major strain on an already imploding Lehman.
Update 7/2/17: JPM said it was increasing its quarterly dividend to 56 cents, up from 50 cents. They are also going to repurchase $19.4 billion in stock between July 1st, 2017 and June 30, 2018. Shares blew through resistance to hit $91.72 before the weak market fade those gains. The buyback program plus the Fed's rate hike schedule should provide a boost to JPM shares the rest of 2017.
Earnings July 13th.
Options are relatively cheap for LEAPS and we can give the stock plenty of leeway before stopping out. If you are afraid of future events you can add a March $82.50 put for 85 cents.
Long Jan 2018 $90 Call @ $5.37, see portfolio graphic for stop loss.
Position 5/31/17: Long 2018 $90 Call @ $2.38, see portfolio graphic for stop loss.
Average cost for position: $3.88.
MNST - Monster Beverage - Company Profile
No specific news. Shares rebounded from the Nasdaq weakness and are moving sharply higher.
Original Trade Description: June 4th.
Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. Its Monster Energy Drinks segment sells ready-to-drink packaged drinks and non-carbonated dairy based coffee energy drinks primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, and the military. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations; and ready-to-drink packaged energy drinks to bottlers and full service beverage distributors. It sells its products under the Monster Energy, Nalu, Monster Rehab, NOS, Monster Energy Extra Strength Nitrous Technology, Full Throttle, Java Monster, Burn, Muscle Monster, Mother, Mega Monster Energy, Ultra, Punch Monster, Play and Power Play, Juice Monster, Gladiator, Ubermonster, Relentless, Samurai, BU, and Mutant Super Soda brands. The company was formerly known as Hansen Natural Corporation and changed its name to Monster Beverage Corporation in January 2012. Company description from FinViz.com.
Monster reported earnings of 33 cents that rose 26.9% and beat estimates by a penny. Revenue of $742.1 million rose 9.1% and beat estimates for $741.4 million. These numbers beat estimates despite a -$3.7 million hit from foreign currency translation. Net sales outside the U.S. rose 28% to $190.9 million. Sales of new products were so strong there was actually a shortage of product.
Earnings August 3rd.
Monster is doing great in a weak retail sector. This proves if you sell something habit forming you will always have a market.
They have multiple initiatives underway to increase global sales and they appear to be overcoming all the daily headaches that impact a retail distribution company. Gross profits rose from 62.2% to 64.8%.
For the last couple of years Monster has been transitioning their distribution into the Coca-Cola network. Coke took a major equity stake in Monster and part of the deal was that Coke would distribute the product globally. That is working out well and giving Monster a wider presence than they could have ever done on their own. Coke has an option to buy more Monster stock, or even the entire company. Given the slowdown in carbonated sugar drinks, Coke could be looking to exercise their option soon.
I am recommending two positions. The first is a Jan-2018 call that will get us through the rest of the year and capture any short-term gains. The second is a Jan-2019 LEAP call that could capture a run to a new high and/or acquisition by Coke. You can do one position or both.
Long Jan 2019 $55 call @ $5.60, see portfolio graphic for stop loss.
I will turn the 2019 call into a spread once the stock moves higher so we can widen our potential gains.
MU - Micron Technology - Company Description
No specific news. Shares only 71 cents from a new high.
Original Trade Description: July 2nd.
Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. It markets its products to original equipment manufacturers and retailers through its internal sales force, independent sales representatives, and distributors; and through a Web-based customer direct sales channel, and channel and distribution partners.
Micron Technology (MU) reported earnings of $1.62 compared to estimates for $1.51. Revenue rose 92% to $5.57 billion. CEO Sanjay Mehrotra said, "Our results reflect solid execution of our cost-reduction plans and ongoing favorable industry supply-and-demand dynamics." They guided for the current quarter for earnings $1.80 on revenue of $5.9 billion at the midpoint. Analysts were expecting $1.57 and $5.62 billion. The company ended the quarter with $4.9 billion in cash.
Micron said DRAM prices rose 14% during the quarter. That is after similar gains in the prior two quarters as well. Memory is in tight supply and prices are rising sharply. Hewlett Packard warned that margins would shrink because of rising memory prices.
After a post earnings spike in afterhours on Thursday the stock fell 5% on Friday. With revenue up 92% and a beat on earnings and guidance you would have expected a blowout gain. However, Micron shares were up 200% since May 2016 so there was a lot of expectation already built in. This is definitely a buy the dip story.
Position 7/3/17 with a dip to $28.75:
Long Jan 2018, $32 call @ $2.63, see portfolio graphic for stop loss.
NVDA - Nvidia - Company Profile
SunTrust upgraded Nvidia from hold to buy. Needham reiterated a buy rating and upgraded the price target from $130 to $200 making them the highest on the street. There is so much news on Nvidia it is impossible to list it all. The buy the dip trade is still working on this stock and the dips are short. Shares hit $138 the prior week and closed at $165 on Friday.
Original Trade Description: September 18th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Update 10/3/16: Nvidia announced a new chip code-named Xavier that is specifically designed for self-driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.
Update 2/6/17: Nvidia announced a new class of supercomputing workstations with breakthrough design features. The new Quadro products provide more than twice the performance of their prior league leading technology and offer ultra-fast memory to further enhance the speed. The new GP100 GPUs provide more than 20 TFLOPS of 16-bit floating point precision computing. In English that means they are faster than the human brain can even comprehend. The Quadro GPUs can render photorealistic images more than 18 times faster than a CPU.
Update 2/12/17: Nvidia reported earnings of 99 cents that rose +183% from the year ago quarter and compared to estimates for 83 cents. Revenue of $2.17 billion rose 55% and beat estimates for $2.11 billion. Shares declined slightly after the company guided for Q1 revenue of $1.9 billion plus or minus 2% with gross margins of 59.7% give or take 50 basis points.
Update 2/17/17: Nvidia said its processors are going to be used to power Japan's fastest super computer named TSUBAME3.0. The new computer will be more than twice as fast as the prior super computer named TSUBAME2.5. The Tokyo Institute of Technology said the new computer would be fast enough to solve some of the world's once unsolvable problems.
Update 2/26/17: Two downgrades knocked the heck out of Nvidia last week. Romit Shah cut it from buy to sell with a price target of $90. BMO Capital cut the rating from market perform to underperform and an $80 price target. Shares fell about $15 as of Friday's open at $95. That is down from $120 two weeks ago.
Update 3/13/17: The Nvidia powered supercomputer in Japan is scheduled to go online in April and will be the most powerful in the world. The computer will use 24 Nvidia DGX-1 AI systems. This will be the largest installation of DGX-1 systems to date. Each DGX-1 combines the power of eight Nvidia Tesla P100 GPUs, each capable of delivering the performance of 250 normal servers. Each P100 can process 10 trillion instructions per second. That is a combined total of 192 P-100s equivalent to 48,000 regular servers with Intel processors.
I am recommending we add to our Nvidia position with a new strike while the stock is depressed. Nvidia topped at $120 in the last cycle and I have the utmost confidence it will breakout to new highs once the current consolidation is completed. I recommended we buy Jan $120 LEAP calls to add to our current position.
Update 3/26/17: Nvidia said TenCent had selected Nvidia's high power GPUs to power its cloud offerings to clients that need lots of processing power to run AI and machine learning in their clouds. TenCent said revenues rose 48% in 2016 to $21.9 billion. Angel List said more than 1,700 AI startups had been funded by 2,300 angel investors and almost all use cloud based Nvidia GPUs for their products and services. Nvidia can now claim that every significant cloud service provider is a customer and supplier of Nvidia GPUs as a service, including Amazon, Google, IBM SoftLayer, Microsoft, Alibaba Cloud and Nimbix.
Update 4/9/17: Nvidia was crushed on Tuesday after an obscure analyst from Pacific Crest cut the stock from sector weight to underweight saying PC gaming was slowing and data center sales were under pressure. Neither of those claims are true. Bank of America said consider the source (Michael McConnell) before paying attention to the downgrade. BAC said prior ratings calls did not work out for the analyst on several occasions. Shares fell from $108 to $100 on the downgrade but that was support and the Nvidia faithful rushed to buy more at a bargain price.
Later in the week Nvidia unveiled a new, bigger, faster, $1,200 graphics card and bragged about the high demand.
Update 4/22/17: Boutique research firm MScience said there was no weakness in the GPU market for Nvidia as another research firm had said several weeks ago. On the contrary, MScience said sales and pricing were strong while AMD was seeing some softness. Also, Nvidia's new graphics card, the GTX 1080 Ti, which has only been on the market for 20 days are selling for more than list as gamers bid up the prices in a market where the cards are almost unavailable. There are a few listed on Ebay for as much as $900. Nvidia has a new and even faster card launching in Q3. Nvidia just partnered with Bosch to build self-driving car equipment off the DRIVE PX AI car computer using Nvidia chips.
Update 5/30/17: In February Exxon announced a record time to process a one billion cell reservoir simulation program using 22,000 server nodes and 716,000 CPU cores. The cluster of computers occupied the space of half a football field and required a massive amount of power.
Last week IBM and Stone Ridge Technology smashed that record in only 92 minutes for one tenth the power and 1/100th of the space in 1/10th the execution time. The technology used was only 30 computers with 120 Nvidia P100 GPUs installed with 4 in each computer. The space required was about the equivalent of half a ping-pong table.
I keep telling everyone that Nvidia is the Intel of the future and their technology is light years ahead of conventional computing.
Update 5/14/17: Nvidia reported earnings of 79 cents that rose 126% and beat estimates for 66 cents. Revenue of $1.94 billion rose 48% and beat estimates for $1.91 billion. Datacenter revenues rose 186% and now 20% of total revenue. They also raised guidance well above estimates and said they would pay $1.25 billion in dividends this year.
The day after earnings they held their tech conference. The CEO held up the first Volta processor and said they have spent $3 billion developing it. "This is the first one. If you want to buy it the price is $3 billion."
During the quarter, Tesla P100 and P40 GPUs were added to the Microsoft Azure cloud. Tesla accelerators for datacenter AI were added to the Google Cloud, Tencent Cloud, IBM Cloud and Baidu Cloud. They announced a new project with facebook to create Caffe2 deep learning framework and Big Basin servers with Tesla P100 GPUs. They announced plans to train 100,000 developers this year, a 10X increase over 2016.
I have said it before and I will say it again, Tesla is the bleeding edge of technology development and they are running away from Intel, AMD and Qualcomm. Nobody is even close.
Update 5/21/17: Nvidia (NVDA) shook off the market crash and hit another intraday high on Friday after a Bernstein note. The analyst initiated coverage of Nvidia with an outperform saying the company has barely tapped into some massive growth markets. "Our analysis suggests their datacenter total addressable market (TAM) is likely somewhere between 'big' and 'huge,' driven by the mainstreaming of AI and the rise of accelerated computing; we forecast 63% annual growth through CY2019, reaching $3.6B in revenue." The analyst said Nvidia's multiyear head start in investing in artificial intelligence and deep learning puts the company well ahead of competitors in those two high-growth fields.
In addition, their automotive business is just getting started and could eventually be a multibillion-dollar business. Also, double-digit gaming growth should be sustainable in the long term. The analyst said even after their recent gains the stock remains reasonably valued compared to other high growth tech stocks and the market may not be fully appreciating Nvidia's long-term value. Currently the stock trades a 9 times sales and a PE of 40. Considering the explosive growth and technological lead on competitors that is probably conservative. Bernstein has a $165 price target.
UBS said Nvidia's new Volta chip has a 20% performance advantage over the yet to be released Vega chip from AMD and requires less power with better efficiency. They expect gross margin upside as sales of the Volta and Pascal chips increase. UBS has a $145 price target. Canaccord Genuity upgraded their price target to $155.
Update 5/28/17: Recently Softbank bought a 4.9% stake worth $4.1 billion making them the 4th largest holder. News broke this week their new $100 billion Vision technology fund is thinking about increasing that stake. They said they would raise the stake over time and begin to work more closely with Nvidia on future developments. That prompted Nvidia to note in a regulatory filing that Microsoft has the right of first refusal to buy the shares if another company tries to acquire more than 30% of Nvidia. I do not think that was public knowledge or maybe everyone had just forgotten it. I looked up the top holders and Microsoft was not listed. The list is a who's who of big names. The top ten includes FMR, LLC, Vanguard Group, BlackRock, State Street, JP Morgan and Morgan Stanley.
Noted investor Louis Navellier said on Friday that Nvidia is going to $300 over the next couple of years because their technology is far ahead of Intel and Qualcomm. That would be more than a 100% gain from here.
Update 5/5/17: Nvidia CFO, Colette Kress said, "Since our DRIVE PX 2 AI car platform began shipping just one year ago, more than 225 car and truck makers, suppliers, research organizations and start-ups have begun developing with it. That number has grown by more than 50% in the past quarter alone, the result of the platform's enhanced processing power and the introduction of TensorRT for the in-vehicle AI inferencing."
Since Nvidia only derived 7% of its revenue from automotive sources, this is going to be a monster source of revenue gains in the future.
Update 6/11/17: On Friday, short seller, Citron Research, went all in on an Nvidia short saying the recent price target revisions were "irresponsibly bullish." On Thursday, Citigroup put a $180 price target on Nvidia and laid out a bullish case for it to reach $300. Argus raised their target to $185 and Bank of America $180. The stock rallied $12 on Thursday and declined $10 on Friday so investors are still not running for the sidelines.
Update 6/19/17: Several times in the last couple of weeks, the spread between the Jan $70/$90 call has traded for wider than the $15 gain we will get if we hold until expiration. I recommended we place an order to close the spread for a net credit of $15. If we get it, that frees up our capital and there is no reason to wait until January.
On Wednesday, the long $70 call traded at $84.50 at the same time the $90 call traded for $64.30. That was a $20.20 spread and that satisfied the order from last week to enter an order to close the spread for a net credit of at least $15. Therefore, I am closing the spread portion of this position. That is basically what we could have made if we held the spread until expiration.
Update 7/2/17: Nvidia is poised to launch a new set of cards for cryptocurrency mining. They will be very powerful and designed strictly for mining currency like Bitcoing and Ethereum at the lowest cost. There are specific models yet announced but Asus, a Nvidia partner is showing a description on their website. This is just one more income stream for Nvidia.
Update 7/10/17: Nvidia announced a far reaching agreement with Baidu to work on developing artificial intelligence for the cloud, autonomous driving, education and research, and domestic uses with consumer devices. Baidu will use Nvidia's Volta GPUs in the Baidu Cloud and use Nvidia's Drive PX in Baidu's efforts to build self driving cars. Baidu has partnerships with multiple Chinese auto manufacturers to build self driving cars. This was a major deal for Nvidia.
Position 9/19/16 with a NVDA trade at $63.50
Closed 6/14/17: Long Jan 2018 $70 LEAP Call @ $9.40, exit $84.50, +75.10 gain.
Closed 6/14/17: Short Jan 2018 $90 LEAP Call @ $3.73, exit 64.30, -60.57 loss.
Net gain $14.53.
New Position 3/13/17:
Long Jan $120 LEAP Call @ $6.75, see portfolio graphic for stop loss.
PCRX - Pacira Pharmaceuticals - Company Profile
No specific news. Shares were doing ok until Friday and a minor 70 cent decline appeared.
Original Trade Description: July 9th.
Pacira Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, manufactures, and commercializes proprietary pharmaceutical products primarily for use in hospitals and ambulatory surgery centers in the United States. The company develops pharmaceutical products based on its proprietary DepoFoam drug delivery technology. Its lead product includes, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgical analgesia. The company also markets DepoCyt(e), a liposomal formulation of the chemotherapeutic agent cytarabine indicated for the intrathecal treatment of lymphomatous meningitis, a life-threatening complication of lymphoma, a cancer of the immune system. Its development pipeline comprises DepoTranexamic Acid, a long-acting local antifibrinolytic agent, which is in Phase II clinical development for the treatment or prevention of excessive blood loss during surgery by preventing the breakdown of a clot; and DepoMeloxicam, a long-acting non-steroidal anti-inflammatory drug, which is in preclinical development for the treatment of acute postsurgical pain. Company description from FinViz.com.
Pacira has one major drug named Exparel, which is used to control pain at the site of major surgeries. This is an injectable non-opioid pain reliever that reduces the amount of opioid medications a patient needs. With more than 20,101 people dying from opioid medications in 2016 there is a tremendous effort underway to reduce the number of opioid prescriptions and usage.
Pacira was off to the races after the drug was approved but was derailed by a FDA warning letter that slowed sales significantly. The warning was subsequently removed and the drug is in full use once again. The company recently received approval for oral surgeries, soft-tissue surgeries and orthopedic patients.
Because of the pothole in the approval process, the company is expected to lose one cent in 2017. However, the rapidly increasing sales are expected to lift earnings to $3.90 per year by 2020, which is only 3 years away. That is a monster improvement in earnings. Revenue is expected to grow by 20% or more per year.
Expected earnings August 3rd.
Pacira does not have LEAPS. I am going to use the Feb options instead and that will give us 7 months of exposure. The option series was just recently added so the open interest is low but it should rise quickly. PCRX is very close to a breakout over its prior 52-week high at $51.70.
Long Feb $52.50 call @ $6.60, see portfolio graphic for stop loss.
Short Feb $65.00 call @ $2.56, see portfolio graphic for stop loss.
Net debit $4.04.
SLCA - U.S. Silica Holdings - Company Description
There is no fundamental reason for SLCA shares to be this low. Business is booming and getting better every day. This is simply a reaction to the low oil prices and a sector decline.
Shares rebounded with crude prices and this will probably be the pattern until they report earnings.
Original Trade Description: March 19th
U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.
Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.
Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.
Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.
U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.
They were crushed again on the week of Feb 6th when oil prices fell 7% in just two days to the lows for the year.
Oil prices are down on record inventory levels. Inventories at 528.4 million barrels are the highest since record were started. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.
Revised earnings July 31st.
We know oil prices are going to rise when refiners come back online and the summer. We also know Saudi Arabia needs high oil prices when they try to IPO Saudi Aramco later this year. Rig activations are exploding. For the week of March 17th, there were 21 new rigs. We have almost double the number of rigs operating today than we did last May.
Update 3/26/17: Halliburton said they were hiring 2,000 in Texas in Q1 in an attempt to catch up with the surging oil field activity. More importantly, they said they were getting killed by sand prices because they did not have enough long term supply contracts. They said they could lose $50 million because prices were rising so rapidly. Halliburton story
In a related article analyst firm Tudor Pickering Holt said sand use in individual wells was exploding. In 2013 drillers used an average of 3 million pounds per well. In 2014 that rose to 8 million pounds as laterals grew longer and fracking techniques improved. Today that is expected to climb to 11 million pounds per well in Q2 and some "leading edge" companies were experimenting with 15-20 million pounds. Gas wells in the Haynesville are now experimenting with 30 to 50 million pounds per well. The article said moving this much sand was going to be a logistical nightmare. That is a plus for SLCA because they have the "Sand Box" container that is moved by truck or train right to the well head where they are stacked to provide as much sand as needed. Sand Usage
Premiums are high on SLCA so I am recommending a spread.
Update 4/30/17: Silica reported earnings of 9 cents compares to estimates for 6 cents. Revenue of $244.8 million easily beat estimates for $227.2 million. Guidance was off the charts with very strong demand for fracking sand, anticipated shortages and soaring prices.
Update 5/7/17: Silica shares fell all the way to $34.39 on Thursday as oil prices continued to implode. While I understand why it is still hard to believe investors are bailing after such strong guidance in the earnings call. Full transcript
On our fourth quarter call, we outlined the steps we're taking to meet this growing demand through a combination of greenfield sites and brownfield expansions with a likelihood of some M&A in the mix as well.
Our comments last quarter and other industry capacity expansion announcements have created questions for some investors over the potential future supply and demand balance of sand proppants and the implications for pricing and other industry dynamics. Let me take a few minutes this morning to share some thoughts on how we see this unfolding and why we believe that the sand proppant market fundamentals should say strong for the foreseeable future.
We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons.
Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry. Second, oil sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs. And third, even all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.
There are several implications of this on a national level. First, our markets are expected to stay very tight. Most of the major sand suppliers, including U.S. Silica, are running flat out today. Demand is expected to continue growing faster than supply for the foreseeable future and as such, we expect to continue pricing recovery and improving margins in our sand sales. Second, customers do come in to us to lock in sand supply for the next 3 to 5 years. We're using these discussions to form deeper relationships with the companies that we expect to be the long-term winners. We're also working on the next generation of agreements that can better weather the cycle, both for our customers and for U.S. Silica. And third, rapid growth in proppant demand represents a massive opportunity for Sandbox. Keep in mind that this new local sand phenomenon is not just an opportunity for U.S. Silica to substantially increase sand sales. All this new capacity has to get to the wellhead and we believe that Sandbox is the ideal delivery solution with an unmatched combination of flexibility, efficiency and scalability.
Now let's talk more about the Permian, specifically. It remains very hard to add capacity there. Despite all the hoopla, there are numerous challenges to bringing on new capacity locally in the Permian, including permitting, water, infrastructure, trucking and equipment availability, just to name a few.
You not only need to find a good site, you need a lot of cash and the ability to sign long-term contracts with reliable customers, which leads me to my final point. When it comes to local sand, it's definitely not a field of dreams. We believe the market for local Permian sand will have limitations and that it will only be a subset of E&Ps who choose to use these products. And once those companies or their service companies sign long-term supply agreements, it's highly unlikely that additional capacity would be needed or built. Moreover, Permian local sands might not be right for some E&Ps because of their well designs and geology within their acreage.
Update 6/18/17: Silica announced it was building a new frac sand mine/plant in the Permian Basin to be closer to the drilling locations. The mine occupies 3,200 acres and has up to 30 years of reserves. The mine is expected to produce 4 million tons of sand annually. The mine/plant will cost $225 million and will be funded out of cash on hand. Initial production is expected in Q4. The new facility is close to Interstate 20 for easy delivery and has good water availability. Producers are so excited about the development they are signing long-term contracts with upfront payments to secure their future sand needs. This is a strong positive for Silica. The company said it had "other" capacity expansion projects underway to handle the previously announced 8 to 10 million tons of new capacity the company previously announced plans to acquire.
Update 7/2/17: Silica and Arrows Up, an affiliate of OmniTRAX Inc, are suing each other over patents related to the SandBox logistics solution. This will take a long time to play out and does not impact Silica in 2017, if at all. Silica sued Arrows Up for patent infringement and Arrows Up is counter suing. This is a he said, he said battle and will likely be settled in 2018 or 2019.
Long Jan $50 LEAP Call @ $6.93, no initial stop loss.
Position 5/8/17: Long Jan $50 LEAP Call @ $2.30.
Adjusted cost in the position: $4.61.
Doubled down again on 6/26/17: Long 2 contracts at $1.20.
Adjusted cost in the position = $2.33.
Closed 5/8/17: Short Jan $65 LEAP Call @ $2.58, exit .80, +$1.78 gain.
UNP - Union Pacific - Company Description
All the prior spreads representing $40 million in option premiums, are still in force. Shares are holding near the high end of their recent range. We just need one move bump to move convincingly over the $110-$112 level.
No specific news. Earnings date was changed to July 20th.
Original Trade Description: February 26th.
Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates railroads in the United States. It offers transportation services for agricultural products, including grains, commodities produced from grains, and food and beverage products; automotive products, such as finished vehicles and automotive parts; and chemicals comprising industrial chemicals, plastics, fertilizers, petroleum and liquid petroleum gases, crude oil, and soda ash. The company also provides transportation services for coal, petroleum coke, and biomass; industrial products consisting of construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products; and intermodal import and export container traffic. Its rail network includes 32,070 route miles linking the Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways. Union Pacific Corporation was founded in 1862 and is headquartered in Omaha, Nebraska. Company description from FinViz.com.
On February 17th, somebody bought 70,000 of the Union Pacific (UNP) January $130 calls for $2.57 each. I made a note of it but never got back to do the research. When I was reviewing my notes this weekend I discovered that somebody had bought 140,000 of those calls and sold 140,000 of the January $150 calls at 50 cents. They put on 70,000 contracts on January 30th and another 70,000 contracts on February 17th. This is important because they spent just over $29 million in premium to put on this January spread with UNP at $108. I am betting that you have to be pretty sure of a trade to invest $29 million for a spread that is roughly $25 out of the money.
Somebody knows something. After Warren Buffett bought BNSF Railway, maybe somebody else is looking to grow by acquisition. I have no clue what is going on but you do not bet $29 million just because you are feeling lucky.
The railroad reported earnings on January 19th of $1.39 that beat estimates for $1.33. Revenues of $5.168 million beat estimates for $5.143 billion. The company said it was optimist for 2017 as coal shipments began to increase again and the energy sector was recovering. That means additional frac sand shipments and more drill pipe shipped to the shale fields. Coal shipments were down -25% in 2016 and -6% in Q4.
They guided for low single digit growth in freight volumes compared to volume declines in recent quarters. The CEO said various macro-economic indicators that drive the core business were also improving.
UNP is the only railroad serving all six major gateways to Mexico and they connect to Canada's rail system. Their routes cover 20 states.
They bought back $940 million in shares in Q4.
Earnings July 27th.
Shares of UNP have been in a choppy uptrend for the last year and made a new high in January. Shares fell last week when the Transports crashed for a single day. This will give us a buying opportunity for a long-term hold. I am going to follow the big money trade described above but I am not going to add the short call. At 50 cents, it is not worth it and I am going to pick a lower strike just in case that investor was overly optimistic.
Update 4/9/17: This week a new spread appeared with 50,000 contracts each of the Jan 2019 $140 calls @ $3.50 and $160 calls at $1.25. Even as a spread that is another $11 million in premium. This has gone past the point of "somebody knows something" to "somebody is making a run at UNP."
Last week: The 140,000 Jan 2018 $130 LEAP contracts are still in play. However, another 140,000 Jan calls appeared at $150 that could mean the investor saw his investment shrinking and turned it into a spread to reduce the amount of premium at risk.
UNP only has 811 million shares outstanding. Assuming those two positions are the same entity, they have a future claim on 19 million shares. Assuming somebody like Carl Icahn or Warren Buffett was going to make a play on UNP, they could benefit from their play by launching these positions. Let's say they made an offer for $150. The stock would immediately spike to somewhere in the $145 range. The $130 calls would spike to roughly $20 ($280 million) and the 2019 $140 calls would be worth about $18 ($90 million). Let's call it $370 million. They could cash out and even if the offer was never accepted, they have a very nice payday.
For whatever the reason, somebody has $40 million invested in LEAPS calls on UNP. I really hope they are right.
Update 4/30/17: The company reported earnings of $1.32 that rose 14% and beat estimates for $1.23. Revenues of $5.132 billion rose 6% and beat estimates for $4.997 billion. The railroad bought back 7.5 million shares for $802 million.
Long Jan $120 call @ $4.95, no initial stop loss.
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