Stocks posted gains for the week but Thursday's decline kept the Nasdaq and Russell out of record territory.
In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. Shares are starting to recover from the $7.5 billion Dutch auction.
Original Trade Description: February 11th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. The company reported Q4 adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.
The company's many new drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.
AbbVie's drug Humira is expected to sell more than $20 billion in 2018 after a $18 billion revenue in 2017. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs. AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams.
AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.
Update 3/4/18: AbbVie and Biogen removed the MS drug Zinbryta from the market to evaluate the drug's "complex and evolving benefit/risk profile." They said evaluating it in the current patient base would not be possible given the limited number of patients being treated. The companies are investigating several cases of brain inflammation and liver toxicity. The drug's removal will not impact profitability. Sales were only $12 million in Q4 and $53 million for all of 2017. Patients on the drug were told to remain on the drug.
Update 3/25/18: AbbVie was crushed on Thursday after they reported disappointing mid-stage results on their Rova-T drug. They were hoping to use the drug in a different application to treat third line small cell lung cancer. The company said it has shifted its focus after a phase 2 trial resulted in a "magnitude of effect across multiple parameters." This is not a setback but a redirection. AbbVie has dozens of drugs in the pipeline with many of them expected to be blockbusters. The company has seen analysts raise earnings estimates 11 times over the last 60 days. Expectations are for 34% earnings growth and 14% revenue growth in 2018.
This would absolutely be a buying opportunity. I am recommending we double down on the ABBV position .
Update 4/3/18: AbbVie announced a deal with Biogen/Samsung to prevent the company from competing with a biosimilar drug to Humira until 2023. Biogen will be able to begin marketinf their similar Bioepis drug in Europe at the end of 2018 but is restricted from marketing in the U.S. until 2023. This is similar to a prior agreement with Amgen. Humira had $18.43 billion in sales in 2017 and accounted for two-thirds of Abbvie revenue. Abbvie has plenty of blockbuster drugs in the pipeline to replace the Humira revenue by 2023.
Update 4/15/18: The FDA said it was delaying the decision on the marketing application for elagolix for pain management associated with endometriosis from Q2 to Q3 2018. The drug was granted a priority review status in October but they have requested more data related to liver function tests. The drug had two successful phase III trials so it is likely to be eventually approved. Endometriosis affects 1 of every 10 women of reproductive age. There is no cure and pain management is the only option.
Update 4/27/18: ABBV reported earnings of $1.87 compared to estimates for $1.79. Revenue was $7.93 billion, beating estimates for $7.60 billion. Humira, Imbruvica, Lupron, Creon, Synagis, AndroGeol, Duodopa and Sevoflurane sales all came in above expectations. The company raised guidance from $7.33-$7.43 to $7.66-$7.76. They also announced a $7.5 billion buyback starting May 1st.
Update 6/3/18: A botched Dutch auction for AbbVie to buyback $2 billion in shares caused traders to be frustrated and dump the stock. The company handling the auction quoted $105 as the buy price before the open but that was later changed to $103 and traders were very upset. Shares declined as those not accepted to be sold in the auction were dumped on the market. This has nothing to do with stock fundamentals and it should blow over soon.
Long Jan 2019 $120 LEAP Call @ $8.50, see portfolio graphic for stop loss.
Long Jan 2019 $120 LEAP Call @ $3.30.
Adjusted cost now $5.90.
AFSI - AmTrust Financial Company Profile
Icahn caved in to management because of his weak position. His shares were bought after the April 5th record date so his vote would not count. He sued but ended up settling for a revised offer to compensate him for his expenses. The sweetened offer was for $14.75 per share and we have a $15 call. Unless something else happens to push the shares higher, this is going to be a loser. We knew going in that the 60 cent position was either going to be a big winner or a big loser. There was no middle ground. The actual vote has been pushed off until June 21st but at this point it is probably a done deal. Don't close the position until after the vote.
Original Trade Description: May 20th.
AmTrust Financial Services, Inc. provides property and casualty insurance in the United States and internationally. The company operates in three segments: Small Commercial Business, Specialty Risk and Extended Warranty, and Specialty Program. The Small Commercial Business segment offers workers' compensation insurance products; and commercial package, and other property and casualty insurance products, such as commercial property, general liability, inland marine, employment practices liability, commercial automobile, and umbrella coverage to small businesses. The Specialty Risk and Extended Warranty segment provides custom designed coverages, such as accidental damage plans, mechanical breakdown protection, and payment protection plans in connection with the sale of consumer and commercial goods; and coverage for niche property, casualty, and specialty liability risks comprising general liability, employers' liability, and professional and medical liability. The Specialty Program segment offers workers' compensation, general liability, commercial auto liability, property coverage, excess and surplus lines programs, and other specialty commercial property and casualty insurance products to small and middle market companies. The company also provides reinsurance services primarily for personal and commercial automotive business. It distributes its policies third-party brokers, agents, retailers, or administrators. AmTrust Financial Services, Inc. was founded in 1998 and is based in New York, New York. Company description from FinViz.com.
After spending a billion dollars of shareholder money to build the business, the CEO, family and private equity firms decided to take the company private for $13.50 when the company was trading at $12.50. Minority shareholders believe the company is worth $21-$25.
The buyout group of company officers and their families formed a company called Evergreen Parent and it will be managed by Stone Point Capital. This is a case of the founders taking advantage of being public to raise money to build the business and just when it begins to turn profitable they are trying to take it private again.
Lawyers immediately came out of the woodwork to file suit to halt the transaction. Carl Icahn quickly acquired a 9.4% stake in the company and took aim at the board calling the privatization transaction a sham. The board set a record date of April 5th to vote on going private but they never notified the shareholders or the market. With multiple suits outstanding to halt the June 8th vote the odds are good it will at least be postponed.
The normal process in takeunder transactions is to have a group of minority shareholders sue for a determination of value. An impartial valuation company will be assigned and they will determine the value. If it is over $20 as believed the shareholders can then void the transaction as fraudulent insider dealing.
Part of the valuation process is determining what company might be interested in buying AmTrust and at what price. If a competing offer appears the board would be forced to consider it.
This position has risk because of the uncertainty of the court process. However, with Carl Icahn holding over 9% you can bet he will be advocating for our position.
The option is cheap and we stand to lose it all if the court does not rule in favor of the shareholders. If the process does go in our favor the stock could be $20 by December.
Update 5/27/18: Icahn received a minor setback in his attempt to derail the take under by the family. Shareholder services firm ISS recommended a vote with Icahn to void the takeover. However, shareholder service firm Glass Lewis recommended accepting the take under offer because it was a bird in the hand cash deal for a "certain cash value" for shareholders. They said the future of the company was uncertain and it was better to take cash now rather than the potential proceeds of a full sale later.
The company did not notify shareholders of the April 5th record date until three weeks later and ISS suggests they kept the date secret because they expected to get blowback from shareholders. It also means Icahn cannot vote because he acquired his shares after April 5th, unaware of the secret record date. Icahn is suing the board, officers and family to halt the transaction. Since he has more money than they do, he has better than a 50% chance of success. He should at least be able to get the record date reset and the vote pushed farther into the future.
Update 6/3/18: Icahn is going all out to block the AFSI vote on Tuesday. He is suing multiple entities for multiple reasons. If the vote passes the company will be sold for $13.50 per share. If the vote fails, Icahn will try to install a slate of directors because he thinks the stock is worth twice the current price. I considered buying a $12.50 put for 15 cents but with a $13.50 buyout price the low bar, the put would likely expire worthless. We knew going into this position it would be a win/lose deal. The vote either passes or not. We are hoping it fails.
Long Jan $15 call @ 60 cents. See portfolio graphic for stop loss.
AKAM - Akamai Technologies Company Profile
No specific news. New high close on Wednesday.
Original Trade Description: May 28th.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution; Dynamic Site Accelerator that helps in consistent Website performance; Image Manager that automatically optimizes online images; CloudTest to conduct load testing and other analysis of Websites in a pre-production environment; mPulse that provides real-time Website performance data to provide insight about end-user experiences on a Website; and Global Traffic Management, a fault-tolerant solution. It also provides cloud security solutions, including Web Application Protector to safeguard Web assets from Web application and distributed denial of service; Kona Site Defender, a cloud computing security solution; Bot Manager Premier to identify bots; Fast DNS, which translates human-readable domain names into numerical IP addresses; Prolexic Routed to protect Web- and IP-based applications; and Client Reputation for protection against DDoS and Web application attacks. In addition, the company offers enterprise security solutions, including Enterprise Application Access that enables remote access to applications; and Enterprise Threat Protector to enable enterprise security teams to identify, block, and mitigate targeted threats. Further, it provides network operator solutions, including Aura Licensed CDN, Aura Managed CDN, and Intelligent DNS solutions, as well as professional services and solutions; media delivery solutions, such as adaptive delivery, download delivery, infinite media acceleration, media services, and media analytics solutions; and NetStorage, a cloud storage solution. The company sells its solutions through direct sales and service organization; and channel partners. Company description from FinViz.com
Akamai reported earnings of 79 cents that beat estimates for 70 cents. Revenue of $669 million rose 11% and beat estimates for $657 million. The earnings beat came from a concentrated push into cloud security along with a surge in its media delivery business. Revenue in the booming cloud security business surged 36%.
They did not provide guidance but with the cloud business booming shares should continue moving higher.
Earnings July 30th.
On May 9th CEO and Founder, Tom Leighton answered an acquisition question positively and shares spiked. An analyst asked him if the company was for sale and he said, "We are a public company and our board, which is very professional and diligent, is always going to do the right thing for shareholders." That suggests if they are not considering any offers today, they will more than likely be receiving some in the near future.
Shares spiked on May 22nd when Akamai announced a partnership with MUFG (MUFG) to develop a blockchain payment network that could handle one million transactions per second and be operational in early 2020 or before. Akamai has the scope and the horsepower to make it happen.
They have been moving relatively sideways since May 10th but the market has been very choppy over the same period. If the Nasdaq breaks out of resistance at 7,425 this week, Akamai should breakout to a new high as well.
Long Jan $80 call @ $6.60, see portfolio graphic for stop loss.
BB - BlackBerry Company Profile
The new Key2 phone was announced on Wednesday with features that make it the most secure Android phone on the market. The price for the high-end phone is $649. Shares spiked on Wednesday then declined with the tech sector on Thursday.
Original Trade Description: April 1st.
BlackBerry Limited operates as security software and services company in securing, connecting, and mobilizing enterprises worldwide. The company operates in three segments: Software & Services, Mobility Solutions, and Service Access Fees (SAF). The Software & Services segment offers enterprise software and services, including mobile-first security, productivity, collaboration, and end-point management solutions for the Enterprise of Things through the BlackBerry Secure platform; BlackBerry technology solutions, such as BlackBerry QNX, Certicom, Paratek, BlackBerry Radar, and intellectual property and licensing; AtHoc, which provides secure, networked crisis communications solutions; SecuSmart that offers secure voice and text messaging solutions with encryption and anti-eavesdropping facilities; licensing and services related to BlackBerry Messenger; and cybersecurity consulting services and tools. The Mobility Solutions segment engages in the development and licensing of secure device software and the outsourcing to partners of design, manufacturing, sales, and customer support for BlackBerry-branded handsets. This segment also develops software updates for its legacy BlackBerry 10 platform, and delivers BlackBerry productivity applications to Android smartphone users via the Google Play store; and sells its DTEK60, DTEK50, Priv, Leap, and Passport smartphones and smartphone accessories, as well as offers non-warranty repair services. The SAF segment consists of operations related to subscribers using mobile devices with its legacy BlackBerry 7 and prior operating systems. The company was formerly known as Research In Motion Limited and changed its name to BlackBerry Limited in July 2013. BlackBerry Limited was founded in 1984 and is headquartered in Waterloo, Canada. Company description from FinViz.com
BlackBerry reported adjusted earnings of 5 cents that beat analyst estimates for a breakeven. Revenue fell 18.5% to $233 million. Revenue from software and services rose 19% to $108 million. Gross margins rose from 60.1% to 76%. The company has about 3,500 enterprise customers and expects software and services billings to grow by double digits. The stock was slammed on the lack of concrete guidance. BlackBerry is transitioning customers to a subscription model and that depresses earnings for the first 18 months of a transition but provides more stable earnings in the future.
BlackBerry started out as a smartphone manufacturer under the name Research in Motion (RIMM). Over the years they failed to keep pace with Apple and Android and the BlackBerry phones are now just a niche market and they contract with another company to have them made.
BlackBerry has evolved into a software and services company with security software, mobility solutions, and dozens of other categories. The company is now the largest provider of automobile operating systems with tens of millions of cars using their QNX software.
They are using their experience in auto OS to build the next generation of autonomous vehicles. They announced last week that Baidu had chosen them to help develop self-driving technology. Baidu said "by integrating the QNX OS with the Apollo platform, we will enable carmakers to leap from prototype to production systems." BlackBerry radar, an asset tracking solution, is already available at more than 2,800 heavy-duty truck dealerships across North America. This software and equipment tracks trucks, loads, trailers, containers, heavy machinery and other transportation assets. Trucking companies and shippers can track the location of their cargo and vehicles in real time all the time.
There are rumors in the market that BlackBerry could suddenly become an acquisition target because of their small size of $8 billion market cap and vast array of growing software services. This is not some new fad company. There is history and there is a remarkable turnaround in progress.
BlackBerry recently launched a product called BlackBerry Jarvis. This is anti hacking software for self driving cars. Manufacturers can use it to scan their product before they are released to look for weak points that could be hacked. Tata Motors said the product allowed them to cut the analysis time down from 30 days to 7 minutes.
BlackBerry is suing Facebook on patent violations after years of negotiations on the topic. BlackBerry contends that the WhatsApp and other Facebook features violate their patents from the early days when Research in Motion was the biggest maker of smartphones. Negotiations broke down because of the monetary size of the problem. This could be a real windfall for BlackBerry but it could be years from now before the case will be settled.
I believe BlackBerry will either rise from the ashes of the telephone handset market or be acquired by any number of possible suitors. BlackBerry has thousands of patents that are probably worth almost as much as their market cap. They are a rapidly expanding business and they will be noticed. I am recommending we take advantage of their post earnings dip to look long term and be greedy when others are fearful.
Update 4/3: BlackBerry filed suit against Snap Inc for patent violations on proprietary messaging methods used by the company when it was the leading smartphone market under the Research in Motion name. They filed suit on six patents. They recently filed suit against Facebook on seven similar patents. They have already reached settlement agreements with Cisco, Avaya and phone maker BLU Products. The odds are pretty good they will win these suits as well because they pioneered smart phone messaging applications with the first BlackBerry phones nearly two decades ago. The first BlackBerry model 850 was released in 1999 as a pocket email device with internet browsing and a monochrome screen. The first iPhone was not released until June 29th, 2007. BlackBerry has 44,000 patents so expect to see them file additional suits in the coming months.
Update 5/20: On June 7th BlackBerry is set to release a new smartphone called the Key2 and yes it will have keys. This will be a very fast Android phone with a Snapdragon processor. It will have a long life battery that does not wimp out after several hours of game play like the iPhones. It will have a headphone jack, dual WiFi. This is an update of their successful Key1 phone released in 2017. The brand is still alive! Now if we could just get the stock to act like it is alive.
Long Jan 2020 $12.50 LEAP Call @ $2.32, see portfolio graphic for stop loss.
C - Citigroup - Company Profile
No specific news. Shares rebounded with the sector ahead of the Fed rate announcement.
Original Trade Description: March 18th.
Citigroup Inc., a diversified financial services holding company, provides various financial products and services for consumers, corporations, governments, and institutions. The company operates through two segments, Global Consumer Banking (GCB) and Institutional Clients Group (ICG). The GCB segment offers traditional banking services to retail customers through retail banking, commercial banking, Citi-branded cards, and Citi retail services. It also provides various banking, credit card lending, and investment services through a network of local branches, offices, and electronic delivery systems. The ICG segment provides wholesale banking products and services, including fixed income and equity sales and trading, foreign exchange, prime brokerage, derivative services, equity and fixed income research, corporate lending, investment banking and advisory services, private banking, cash management, trade finance, and securities services to corporate, institutional, public sector, and high-net-worth clients. The company operates in North America, Latin America, Asia, Europe, the Middle East, and Africa. Citigroup Inc. was founded in 1812 and is based in New York, New York. Company description from FinViz.com.
This is going to be a really short play description. Nearly every banking analyst has Citigroup as one of their top picks because they have been so disrespected over the last six months. The stock has been trading sideways despite having outstanding assets, clients, deposits and a growing loan base. The analysts claim investors are remembering the poor management in years past and the serious trouble they had coming out of the financial crisis.
All of that is behind them and they have only good times ahead. With the Fed raising interest rates their income is going to explode. They took more than $20 billion in noncash charges in Q4 earnings as a result of the tax reform. That is now behind them and they expect earnings to improve because of their lower tax rate. They bought back 74 million shares in Q4 and 214 million for the year with an ongoing buyback program for 2018.
I am recommending an inexpensive 2020 LEAP to give them time to work out all the remaining kinks.
I want to enter this position if we get a post Fed dip to $71.50 and the 200-day average. I am not recommending any offsetting positions to reduce the net debit but I will add one as an option once we have an established position with a positive trend.
Update 4/15: Citigroup reported earnings of $1.68 rose 13% and beat estimates for $1.62. Revenue rose 2.8% to $18.9 billion and matched estimates. Operating expenses rose 1.9% to $10.9 billion. The bank said the volatile market helped it generate $1.1 billion from equity trading, the most since 2010. Fixed income trading fell 7% to $3.4 billion and missing estimates for $3.7 billion. Investment banking revenue fell 10% to $1.1 billion because of "episodic" deal activity in Q1. The bank said it was on track in its multiyear goal of returning $60 billion to shareholders.
Update 5/13: Shares up sharply on news activist investor ValueAct established a $1.2 billion position and was holding discussions with the board.
Position 3/22/18 with a trade at $71.50
Long Jan 2020 $80 call @ $6.75. No initial stop loss.
CAT - Caterpillar Inc Company Profile
No specific news. The resumption of trade worries kept CAT from rebounding with the market.
Original Trade Description: February 11th.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986.
Company description from FinViz.com.
CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.
The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.
CAT said sales for Q4 rose 35% on strong global demand for construction equipment. They reported earnings of $2.16 compared to estimates for $1.79. Revenue of $12.9 billion beat estimates for $11.9 billion. The company guided for 2018 earnings of $8.25-$9.16 and analysts were expecting $8.19. The CEO said demand remains strong thanks to rising oil prices, booming construction and a rapidly rising global economy. CAT reported before the open on Thursday and shares were volatile over the last two days. However, despite the volatility shares are only down about $2 from the pre-earnings close.
Given CAT's big rally over the last six months, it was no surprise to see the stock sell off sharply. However, shares found support at $142 and the 100-day average at $144.
The LEAP premiums are very high. We are going to have to use a spread to enter this position.
Update 2/18/18: CAT reported their rolling 3-month sales rose 34% globally. There was a 23% rise in North America. Resource segment sales rose 49%, construction sales +30%, energy and transportation rose 16%, power generation +8%, industrial sales +13% and oil and gas sales +27%. This company is in the sweet spot of the global economic boom. The report the rolling 3-month average to smooth out the big-ticket sales spikes from month to month.
Update 4/27: Caterpillar was the poster child for blowout earnings and investing their cash in the business. The yellow metal maker reported earnings of $2.82 that rose 120% on a 31% rise in revenue to $12.86 billion and they raised guidance. Analysts were expecting $2.11 and $11.58 billion. Everything was great with the stock spiking 4.5% on the news. Unfortunately, on the conference call the CEO said "operating margins would be lower for the rest of 2018 because of targeted investments to continue expanding their offerings and services, consistent with our strategy for long term growth." Investors should have been cheering. Instead, shares immediately crashed from the $161 high to close at $144. I am sure the CEO meant well but his case of foot in mouth disease cost his shareholders $10 billion in lost market cap.
Long Jan $160 call @ $14.48, see portfolio graphic for stop loss.
Short Jan $185 call @ $5.51, see portfolio graphic for stop loss.
Net debit $8.97.
CDNS - Cadence Design Systems Company Profile
No specific news. New 4-month high on Wednesday.
Original Trade Description: April 15th.
Cadence Design Systems, Inc. provides electronic design automation software, emulation and prototyping hardware, system interconnect, and analysis worldwide. It offers functional verification, including emulation and prototyping hardware. Its functional verification offering consists of JasperGold, a formal verification platform; Incisive, a functional verification platform; and Palladium, a verification computing platform. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and multiple patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process. In addition, it offers custom IC design and verification products to create schematic and physical representations of circuits down to the transistor level for analog, mixed-signal, custom digital, memory, and RF designs; and system interconnect design products to develop printed circuit boards and IC packages. Further, the company provides design IP products consisting of pre-verified and customizable functional blocks to integrate into customer's system-on-chips; and VIP and memory models for use in system-level verification to model correct behavior of full systems interacting with their environments. Additionally, it offers services related to methodology, education, and hosted design solutions, as well as technical support and maintenance services. The company was founded in 1988 and is headquartered in San Jose, California. Company description from FinViz.com.
Cadence reported Q4 earnings of 39 cents that met estimates. Revenue of $501.7 million beat estimates for $497.9 million. Shares fell hard on the lack of an earnings beat right in the middle of the market crash.
However, the company guided for the current quarter for earnings of 36-38 cents and revenue of $400-$510 million. The better news was the full year guidance for earnings of $1.50-$1.60 per share compared to 2017 full year earnings of 73 cents. That is a 100+% improvement.
Cadence is right on the edge of a product breakout cycle and should recover the prior highs in short order. The stock was crushed in the market crash and is starting to rebound with resistance at $39.65 and the 200-day average. A break over that level should trigger additional buying.
They do not have LEAPS so I am going with the November $40 call, which is reasonably priced for that length of time.
Update 4/27: Cadence reported earnings of 40 cents that beat estimates for 37 cents. Revenue rose 8.5% to $517.3 million and beat estimates for $505 million. Services revenue rose 43.9% to $36.7 million. Shares spiked 10% on the news.
Long Nov $40 call @ $2.35, see portfolio graphic for stop loss.
CVX - Chevron Texaco Company Profile
No specific news. Shares volatile with oil prices. A Chevron executive was released in Venezuela. He had been held hostage in a disagreement between the government and Chevron.
Original Trade Description: March 25th.
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com.
Chevron is the dividend leader in the oil patch. The company pays $1.12 quarterly or $4.48 annually for a 3.97% yield. The company said the dividend is a priority and has weathered several analyst comments suggesting otherwise over the last year.
When they reported Q4 earnings, there was a miss caused by low crude prices, higher royalties, temporary production setbacks and higher expenses in the oil field. This was just temporary.
Chevron has massive amounts of new production coming online over the next couple of years. They have the two largest LNG plants in Australia with nearly 100 Tcf of offshore gas reserves to feed them. They have spent more than $85 billion over the last 10 years building these facilities and drilling out the fields. They are almost up to full production and there is no further capex needed. This is happening at the right time since Asian demand for LNG is soaring. Two years ago there was an LNG glut and several projects were mothballed. Now there is an approaching LNG shortage and prices are spiking again. Chevron will be a major earnings winner since all the costs are behinf them and all the production is ahead.
They also have the Jack/St Malo deepwater project in the Gulf. This well system is sitting on some of the strongest reserves in the Gulf. They are expecting to produce more than 500 million barrels. This project is expected to produce at 170,000 bpd with 42.5 million cf of gas per day. The production lifespan is expected to be 30 years. Drilling and initial production was started in 2014 and the various production wells were completed in 2016 and 2017. The wells are 19,500 feet deep under 7,000 feet of water. Now that all the major costs are behind them they have a significant amount of production profits ahead. Chevron has many other projects which will begin producing or increase production significantly over the next several years.
Crude prices are rebounding once again with WTI trading over $66 today. The earnings miss and the weak market have given us a buying opportunity on Chevron.
Update 4/15: Chevron has approved the second stage of its massive Gorgon LNG project in Australia. The initial project cost $54 billion. The second stage will drill 11 additional wells in the Gorgon and Jansz-lo fields and construct the underwater infrastructure to bring that gas to shore. With LNG prices rising, Chevron wants to insure long term supplies for the 15.6 million tonne per year LNG plant. Drilling will begin in 2019 and the expansion should take about 4 years to complete. Chevron has a 47.3% stake in the plant with Exxon and Shell each holding 25%.
Update 4/27: Chevron (CVX) reported earnings of $1.90 that blew away estimates for $1.48. However, revenue of $37.76 billion missed estimates for $40.97 billion. Production rose 7% to 2.9 million Boepd. Shares spiked to a three-month high on the news.
Long Jan 2019 $120 Call @ $6.15, see portfolio graphic for stop loss.
ECA - Encana Corp - Company Profile
No specific news. Shares down with 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.
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.
Update 7/21/17: Encana reported earnings of 18 cents that beat estimates for 4 cents. Revenue of $1.083 billion beat estimates for $773 million. Production averaged 246,500 Boepd, a 9,200 boepd rise. Condensate rose 14% to 124,900 bpd. The margin per barrel rose 25% to $12.10. Recent wells with the newest fracking technology have been coming with production 20% higher than expected. The company has more than 11,000 "premium" drilling locations and thousands of non-core locations.
Update 10/21/17: At the investor day last week, Encana said they were targeting 25% compound annual growth in non-GAAP cash flow over the next five years and $1.5 billion in non-GAAP free cash flow. They are going to do this without any rise in commodity prices. They stressed their 23,000 potential drilling sites with 11,000 offering premiums returns of more than 35%. That included 3,450 in the Permian, 220 in the Eagle Ford, 500 in the Duvernay and 6,900 in the Montney. Most people have not heard of the Montney but that play has over 1,000 feet of pay with six zones of stacked production. Link to presentation slides
Update 11/12/17: Encana reported earnings of 2 cents that missed estimates for 5 cents. Revenue of $861 million beat estimates for $826.8 million. Production of 284,000 Boepd declined from 338,000 in the year ago quarter. The majority of the decline was a 29% drop in natural gas production. The decline came from hurricane impacts and third party curtailments of gas in western Canada. The company said it was firmly on track to hit its full year targets. Shares are holding at 8-month highs after earnings.
Update 1/15/18: The company reported that production rose 31% in Q4 and exceeded their 20% growth targets. They did this within their $1.8 billion capex budget. For 2018 the budget remains roughly the same with 70% targeted for the Permian and Montney. Encana produced 80,000 Boepd from the Permian in Q4. They are targeting 25-35% companywide production growth in 2018. They are expecting significant liquids growth from the Montney as they complete the two remaining processing hubs for natural gas. The company will issue 2018 guidance when they report earnings on Feb 15th.
Update 2/18/18: SocGen upgraded from hold to buy with a $14.80 price target. They called the recent pullback a buying opportunity. Encana guided for a 2018 capex budget of $1.85 billion and yearly production of 370 million Boe, up from 313,200 million Boe in 2017. That is an 18% rise over 2017. The company plans to be cash flow neutral in 2018 after overspending cash flow by 65% in 2017. The company also announced a $400 million stock buyback program which equates to 3.6% of outstanding shares.
Encana reported Q4 earnings of 12 cents that beat estimates for 10 cents. Production increased from 321,500 Boepd to 335,200 Boepd.
Update 3/4/18: Encana put in a request with the Toronto Stock Exchange to repurchase 35 million shares worth up to $400 million over the next 12 months. That equates to 3.6% of the outstanding shares.
Update 3/18/18: Shares are trading sideways with oil prices still volatile. Shares closed at a 5-week high but only by a few cents. This stock is very undervalued and I am recommending we add the 2020 LEAPS on Monday. This stock has significant reserves and production is booming. They could easily be acquired at any time. They have 861 million Boe of proved reserves and 1.909 billion Boe of proved/probable reserves (2P). They have $5.2 billion in cash and credit lines. They produced 313,200 Boepd in 2017 and guided for 370,000-380,000 Boepd for 2018. Their market cap is only $11 billion. They are buying back 3.6% of the outstanding shares in 2018.
Update 4/27/18: Encana said it could increase cash flow through 2022 at a 25% compound rate while generating $1.5 billion in free cash flow with oil as low as $50.
Update 5/6/18: Encana reported earnings of 16 cents that rose 50% and beat estimates for 13 cents. The company bought back 10 million shares for $111 million in Q1. This is part of a $400 million buyback program. Daily production rose from 317,900 Boepd to 324,400. Production in the Permian rose 49% to 83,000 Boepd.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
Long (2) Jan 2019 $15 calls @ .50.
Adjusted 2019 position (3 contracts) @ 80 cents each.
Long (3) Jan 2019 $15 calls @ $1.10.
Adjusted 2019 position (6 contracts) @ .95 each.
Long Jan 2020 $12 LEAP Call @ $2.35, see portfolio graphic for stop loss.
Previously Closed 1/16: Long Jan 2018 $12 call @ $1.50, exit $2.05, +.55 gain.
FLIR - FLIR Systems - Company Description
No specific news. Resistance has formed at $55.65.
Original Trade Description: February 11th
FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.
The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.
For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.
The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.
They do not have LEAPS but we can buy the July calls very reasonably.
Update 2/11/18: Shares declined with the market. Earnings on Feb 14th. We were stopped out of our existing position on the big market drop on Tuesday. Support has held but the 50-day average at $48.60 looks like resistance. I am going to recommend we reenter the July $50 call ahead of earnings on Wednesday. The passage of the defense-funding bill should be beneficial for all the stocks in the sector.
Update 2/18/18: FLIR reported earnings of 58 cents that rose 11.5% and beat estimates for 56 cents. Revenue of $494.8 million missed estimates for $501.1 million. They guided for full year earnings of $2.05-$2.10 with revenue in the range of $1.73-$1.76 billion. Order backlogs rose 10% to $652 million. They declared a quarterly dividend of 16 cents payable on March 9th to holders on Feb 23rd.
Update 3/4/18: Caterpillar just announced a new $1,000 smart phone called the S61 that has a laser measurement tool, senses the air for toxic gases and has a thermal imaging camera made by FLIR. The camera lets you see images of people and other things in total darkness based on their heat signature. The phone is guaranteed against breakage in a 6-foot drop. It is also a complete Android smartphone. Simply amazing.
Update 3/26/18: The company introduced a new V2X sensor for self driving cars that detects vehicles, pedestrians, bicycles, animals, etc using FLIR infrared technology. The sensor can then transmit this info to other cars and traffic systems in the same area warning them about the potential hazard.
Update 4/27/18: Flir reported earnings of 48 cents that beat estimates for 43 cents. Revenue of $439.6 million easily beat estimates for $397.5 million. They raised guidance from $2.11 to $2.16 with revenue of $1.76-$1.79 billion. Shares broke out to a new high.
Update 5/27/18: Flir announced a flat panel radar with or without a drone to monitor enemy movement at the soldier level on the ground. They also announced a lightweight thermal monocular device. The radar can detect people walking or crawling as well as small drones at ranges up to 2 miles. The radar can classify and track up to 500 threats and their exact locations simultaneously.
Update 6/3/18: Flir announced a contract with the Army to deliver the next generation of the Black Hornet personal drone. The hand sized helicopter can provide HD video and still pictures with a 25 min loiter time. It is almost silent and almost invisible at height. More than 30 nations are already using earlier models of the Hornet. This is truly science fiction coming to life. Black Hornet
Long July $50 call @ $2.80, see portfolio graphic for stop loss.
GE - General Electric - Company Description
GE announced a quarterly dividend of 12 cents and surprised many analysts who expected the dividend to be cut. The focus will move out to the next quarterly announcement.
Original Trade Description: January 21st
General Electric Company operates as an infrastructure and technology company worldwide. Its Power segment offers gas and steam power systems; maintenance, service, and upgrade solutions; distributed power gas engines; water treatment, wastewater treatment, and process system solutions; and nuclear reactors, fuels, and support services. The company's Renewable Energy segment provides wind turbine platforms, and hardware and software; onshore and offshore wind turbines; and solutions, products, and services to hydropower industry. Its Oil & Gas segment offers surface and subsea drilling and production systems, and equipment for floating production platforms; and compressors, turbines, turboexpanders, reactors, industrial power generation, and auxiliary equipment. The company's Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, and electric power and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment offers diagnostic imaging and clinical systems; products for drug discovery, biopharmaceutical manufacturing, and cellular technologies; and medical technologies, software, analytics, cloud solutions, and implementation services. The company's Transportation segment provides freight and passenger locomotives, and rail and support advisory services; and parts, integrated software solutions and data analytics, software-enabled solutions, mining equipment and services, and marine diesel and stationary power diesel engines and motors, as well as overhaul, repair and upgrade, and wreck repair services. Its Energy Connections & Lighting segment offers industrial, grid, power conversion, automation and control, lighting, and current solutions. The company's Capital segment provides industrial and energy financial services; and commercial aircraft leasing, financing, and consulting services. General Electric Company was founded in 1892 and is based in Boston, Massachusetts. Company description from FinViz.com.
GE has been having a hard time. The financial crisis killed GE Capital and forced them out of that business to drop their SIFI designation and government oversight. They bought Baker Hughes at almost the top of the oil market. Competition is flourishing in every sector. The prior CEO, Jeffrey Immelt left the company under a cloud. They are selling off unprofitable or low profit divisions but the stock just keeps falling. Shares are currently at a 7 year low.
However, while things have been rocky, the new CEO is determined to right the ship. Nobody reading this play description thinks GE is going under. They are a huge manufacturing company with assets in transportation, railroads, aerospace, power, energy, etc.
This is what it driving this recommendation. There are strong rumors and forecasts that GE could be split up into 3-4 companies in a massive restructuring program. Other divisions could be sold to reduce the overall management complexity. There is tremendous value in GE and the new CEO has pledged to unlock it.
With the stock at a 7-year low at $16, this is the target low for a large number of analysts. It could go lower but GE is now a strong value proposition. It is not likely to happen this quarter or even this year, but it will recover. The options are cheap and with earnings on Wednesday, there could be some positive surprises.
With GE in crash mode, I am also recommending a March $16 put. If the stock drops another couple of bucks post earnings, we could sell the put and further reduce our cost in the LEAP.
The LEAP options are cheap. Buy a couple contracts and put them in your "do not disturb" folder. Other traders think this is a good idea as well. More than 4,500 contracts were bought on Friday with another 4,700 contracts of the $20 LEAPs.
Update 1/26/18: The company disclosed a SEC investigation into a $6.2 billion charge for insurance reserves. The company also reserved for future charges of as much as $15 billion. The company posted a $10 billion loss including charges and said it was looking to sell $20 billion in assets. The company reaffirmed their 2018 guidance for earnings of $1.00-$1.07. That was significantly lower than the $2 Immelt had promised before he left in August. That $1 number contains a lot of charges and is not an adjusted number. We knew there would be volatility when we entered the position but we are looking well into the future. GE posted $122.1 billion in revenue in 2017. They are not going away and the new CEO is committed to making them more profitable and easier to manage.
Update 2/11/18: GE shares collapsed to $14.25 on Friday. We have a long March $16 put as insurance. They announced a 12 cent dividend payable April 25th to holders on Feb 26th. We could close the put for a gain on the assumption the market decline is nearly over but there is no guarantee. I did put a stop loss on the put to prevent it from turning into a loss.
Update 2/18/18: GE hired Citigroup to prepare a sales plan for their gas engine/generator business. The division could be worth $2 billion. The new CEO said in January he was looking to divest up to $20 billion in assets to make GE a leaner and more profitable business. The GE power division saw profits fall -45% in 2017 as sales of power plants and services fell sharply.
GE announced it was building the largest wind turbine ever built. The turbine, called Halidade-X, will be 260 meters (853 ft) tall and have individual blades more than 350 feet long. The device can generate 12 megawatts of power daily and power up to 5,000 homes. That is 45% more energy than any current turbine. GE will spend up to $400 million developing the turbine with the first unit demonstrated in 2019 and shipping the first production units in 2021. Windfarm engineers have found that it is simpler to build and connect several large turbines than dozens of smaller ones. They require fewer foundations and less complicated electrical connections to the grid.
Update 3/26/18: GE was rebounding until a JP Morgan analyst reiterated a sell rating and lowered his price target to $11 the prior week. The analyst said GE's earnings guidance was suspect and likely to be lowered because it did not contain any restructuring charges and there will be many. We have no worries. We have a long $14 put and this is a 2020 LEAP. There will be a lot of good news before this LEAP expires. I would buy it again today at the current $.95 price. I put an $11 profit target on the put just in case but we will need to exit that position the following week anyway.
Update 4/22/18: GE reported earnings of 16 cents that beat estimates for 12 cents. Revenue rose 7% to $28.66 billion, beating the estimates for $27.56 billion. Obviously, analysts have been talking about how bad the quarter was going to be ever since it started. This was a case of everyone being cautious.
Power revenue fell -9% while aviation revenue rose 7%. Oil and gas revenue rose 74% and healthcare revenue rose 9%. The CEO said Q1 was just an example of the future growth as their restructuring plan is enacted. While the stock rose slightly on the beat, analysts pondered whether this was as good as it gets. One analyst expected the shares to be firm until the shareholder meeting then retest the lows. The meeting is on April 25th. Investors may remain positive until the meeting then become frustrated with weak guidance.
Update 5/13: In 2015 GE acquired Alstom's power business for $10.6 billion. Three joint ventures were created as part of that deal in the renewables, power grid and nuclear energy sector. Alstom has exercised its right to exit the ventures and GE will have to pay $3.1 billion to buy them out. When the deal was first entered GE expected the acquisition ot add 5-8 cents to earnings in 2016 and 15-20 cents by 2018. Instead the division took a loss in 2017 and forced GE earnings lower. These losses are not expected to recover soon, which means by taking full control of the joint ventures, GE will incur additional losses.
Update 5/27: GE shares lost $6 billion in market cap on Wednesday after the CEO spoke at a conference in Florida saying there was not going to be a quick fix and that earnings would be at the low end of guidance. He complained about a soft market for GE energy products.
Update 6/3: GE said the EU Commission approved ABB's purchase of GE's industrial solutions unit for $2.6 billion. GE also said it had picked KKR and Kohler as potential bidders for the sale of their industrial gas-engine business for more than $3.5 billion. Multiple bidders were not chosen to move to the final round of negotiations.
Shares declined on analyst warnings of a possible capital raise for GE Capital.
Long Jan 2020 $18 LEAP Call @ $2.42, see portfolio graphic for stop loss.
Long Jun $13 Put @ .71, see portfolio graphic for stop loss.
4/02: Closed Long Apr $14 put, entry @ 50 cents, exit $ .92, +.42 gain.
2/20: Closed Long Mar $16 put, entry @ 75 cents, exit $1.33, +.58 gain.
GOOS - Canada Goose Company Profile
No specific news. Earnings on Friday.
Original Trade Description: March 17th.
Canada Goose Holdings Inc is a designer, manufacturer, distributor and retailer of premium outerwear for men, women and children. Its products are sold through select outdoor, luxury and online retailers and distributors. Founded in a small warehouse in Toronto, Canada in 1957, Canada Goose has grown into one of the worldâ€™s leading makers of performance luxury apparel. Every collection is informed by the rugged demands of the Arctic and inspired by relentless innovation and uncompromised craftsmanship. From Antarctic research facilities and the Canadian High Arctic, to the streets of New York, London, Milan, Paris, and Tokyo, people are proud to wear Canada Goose products. Employing more than 2,000 people worldwide, Canada Goose is a recognized leader for its Made in Canada commitment, and is a long-time partner of Polar Bears International. Company description from Canada Goose.
Canada Goose came public last March and the recent Q4 earnings was the first holiday quarter they have reported. The company reported earnings fo 46 cents that beat estimates for 36 cents. Revenue was $209.3 million. Their direct to consumer business revenue rose 83% and gross margin rose 605 basis points. Earnings were 20% over estimates. Shares were crushed for a 25% decline to $28. After trading sideways for a month they rallied to close at a 5-week high on Friday.
The key for the Goose is that they have 70% brand awareness in Canada but only 20% in the U.S.A. William Baird reiterated a buy rating saying GOOS can grow their earnings by 250% over the next couple years. Baird said the outlook was "very bright" because their brand blends luxury and function. The analyst said revenue growth should be in the high teens and 20% plus earnings growth.
Now that the post earnings depression is over this would be a good spot for an entry before the stock makes new highs again.
Update 6/3: Shares spiked to a new high after the company said it was opening two stores and a regional headquarters in China. There will be a flagship store in Beijing and a store in Hong Kong. They will also host an e-commerce business on T-Mall. This is a major opportunity because it gets cold in China and they have already seen strong demand from Chinese online shoppers.
Long $40 call @ $4.30, see portfolio graphic for stop loss.
HACK - Nasdaq 100 ETF ETF Profile
New high on Wednesday.
Original Trade Description: April 22nd.
As hackers have demonstrated their ability to shut down energy infrastructure, weapons defense systems, and financial markets, the cyber security industry continues to grow, offering governments and corporations protection against massive financial loss. The worldâ€™s first cyber security ETF to offer investors exposure to this evolving industry. Comprised of companies that offer hardware, software, consulting and services to defend against cybercrime, the ETFMG Prime Cyber Security ETF offers investors a transparent and efficient vehicle to invest in this burgeoning industry. The Fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Prime Cyber Defense Index. ETF description from ETFMG Funds.
I looked at playing several of the cyber security stocks but most had sky high options and earnings within the next couple weeks. I have looked at HACK before but the options were also high. That is no longer the case. We can buy these options cheap but they do not have leaps. I am suggesting we use the longest dated, which is September then roll them out to a longer date when the time is up.
The HACK ETF contains CVLT, SAIC, PANW, FTNT, CSCO, PFPT, IMPV, CYBR, SYMC and Trend Micro as its top ten holdings.
It would be crazy to think that cyber attacks are not going to increase in the months ahead. This is the trend for the future for state actors, rogue hacking groups, irate employees, to try and profit from the information they steal or damage companies by destroying their information.
HACK is a slow mover but the cyber attacks are only going to increase. With the mid-term elections ahead there will be a huge focus on election hacking and that should help the stocks.
Long Sept $38 call @ $1.23, see portfolio graphic for stop loss.
HPQ - HP Inc - Company Description
Excellent week for HPQ with a surge to a two-month high. Company said current restructuring plan could cut 5,000 jobs.
Original Trade Description: January 28th
HP Inc. provides products, technologies, software, solutions, and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health, and education sectors worldwide. It operates through Personal Systems and Printing segments. The Personal Systems segment offers commercial personal computers (PCs), consumer PCs, workstations, thin clients, commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support, and services for the commercial and consumer markets. The Printing segment provides consumer and commercial printer hardware, supplies, media, solutions, and services, as well as scanning devices; and laserJet and enterprise, inkjet and printing, graphics, and 3D printing solutions. The company was formerly known as Hewlett-Packard Company and changed its name to HP Inc. in October 2015. HP Inc. was founded in 1939 and is headquartered in Palo Alto, California. Company description from FinViz.com.
Hewlett Packard, now HP Inc, saw its shares crash back to $9 in 2016 as Lenovo cornered the cheap laptop market and consumers were moving away from desktop PCs. That was a lifetime ago in the tech world. Since that cycle low, HP has reinvigorated itself and changed its business model. The company no longer competes in the cheap computer market. HP now sells top end PCs to compete with the Apple Macs and fully features Dell workstations.
The reinventing of HP has worked. According to IDC, HP's market share rose from 21,8% to 23.5% in the last quarter. Only three companies, HP, Dell and Apple, saw shipments rise in Q4. HP shipments rose 8.3% to 16.6 million, Apple shipped 7.3% more to 5.8 million and Dell barely made the list with a 0.7% rise to 11.1 million. Total PC shipments rose only 0.7% in the quarter, showing how dominant HP was in stealing market share. That was the first quarter where overall PC sales have risen in the last six years. The PC is coming back to life.
Analysts credit high speed gaming computers, crypto currency mining computers and stylish new models for the surge in market share. For instance the graphic below is the HP Envy All-in-One PC. This comes with Windows 10, 16GB, Core I7 Processor, 2TB hard disk and 256GB SSD, Nvidia GeForce GTX 950 video, QHD 4K video, dual band Wi-Fi, camera, microphone, HDMI input and output. The optional quad speakers makes this not only a PC but an entertainment center as well. This is not your father's PC. Base price $1,899.
HP's PC revenue rose 13% in 2017 to $9.1 billion with total shipments rising 6%. That was after a 12% rise in revenue in the prior quarter. Notebook revenues rose 16% on a 8% increase in shipments.
The printer business is also coming back from the dead. Printers generated 65% of the revenue and 30% of earnings. HP is buying Samsung's printer unit, which will expand the product line in multiple directions including mobile printers and 3D printers. The company is poised to announce a new 3D printer that prints metal components in 2018.
The company is expected to grow earnings 10% in 2018 with a 4% increase in revenue. Compared to other tech companies their PE of 13 is positively ridiculous when most companies are in the 203. 30s or even 100s.
HP shares are about to break out to an 8 year high over $25. This should trigger additional buying because everyone wants to own a winner.
Update 2/25: HP reported earnings of 48 cents that beat estimates for 42 cents. Revenue of $14.5 billion beat estimates for $13.5 billion. They guided for the full year for earnings of $1.90-$2.00, up from prior guidance of $1.75-$1.85. Personal systems revenue was up 15%, commercial revenue up 16% and consumer net revenue rose 13%. Total units rose 7%, notebooks +8% and desktops 6%. Printing revenue rose 14%, total hardware units rose 14% with commercial hardware units rising 73%. Shares rose to $23.22 in afterhours but faded $1 in trading on Friday.
Update 4/15: Market data provider IDC reported that HP PC sales rose 4.3% in Q1 compared to Dell +6.4% and Apple -4.8%. HPQ maintained its market share at 22.6% with Lenovo in second place at 20.4%, then Dell at 16.9%. Acer had 6.8% and Apple came in last at 6.6%.
Update 6/3: HPQ reported earnings of 48 cents that matched estimates. Revenue of $14.0 billion beat estimates for $13.57 billion. They guided for Q2 earnings of 49-52 cents and analysts were expecting 49 cents. Shares initially dipped on the news but rebounded to close at a two-week high.
Long Jan 2019 $25 call @ $2.13, see portfolio graphic for stop loss.
Long Jan 2019 $25 call @ 85, average cost now $1.49.
MCD - McDonalds Company Profile
McDonalds announced a new restructuring and streamlining of corporate infrastructure. They also said they were installing kiosks for ordering at more than 1,000 stores in an effort to reduce wait time and employee headcount. You order, get a number and a bluetooth enabled tent card, find a seat and your food is brought to you. McDonalds said the kiosks were seeing a higher average ticket because customers were buying more food given all the available options at their fingertips. Shares spiked nearly $10 on the news but faded to retain $8 over two days.
Original Trade Description: February 25th.
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 5.5%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
McDonalds said it was going to sell some of the McCafe beverages in supermarkets in early 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
A consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company restarted its dollar menu in January and there are $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3.
In their Q4 earnings sales for all stores rose 8%, up from 7% in Q3. Same store sales rose from 2.7% to 5.5%. That was down slightly from Q3 at 6.0% but still very respectable. Starbucks only posted 2% same store sales and Wendy's 3.4%. Earnings per share rose 19%. Capex spending in 2018 will be $2.4 billion with the majority going to update 4,000 restaurants and update marketing signage. They plan to open 1,000 new stores in 2018.
We were stopped out of our prior position in the market correction. The decline in the stock has ended and shares are rebounding.
Update 3/4/18: McDonalds was hammered in the already weak market on worries the $1, $2, $3 value menu was off to a slow start. Shares lost $7.43 and the worst one-day dollar drop since 1972 and the worst percentage drop (-4.77%) since they became a publicly traded company in 1965. The decline knocked 52 points off the Dow.
RBC Capital Markets cut its price target from $190 to $170 and lowered their comp sales forecast to 1% from 3.5%. Factset is still expecting 3.8% growth. The RBC analyst said "deteriorating industry conditions" and "disappointing" sales from the new value menu drove the downward revision to sales forecasts. They also believe the new menu was detracting from higher margin products and it lacked the "hero" item necessary to resonate with value-conscious consumers.
Update 4/15/18: McDonalds said it was planning on opening 200 new stores in Finland, Sweden, Norway and Denmark over the next ten years. They expect this expansion to increase their customer base by one-third in those countries. There are currently 430 stores that serve 150 million customers a year.
Update 5/6/18 McDonalds reported earnings of $1.79 compared to estimates for $1.67. Revenue of $5.14 billion beat estimates for $4.97 billion. Same store sales rose 5.5% overall and beat estimates for 3.6%. U.S. same store sales rose 2.9% and matched estimates. It was a good report and put to rest all the worries about increasing competition.
Update 5/27/18: McDonalds declared a quarterly dividend of $1.01 payable June 18th to holders on June 4th. A proposal to consider banning plastic straws was voted down. The company said it was exploring alternatives.
Long Jan $170 call @ $8.52, see portfolio graphic for stop loss.
Optional: Short Jan $190 call @ $2.79, see portfolio graphic for stop loss.
Net debit $5.73. Maximum gain $14.27.
MRK - Merck & Co - Company Description
News presented at ASCO on Merck's cancer drugs provided a significant boost for the stock to a 7-month high.
Original Trade Description: November 12th
Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey.
Company description from FinViz.com
Merck reported earnings of $1.11 compares to the $1.03 that analysts expected. Revenue of $10.33 billion beat estimates. The company guided for full year earnings of $1,.78-$1.84 up from $1.60-$1.72. Revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion.
Shares were crushed after the company said it had pulled its European application for the cancer drug Keytruda. Sales of the drug nearly tripled to $1.05 billion where it has already been approved and are expected to continue to grow to $5 billion over the next two years.
The reason they pulled the European application was to modify a phase III trial to focus on "overall survival" or OS rather than short-term "progression free survival" or PFS. This pushed the trial end date out to early 2019. Overall survival is the holy grail of any cancer drug. It is one thing for cancer to grow slower and let the patient live a longer life but gaining another 6-12 months of life is a fleeting goal. Living out your normal life span is the target all drugs shoot for. By modifying the trial to focus on longer term benefits, the eventual drug approval will be worth more. If the short term drug is worth $10,000 per treatment, a drug that give you upir life back is worth 10 times or even a 100 times that amount.
Merck will refile the application when they have the new data but this is one drug with $3 billion a year in sales compared to their current $40 billion in overall volume. If they get the OS data they want, Keytruda could grow to $10 billion a year by 2022.
I believe this drop is a buying opportunity because the LEAP premiums are miniscule for a company with a $150 billion market cap and $40 billion in annual sales.
I am going to recommend two LEAPS because they are so cheap. Choose either one or buy both.
Update 12/3/17: Merck announced another $10 billion share buyback program and they increased their dividend to 48 cents.
Update 12/17/17: Merck said a late stage trial for its blockbuster drug Keytruda failed to meet the main goal of extending lives of patients with gastric cancer. The drug is effective in other forms of cancer. Shares declined slightly on the news.
Update 12/30/17: Merck said the drug Steglatro and the combination drug Steglujan, both for diabetes, had been approved by the FDA. These drugs are in partnership with Pfizer. Both will be available in January.
Update 2/5/18: Merck reported earnings of 98 cents that beat earnings for 94 cents. Revenue of $10.43 billion missed estimates for $10.49 billion. The company recorded a loss of $125 million as the result of the June cyber attack. Sales of Januvia, Keytruda and Gardasil beat expectations. The company guided for full year revenue of $41.2-$42.7 billion compared to estimates for $41 billion. They guided for earnings of $4.08-$4.34 and analysts were expecting $4.10. They announced plans to invest $8 billion in US capital projects over the next five years with $12 billion planned in total. They also announced bonuses for employees as a result of tax reform. Shares had been declining since the "lower drug prices" pledge by President Trump on Tuesday.
Update 2/18/18: On Saturday, Gilead announced it had won a reversal of a prior verdict that required a $2.54 billion payment to Merck because of a patent violation on a Hep-C drug. The court reversed an earlier court ruling. Merck said they would appeal because the ruling did not conform with the facts on the case. This could cause MRK shares to decline at the open on Tuesday.
Update 2/25/18: The company said it was buying the virus-based cancer drug firm Viralytics for $394 million. The company uses viruses to infect and kill cancer cells. In theory, it causes the cancer cells to rupture and die and it also increases the body's immune response. Viralytics is expected to have some breakthrough news in the field in Q2 so that will help our Merck position.
Update 3/11/18: Merck and Eisai Co Ltd from Japan agreed to a partnership to develop and sell Eisai's cancer drug Lenvima, which is already approved in dozens of countries for multiple uses. The deal will develop Lenvima to treat several types of cancer alone and in combination with Merck's Keytruda. This will really help to broaden Merck's product offerings.
Update 5/6/18: Merck reported earnings of $1.05 that beat estimates of $1.00. Revenue of $10.04 billion missed estimates for $10.09 billion. Revenue was impacted by lower than expected sales of Hep-C drugs. Since every major drug maker now has a Hep-C drug, the competition is fierce and prices are slipping. The company raised guidance for full year earnings to $4.16-$4.28.
Long Jan 2019 $60 LEAP Call @ $2.38, see portfolio graphic for stop loss.
Long Jan 2020 $60 LEAP Call @ $3.90, see portfolio graphic for stop loss.
MSFT - Microsoft Company Profile
Microsoft said it had acquired 5 Game Studios to increase content for the Xbox One console. No dollar amount was given. Microsoft is on track to become the Netflix of video games.
Original Trade Description: March 11th
Microsoft Corporation develops, licenses, and supports software products, services, and devices worldwide. The company's Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, Skype for Business, and related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company's More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation has a strategic partnership with CNH Industrial N.V. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.
Microsoft has broken out after years of lethargy as a designer of Windows operating systems. Every couple of years they would release a new version and revenue would pop for the next 12 months as people upgraded. As the systems became more stable, the number of people upgrading began to decline. With the help of the new CEO that has changed.
Now they are moving to a subscription software as a service model on the Office products and versions of their new products. They moved into the cloud with Azure and a handful of cloud offerings. They are expanding into service relationship with enterprise customers. Their Windows Surface tablets have caught fire. The Xbox family of products continues to expand.
They are no longer just an operating system and database company. The stock closed at a new high on Friday and seems destined to move a lot higher. Twenty years ago you could always buy Microsoft and never go wrong because they always went up. After being dormant from 2001-2012 the stock has begun a multiyear rally but a lot of people are ignoring their newfound prosperity because they are remembering the 11 years of lethargy.
Update 3/30: The government asked federal prosecutors to dismiss a Supreme Court case against Microsoft demanding access to user data for accounts related to users outside the USA. On March 22nd President Trump signed a new law authorizing government access to overseas data but giving companies an avenue to object. Under the new law there was no reason to continue the old case.
There are rumors Microsoft will begin charging more for Windows operating systems on higher end computers. An inexpensive desktop or notebook with minimal capacity would be charged less than a fully featured PC with high end components like processors, video cards and high speed disks. This would give Microsoft a revenue bump but would likely make a lot of users mad. However, it is not like they can go elsewhere and get a different operating system since 90% of PCs and notebooks run Windows.
Fortunately, because they have 8 billion shares outstanding their options are relatively cheap.
Update 4/27: Microsoft reported earnings of 95 cents that beat estimates for 85 cents. Revenue of $26.82 billion beat estimates for $25.71 billion. Their cloud revenue almost caught up with Amazon but they are counting Office 365 subscriptions in with their cloud so it is not an apples to apples comparison. Shares rose $1.56 on the news but were $2 off the intraday highs. Microsoft now has a $738 billion market cap.
Update 5/4: 33 years ago on Wednesday, Microsoft unveiled their new product, Excel spreadsheet software. The software only ran on Apple Macs. The Dow closed at 1,242 and the S&P at 179. They released the Windows version two years later. At the time, VisiCalc was the market leader in spreadsheet software followed by Lotus 1-2-3.
Update 6/3: Microsoft agreed to buy GitHub for $7.5 billion, a website for programmers. Coders can collaborate and store code on the website with a monthly subscription. They can get help from other programmers or join with them to cooperate on projects.
Long Jan $100 call @ $7.03, see portfolio graphic for stop loss.
Optional: Short Jan $80 put @ $2.29, see portfolio graphic for stop loss.
Net debit $4.74.
MTCH - Match Group Company Profile
Match continues to talk down the Facebook threat and promises strong future growth. Down with the Nasdaq on Thursday.
Original Trade Description: May 13th.
Match Group, Inc. provides dating products. It operates a portfolio of brands, including Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs. Match Group, Inc. offers its dating products through its Websites and applications in 42 languages approximately in 190 countries. The company was incorporated in 2009 and is headquartered in Dallas, Texas. Match Group, Inc. is a subsidiary of IAC/InterActiveCorp. Company description from FinViz.com.
Match reported earnings on May 8th of 33 cents that easily beat estimates for 19 cents. Revenue rose 36% to $407.4 million and beat estimates of $386 million. Tinder, their leading revenue generator, added 368,000 paying members beating estimates for 355,000. The CEO said the new Facebook dating service should have no impact on Match because Tinder was the driving force behind their earnings and Facebook has no equivalent application. Match is entrenched and has a loyal following.
The CEO reiterated those comments on May 9th. Bank of America reiterated a buy rating with a $46 price target.
Match crashed $13 when Facebook made their announcement on May 1st. I believe the worst is over since the stock has not decline any further in a week. The close Friday was a post crash high.
Earnings August 7th.
Long Jan $45 Call @ $5.10, see portfolio graphic for stop loss.
Optional: Short Jan $30 put @ $2.20, see portfolio graphic for stop loss.
Net debit $2.90.
MU - Micron Technologies Company Profile
Micron said the number of servers sold today for AI applications was very low. Those servers tend to have massive amounts of memory, made by Micron. However, by 2025 they could make up 50% of all servers shipped. Micron believes its annual addressable market for DRAM will rise from $29 billion to $62 billion by 2021 and that is just on the beginning of the soaring AI demand.
Original Trade Description: June 3rd.
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; lower power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 DRAM and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, and automotive and industrial applications, as well as for computer memory upgrades; and hybrid memory cube semiconductor memory devices. The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; cloud SSDs; and multi-chip package and managed NAND products. 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 non-volatile 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. Company description from FinViz.com.
Stifel recently reiterated a buy rating and raised the price target to $101. Needham just reiterated a strong buy and $106 price target. Morgan Stanley went the other direction and downgraded them from buy to hold and a price target of $65. The next day Mizuho defended Micron saying there was still reason for optimism in regards to both DRAM and NAND.
The long awaited decline in DRAM/NAND prices has failed to appear. Micron did say they thought prices would "normalize" the second half of this year. They still reported blowout earnings because prices have been high for the last year due to shortages.
Micron and Samsung, the two biggest memory producers are being smart and not flooding the market with supply as they would have done in prior years. This keeps the prices stable and they are going to normalize at a higher level.
Analysts expect Micron's revenue to grow 44% in 2018 to $29.3 billion with earnings growth of 121%. Yes, 121%. That is up from estimates in February for 40% sales growth and 102% earnings growth. At the end of 2017 analysts were expecting 26% and 60% earnings growth. Despite this monster revenue/earnings growth the stock only trades at a PE of 6. That is less than Ford for a high growth tech stock.
The company raised guidance and announced a $10 billion buyback for 16% of outstanding shares. They also announced a technology breakthrough on NAND memory with a 33% increase in speed.
The sharp drop on the Morgan Stanley downgrade gave us an entry point. Options are still expensive. I am going to recommend the ATM strike with a short put. If you do not want to sell the put, I would go with the $65 strike.
Long Jan $62.50 call @ $7.50, see portfolio graphic for stop loss.
Optional: Short Jan $45 put @ $2.62, see portfolio graphic for stop loss.
Net debit $4.88.
PGR - Progressive Corp Company Profile
No specific news.
Original Trade Description: February 4th
The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com
The company reported Q4 earnings of 99 cents that rose 55% compared to estimates at 77 cents. Premiums written rose 22% to $6.8 billion. Expenses rose 19.6% to nearly $2 billion. That includes a 19.8% loss and adjustments expense, 16.5% increase in policy acquisition costs and 22% higher underwriting costs. The stock cratered after earnings from the new high at $58.25 to a 2-month low at $54. We were stopped out for a minor gain at $54.65.
Shares have held at that $54 level for the last week despite the market meltdown. As the high flying tech stocks and Dow industrials crash and burn we may be better off going back into a stock that posts steady gains without a lot of volatility. According to Zacks earnings estimates are rising.
Premiums are cheap relative to the high beta stocks. I am going with the ATM strike because the premium is only $1 more than the next higher strike. On a slow mover we do not want to start well out of the money.
Update 2/28/18: PGR shares exploded higher after the company reported premiums for January. Net premiums written rose 22% to 2.729 billion. Net premiums earned rose 18% to $2.689.6 billion. Net income attributable to Progressive rose 146% to $448.3 million. Policies in force rose 13% to 5,730 million. Direct auto policies rose 14% to 6.145 million. Property policies rose 27% to 1.579 million. Shares spiked $4 on the news.
Update 3/18/18: Progressive reported that net premiums written rose 23% in February to $2.7 billion up from $2.2 billion. Net premiums earned rose 19% from 1.854 billion to 2.204 billion. Agency auto policies rose 13% to 5.822 million. Direct auto policies rose 14% to 6.279 million. Total personal lines rose 10% to 16.376 million policies. Shares rose to close at a new high on Friday.
Update 4/22/18: Progressive reported earnings of $1.22 that beat estimates for $1.18. Revenue of $7.48 billion beat estimates for $7.34 billion.
Update 5/20/18: Progressive released their April results. Net premiums written rose 19% to $3.226 billion. Net premiums earned rose 21% to $2.882 billion. Net income for Progressive rose 33% to $260.6 million. Auto policies in force rose 15% to 12.521 million. Special policies rose 1% to 4.318 million. Property business rose 32% to 1.689 million. Despite the good news shares were down for the week.
Long Jan $55.00 call @ $4.50, see portfolio graphic for stop loss.
PYPL - PayPal - Company Description
No specific news.
Original Trade Description: February 4th
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com
PayPal reported Q4 earnings that rose 59% to 55 cents that beat estimates for 52 cents. Net revenue rose from $2.98 billion to $3.74 billion. Total payment volumes rose 32% to $131.45 billion. They guided for Q1 for earnings of 52-54 cents, compared to estimates for 54 cents. These were dynamite earnings but shares faltered after the weak guidance.
The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.
Paypal said payment platform Venmo was on track with expectations. The platform processed $9 billion in payment volume, a 93% YoY increase. Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.
In Q3 Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.
The company recently sold its credit card assets to Synchrony Financial (SYF) for $5.8 billion. The bank will become the exclusive issuer of Paypal branded credit cards. The company also raised its guidance for Q4 to 52-59 cents on revenue of $3.64-$3.7 billion. Prior guidance was 37-39 cents on $3.57-$3.63 billion. Paypal said they had been using 40% to 50% of their free cash flow to fund the credit card business. With the asset sale, they will continue to promote the cards and grow the business but it will be up to Synchrony to fund the credit expansion. This was a win-win for both companies.
In December Keybanc raised their price target to $90 saying the Venmo app was the preferred payment app for 76% of responders in a recent survey. They expect $75 billion in Venmo payments in 2018 and Paypal will see earnings rise 4 cents for every $10 billion.
We were stopped out of a prior position when Paypal collapsed after the Ebay earnings. The company announced plans to phase Paypal out of the EBAY network as a preferred payment processor by 2023. Investors did not listen to the entire story. The PayPal CEO said the Ebay transaction revenue was 13% of their total and was growing at only 4% per year. The other 87% of transaction volume was growing at 23% per year. PayPal guided for 2018 for 16% revenue growth and 25% earnings growth.
Shares declined to $76.50 to rest on the support of the 50/60 day averages. Horizontal support is $73.50. I am recommending we reenter a new position on Paypal because there is nothing wrong with the company. This selling has been increased because of the market drop. If we reenter a new position at the open on Monday we could be buying right at support.
Unfortunately, with Paypal at new highs last Wednesday, the LEAP options are expensive. I am going to recommend a combination position. We can sell an OTM put spread for about a $4 credit to reduce our cost in the call. Without a total market meltdown, PayPal should not decline below $70. I would be thrilled to be put the stock at that level if it did happen.
Update 4/15: Paypal is reportedly planning on offering checking account like services where you can deposit checks, make payments to billers and use your Paypal debit card for purchases. You will be able to direct deposit your paycheck just like you could with a bank. There are reportedly more than 30 million people in the U.S. without checking accounts and they spend roughly 9.5% of their income on fees for alternative financial services. That is money orders, cash transfers, check cashing fees, etc. Paypal is going after these potential consumers.
Update 4/27: The company reported earnings of 57 cents that beat estimates for 54 cents. Revenue rose 24% to $3.69 billion beating expectations for $3.59 billion. The company processed $132 billion in payments for the quarter, a 32% increase.
Update 5/20: Paypal said it was buying financial technology company iZettle for $2.2 billion. This is the largest acquisition in Paypal's history. This will give Paypal the ability to expand its digital payment service into thousands of brick and mortar retailers in Europe and Latin America. Paypal will gain entry into 11 new markets with the deal. iZettle is currently on pace to process about $6 billion in payments in 2018.
Update 5/27: Stifel upgraded from hold to buy on Friday with a $99 price target. The analyst said there was $110 trillion in payments and that Paypal could become a major force in the market. The company also teamed up with Google to offer Paypal on Gmail and YouTube. Shares declined with the market on Friday.
Update 6/3: Paypal and Temasek are investing $125 million in Indian payment startup Pine Labs. They are eventually going to own the Indian payment market.
Long Jan $80 call @ $8.95, see portfolio graphic for stop loss.
Closed 4/30: Short Jan $70 put @ $6.15, exit $4.66, +$1.49 gain.
Closed 4/30: Long Jan $55 put @ $2.04, exit $1.12, -.91 loss.
Net gain $.58.
QQQ - Nasdaq 100 ETF ETF Profile
New high on the Nasdaq on Wednesday.
Original Trade Description: April 15th.
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually. ETF description from Invesco.com
The Nasdaq and the Russell 2000 are the two indexes that stand to gain the most from a rebounding market. The Nasdaq rebounded from the first correction and actually made a new high before the second correction appeared. Tech stocks have been punished and thanks to problems like Facebook, they have not recovered. However, last Thursday the Nasdaq Composite closed well above resistance at 7,100 but then fell back to that level in Friday's event risk avoidance.
There are not a lot of tech stocks reporting this coming week but that will change the following week and post tax reform earnings are expected to be good.
I am recommending we add the QQQ as a "market following" position rather than try to pick a potential earnings winner just a week or two before they report.
Options are not cheap so I am recommending an offsetting put.
Long Jan $165 call @ $10.43, see portfolio graphic for stop loss.
Optional: Short Jan $145 put @ $5.43, see portfolio graphic for stop loss.
Net debit $5.00.
SPY - S&P-500 ETF ETF Profile
The S&P 2750 resistance level was broken and the next challenge is just over 280 on the SPY.
Original Trade Description: April 29th.
The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index"). The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors. Launched in January 1993, SPY was the very first exchange-traded fund listed in the United States. ETF description from US.SPDRS.com.
Analysts are still projecting the S&P to rise to 2,850 to as much as 3,100. The market may be weak today and in a minor downtrend, there is significant support. With earnings growth now well over 20%, we could see that expected rebound.
The say we should buy when others are fearful and the SPY is well off its highs but holding in the 265-270 range. I am recommending a speculative position for January. We will stop out if the market moves against us.
Long SPY Jan $275 call @ $9.12, see portfolio graphic for stop loss.
Optional position: Short Jan $240 put @ $6.10, see portfolio graphic for stop loss.
Net debit $3.02.
TEVA - Teva Pharmaceuticals - Company Description
No specific news. New 10-month closing high.
Original Trade Description: December 10th
Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com
Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.
Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO,Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. Last week, the stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.
Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.
I believe the worst is over. The reaction to the news over the last four months has been horrendous. Shares had fallen from $32 to $10. Since the new CEO took control, they have rebounded back to $16.
Because of the giant drop, the LEAP premiums are very reasonable. I am suggesting we take advantage of the los premiums and the potential for a share price recovery. I am recommending both the 2019 and 2020 strikes. This way we can take some gains in late 2018 and let the longer term bet ride.
Update 12/17: Teva announced on Thursday they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.
Update 12/30/17: Teva said its BLA application for Fremanexumab as a preventive for migraine headaches had been granted a priority review designation by the FDA. There were two successful Phase III studies under the HALO program with patients with episodic migraine and chronic migraines.
Update 2/18/18: Teva shares exploded higher after Warren Buffet reported a new stake of 18,875,721 shares or roughly 2% of the company. Teva is now making a generic Viagra that is going to be a cash cow for the next several years and should help raise their stock price.
Update 4/22/18: Teva and P&G dissolved a 7-year partnership to market over the counter products outside North America. This should be positive for Teva thanks to the 7 years of international branding they received with P&Gs help.
Update 5/6/18: Teva reported earnings of 94 cents that blew away estimates for 66 cents. Revenue of $5.65 billion easily beat estimates for $4.81 billion. They raised their 2018 guidance from $18.3-$18.8 billion to $18.5-$19.0 billion. They raised earnings guidance from $2.25-$2.40 to $2.40-$2.65. Shares spiked to resistance and then collapsed. The company said Copaxone sales declined by 40% and generic sales declined 23%.
Update 5/13: Director Roberto Mignone bought 750,000 shares for $2.75 million in the open market. Shares closed at a 2-month high.
Update 5/20: Warren Buffett said he more than doubled his stake in Teva to more than 40 million shares.
Long Jan 2019 $20 LEAP Call @ $2.10, see portfolio graphic for stop loss.
Optional: Long Jan 2020 $20 LEAP Call @ $3.70, see portfolio graphic for stop loss.
WDC - Western Digital Company Profile
No specific news. I am not sure why WDC shares are declining. Cowen reiterated an outperform and raised the price target to $105.
Original Trade Description: April 29th.
Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models; and enterprise solid-state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides system solutions that offer petabyte scalable capacity; data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop and notebook PCs, gaming consoles, security surveillance systems, and set top boxes. In addition, it offers NAND-flash embedded storage products for mobile phones, tablets, notebook PCs, and other portable and wearable devices, automotive, IoT, and connected home applications; NAND-flash memory wafers; and custom embedded solutions and iNAND embedded flash products, such as multi-chip package solutions that combine NAND-flash and mobile dynamic random-access memory in an integrated package. Further, it provides client solutions that consist of HDDs and SSDs embedded into external storage products; removable cards for use in mobile phones, tablets, imaging systems, still cameras, action video cameras, and security surveillance systems; USB flash drives used in computing and consumer markets; and wireless drive products. Additionally, the company licenses its intellectual property. It sells its products under the HGST, SanDisk, and WD brands to original equipment manufacturers (OEMs), distributors, resellers, cloud infrastructure players, and retailers. It serves storage subsystem suppliers, OEMs, Internet and social media infrastructure players, and PC and Mac OEMs. Company description from FinViz.com.
Western Digital reported earnings of $3.63 that beat estimates for $3.30. Revenue was $5.01 billion compared to estimates for $4.93 billion. They raised their current quarter guidance to $3.40-$3.50 and analysts were only expecting $3.29. Shares fell $11. The CEO made the mistake of saying margins were "normalizing" as NAND prices declined. At the same time, he said the average selling price of the company's disk drives rose 14.3% from $63 to $72.
I think investors need to rethink this drop. Margins may be normalizing but the company posted a big earnings beat and raised guidance well over analyst estimates.
Shares have declined to long-term support and should recover when this period of market weakness has passed.
Long Jan $80 call @ $8.20, see portfolio graphic for stop loss.
Optional: Short Jan $62.50 put @ $3.15, see portfolio graphic for stop loss.
Net debit $5.05.
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