The Nasdaq fell sharply at the open on Monday and knocked several stocks out of the portfolio. We lost the SPY, HACK, CDNS and AVAV positions.
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
Post earnings several analysts remarked on how cheap you could buy AbbVie shares. Since earnings, shares have seen a nice rebound. Maybe investors are suddenly getting the point.
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, women's health and Hepatitis C.
Update 7/8/18: AbbVie won a reversal of a $140 million jury award over not adequately disclosing the risks of AndroGel. The court found that the jury in the prior case had found AbbVie not liable in one sense but liable in another and the judge said the decisions were inconsistent. This is great news since there are 4,500 cases pending on AndroGel. With every case that is tried the company gains more experience and insight in how to defend itself and every case they win becomes a precedent.
Update 7/22/18: AbbVie was crushed on Thursday after short seller Citron Research called it the "next great drug short." This guy makes a living shorting stocks and then going public with a monster trash piece in order to tank the stock. This attack on AbbVie is total bull but the stock fell anyway. Evercore ISI analyst Joshua Schimmer said he did not believe the warnings by Citron and said the company had a mixed tract record targeting drug stocks. He reiterated a buy rating and $137 price target. If shares continue to decline this week I am going to establish a new position for Jan 2020.
Update 7/29:AbbVie reported earnings of $2.00 and beat estimates for $1.97. Revenue rose 19% from $6.94 billion to $8.28 billion and beat estimates for $8.22 billion. They raised full year guidance from $7.66-$7.76 to $7.76-$7.86. Sales of their top drug Humira rose to $5.19 billion but barely beat estimates for $5.18 billion. This is their best selling drug and they have agreements with competitors not to produce any generics until 2023.
I recommended we add a 2020 position using the $100 call.
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.
Long Jan 2020 $100 call @ $7.70, see portfolio graphic for stop loss.
AVAV - AeroVironment Company Profile
No specific news. Shares fell sharply with the Nasdaq at the open on Monday to stop us out by 4 cents.
Original Trade Description: June 9th.
AeroVironment, Inc. designs, develops, produces, supports, and operates unmanned aircraft systems (UAS) and efficient energy systems (EES) in the United States and internationally. The company offers small UAS products to deliver intelligence, surveillance, and reconnaissance; and communications, such as real-time tactical reconnaissance, tracking, combat assessment, and geographic data to the small tactical unit or individual operator. Its small UAS wirelessly transmit critical live video and other information to a hand-held ground control unit enabling the operator to view and capture images; ground control systems allow the operator to control the aircraft; and tactical missile systems designed to be reusable for various flights and to be recovered through an autonomous landing feature that enables a controlled descent to a designated location. The company also provides spare equipment, alternative payload modules, batteries, and chargers; repair, refurbishment and replacement, training, and customer support services to small UAS; turnkey information solutions; and engineering services. It serves the U.S. Department of Defense, including the U.S. Army, Marine Corps, Special Operations Command, Air Force, and Navy, as well as commercial, consumer, and government customers. The company was founded in 1971 and is headquartered in Monrovia, California. Company description from FinViz.com.
AVAV had two divisions. One made unmanned aircraft systems (UAS) or drones and the other made charging systems for electric vehicles. The charging systems had a 25% margin and the drones a 40.6% margin. Their drone business is accelerating rapidly and they elected to sell the charging business and the sale was announced last week.
Now that they are free of the effort and overhead of managing a completely unrelated business thye can focus on the UAS systems. Business there is exploding, literally.
Previously they sold UAS to the military for surveillance. If something broke it was replaced but after you sell 50 units to one branch of the military that market is saturated until several break or crash.
They came up with a new product which has a small warhead attached. The two-feet long, six pound UAS is carried in a backpack until needed. When launched it is powered by a battery and sends streaming video back to the operator. This serves two functions. First it is a surveillance drone. Operators can see troop positions, tank emplacements, command and control centers, vehicles, etc. The drone can loiter in the area and observe troop movements, etc. If they see something target worthy they simply arm the warhead and fly the drone into the target. The small warhead limits collateral damage but is sufficient to knock out ground targets like vehicles. The good news is that every time the "Switchblade" drone is used in this manner they need to buy another one and they are buying a lot.
Recently the Army ordered $15.8 million in Switchblade drones. One week later they ordered $6.6 million more and then a day later they placed another order to bring the total to $29 million. Over a nine-day period the army's rapid equipping force (REF) ordered $51.4 million. That is 23% of AVAV's annual revenues in a 9 day period on a new product. The company is ramping up production to cover orders from other service units and revenue in 2018 is going to be explosive, literally. Col Pete Newell, director of the REF said the soldiers on the ground in Afghanistan "needed dramatically more" of the Switchblade units. The company is working on providing multiple models with advanced capabilities to fill out the offering and fill additional military needs.
This play has some danger attached. Earnings are June 26th. While they have beaten estimates in 3 of the last 4 quarters, there is always the risk of a miss. I am recommending this position ahead of earnings with a plan to add to the position if we get a post earnings dip. Shares are about to break out to a new high.
If you are concerned about buying ahead of earnings, then wait until after the report to enter the position.
There are no leaps so we are going to use the December options.
Update 7/1: AVAV reported earnings of 85 cents that easily beat estimates for 52 cents. Revenue of $117.4 million also beat estimates for $113.2 million. Revenue rose 18%. They guided for full year earnings of $1.10-$1.40 and revenue of $290-310 million. The order backlog rose from $70.3 million to $174.3 million and a new record. Shares exploded higher and kept climbing all week.
Update 7/8/18: AVAV said it was joining forces with NASA to build the first flying drone for Mars. The helicopter drone has been tested in the rare atmosphere and super cold nights in simulations here on earth. The drone will be included in the Mars 2020 rover.
Closed 7/30: Long Dec $65 call @ $6.20, exit $11.50, +$5.30 gain.
Closed 7/30: Short Dec $50 put @ $3.25, exit $1.90, +1.35 gain.
Net gain $6.65.
BB - BlackBerry Company Profile
No specific news. Shares were up slightly with the Nasdaq on Thr/Fri.
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 7/8/18: BlackBerry signed a new deal with Samsung to manage their enterprise applications on an end-to-end basis across all devices. Do not count BlackBerry out.
Long Jan 2020 $12.50 LEAP Call @ $2.32, see portfolio graphic for stop loss.
C - Citigroup - Company Profile
No specific news. Citi, IBM and Barclay's announced the availability of a "permissioned blockchain" where you can download specific blockchain apps using DLT (distributed ledger) technology. The platform is called LedgerConnect.
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 7/15: Citi reported earnings of $1.63 that rose 16% and beat estimates for $1.56. However, revenue of $18.47 billion missed estimates slightly at $18.51 billion. They raised their outstanding loans by 5% from $641 to $671 billion. Expenses declined for the seventh consecutive quarter but at 58%, the CEO is still not happy. He is shooting for the low 50% range by 2020. Citigroup shares trade at 93% of book value. The stock is very undervalued on a long-term basis. For comparison, JPM shares trade at 160% of book.
Update7/22: Greenhaven Associats Chairman Edgar Wachenheim said Citigroup shares are set to double by 2020. City had projected $9 in earnings in 2020 and that rose to $10.20 based on the new tax rate. If you only put a reasonable PE of 13 on the stock that would be $130. The S&P is trading at a PE of 16.7. he said if you do a sum of the parts analysis you still end up at $130. Greenhaven managed about $8 billion for a very selective group of wealthy clients, university endowments and nonprofits.
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
Caterpillar reported Q2 earnings of $2.97 that bear estimates for $2.73 and doubled the Q2-2017 number of $1.49.
They said orders were so strong they were booking now for late 2019. Backorders rose $200 million to $17.7 billion. They announced price increases to offset the higher price of steel and were not seeing any material resistance. Sales in the Asia pacific regions rose 39%. They repurchased $750 million in shares for the quarter and announced a $10 billion buyback authorization for 2019. They raised guidance for the full year from 10.25-$11.25 to $11.00-$12.00.
There is nothing wrong with Caterpillar other than they are a prime target for tariff retaliation from China. While nothing has been announced, there will be a cloud until the trade war is over.
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.
Update 6/15: Caterpillar reported a rise of 24% in global sales for the three month period ended in May. That was slightly less than the 28% rise in the 3-month period ending in April. Latin American sales rose 43%, Asia Pacific 36%, North Americs 20% and EAME rose 16%. Resource industries, energy and mining, saw sales rise 35%, Latin America 124%, EAME 42%, North America 37% but Asia Pacific declined -3% after seven consecutive months of growth.
Long Jan $160 call @ $14.48, see portfolio graphic for stop loss.
Closed 7/9: Short Jan $185 call @ $5.51, exit .68, +$4.83 gain.
Net debit $8.97.
CDNS - Cadence Design Systems Company Profile
No specific news. Shares fell sharply with the Nasdaq on Monday to stop us out of a profitable position.
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.
Update 7/29: Cadence reported earnings of 45 cents that beat estimates for 40 cents. Revenue of $518.4 million beat estimates for $515.3 million. They guided for the current quarter for earnings of 40-42 cents and revenue fo $510-$520 million. For the full year they guided for $1.64-$1.70 and revenue of $2.07-$2.09 billion. Shares rallied to a new high but faded when the Nasdaq declined for two days.
Closed 7/30: Long Nov $40 call @ $2.35, exit $5.70, +$3.35 gain.
ECA - Encana Corp - Company Profile
Encana spiked to a 6-month high after reporting earnings of 21 cents that beat estimates for 10 cents. Revenue of $983 million missed estimates because of lower gas prices, lower gas production and higher processing costs. Production averages 337,900 Boepd compared to 316,000 Boepd in the year ago quarter. Natural gas production declined 4% while liquids production rose 24% to 155,300 bpd. Encana is successfully transitioning away from natural gas and into oil and liquids.
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.
GE - General Electric - Company Description
GE is considering the sale of its GE Digital division. The division has been troubled and abandoned plans to create its own cloud and instead partnered with Amazon and Microsoft. GE had invested more than $4 billion in the development. Technical issues and shifting priorities led GE to seek a buyer. They reportedly hired an investment banker but they were unnamed.
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 7/22:The GE rebound was short lived. The company reported earnings of 19 cents that beat estimates for 17 cents. Revenue of $30.1 billion and beat estimates.
The CEO guided to full year earnings of $1.00-$1.07 and analysts expected 93 cents. However, the CEO cut free cash flow estimates from a range of $6-$7 billion to $6 billion. The company said the power business was a drag and would continue to be a drag for the next several years. Shares fell back to $13 once again.
Long Jan 2020 $18 LEAP Call @ $2.42, see portfolio graphic for stop loss.
6/15: Expired Long Jun $13 Put @ .71, expired, -.71 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.
HACK - Nasdaq 100 ETF ETF Profile
No specific news. Security shares were crushed in the Nasdaq decline on Monday and the disappointing results from Symantec. We were stopped out for a minor loss.
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.
Closed 7/30: Long Sept $38 call @ $1.23, exit .70, -.53 loss.
HPQ - HP Inc - Company Description
HPQ said they planned to acquire Apogee Corp, a U.K. based printing company for about $500 million. The acquisition is expected to disrupt the market for A3 copiers. That market is through to be worth $55 billion. Shares remained flat. Apparently investors are waiting for the actual disruption.
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.
Update 6/22: HP authorized a $4 billion stock buyback and opened a 3D printing production center in China.
Update 7/22: HP just announced a new line of high performance workstations for a decent price. LINK
Gartner Group (IT) said PC shipments reported solid growth in Q2. Gartner said PC shipments rse 1.4% in Q2 to 62.1 million units. IDC reported that PC shipments rose 2.7% to 62.3 million. The difference is that IDC included Chromebooks and Gartner includes Microsoft tablets and iPad Pro as detachables.
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
Shares declined further after Chipotle suffered another bout of food borne illness that reminded investors of the recent McDonalds episode. Other fast food companies disappointed on earnings and depressed the sector.
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.
Update 7/15: McDonalds has been hit with a wave of food borne illnesses that forced it to remove salads from more than 3,000 stores. Health officials in Iowa and Illinois said they have more than 100 combined cases of cyclosporiasis linked to McDonalds salads. This illness is caused by a parasite. The company removed the lettuce blend salads and and is attempting to find an alternate supplier. At least one illness has been reported in Indiana, Wisconsin, Michigan, Ohio, Minnesota, Nebraska, North Dakota, South Dakota, Montana, Kentucky, West Virginia and Kentucky.
Update 7/29: McDonalds reported earnings of $1.99 that beat estimates for $1.92. Revenue of $5.25 billion declined from $6.05 billion due to the sale of some company stores to franchisees. Global same store sales were 4.0% with 2.6% growth in the U.S. and 4.9% growth internationally. Analysts were expecting 3.5% overall. Shares fell back to support once again. The CEO said he thought the tariff headlines was slowing foot traffic.
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
No specific news after earnings beat the prior week. New 52-week 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.
Update 7/29: Merck reported earnings of $1.06 that beat estimates by 3 cents. Revenue was $10.47 billion and beat estimates for $10.32 million. Prescription drug sales rose 6% to $9.28 billion led by Keytruda, Januvia and Gardasil. U.S. drug sales fell 3% while international sales rose 13%. Zostavax and Hep-C drug Zepatier both saw sales decline more than 70% as more drugs hit the market and competition becomes fierce.
Keytruda is expanding its base and is now approved for eight different cancer types. The drug was just approved last week in China, which has a serious melanoma problem. Sales of Keytruda are expected to reach $22 billion a year by 2022. The company raised full year earnings guidance from $4.16-$4.28 to $4.22-$4.30. Revenue is expected to range between $42.0-$42.8 billion, up slightly from the prior $41.8-$43.0 billion guidance. Analysts thought this guidance was weak and shares fell sharply at the open.
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
Panos Panay, VP of Surface, said the Surface tablet had returned to a $4 billion business after a successful revamp. Sales have exceeded $1 billion a quarter for the last four quarters. That compares to $5 billion a quarter in sales for the iPad.
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 7/22: The company posted earnings of $1.13 that beat estimates for $1.08. Revenue rose to $30.09 billion and beat estimates for $29.21 billion. All of the good news was in the metrics. Each of the forecasts for the individual divisions for the current quarter was higher than analyst estimates. The Personal Computing forecast was $9.95-$10.25 billion and analysts were expecting $9.87 billion. Intelligent cloud forecasts were $8.15-$8.35 billion and analysts were expecting $8.15 billion. Overall, the company predicted revenue of $27.35-$28.05 billion and analysts were expecting $27.4 billion.
Office 365 revenue rose 35%, Azure cloud revenue rose 85%, gaming revenue rose 38% and Xbox and software revenue rose 35%. Reportedly, high value customers are moving away from Amazon's Web Services to the Azure Smart Cloud. Microsoft languished for years as just a software company but under new leadership, they are surging.
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.
PRA - ProAssurance Corp Company Profile
No specific news. Shares continued rebounding to close at a 3-month high.
Original Trade Description: July 22nd.
ProAssurance Corporation, through its subsidiaries, provides property and casualty insurance, and reinsurance products in the United States. The company operates through Specialty Property and Casualty, Workers' Compensation, and Lloyd's Syndicate segments. It offers professional liability insurance for healthcare professionals and facilities; professional liability insurance for attorneys; liability insurance for medical technology and life sciences risks; and workers' compensation insurance for employers, groups, and associations. The company markets its products through independent agencies and brokers, as well as an internal sales force. ProAssurance Corporation was founded in 1976 and is headquartered in Birmingham, Alabama. Company description from FinViz.com.
The company missed on earnings in Q1 and shares gapped lower then bled points for the next 7 weeks to make a new 52-week low on July 2nd. That direction has changed and shares closed at a 7 week high on Friday.
This is a low volatility position. If the tech sector rolls over in early August, these low volatility, high dividend stocks should rally during the summer doldrums.
Gross premiums rose 5.6% in 2016 and 4.8% in 2017. In the first quarter of 2018 alone they rose 5.0%. They have been actively acquiring other lines of business including American Physicians Service Group, Medmarc and Eastern Insurance Holdings. This broadens their offerings and gives them depth in existing insurance lines.
They have not been afraid to pay regular and special dividends and they have been repurchasing stock with $110 million left on their current buyback program.
Earnings are right around the corner on August 7th so that is the first hurdle. Since they underperformed in Q1, expectations are low. Hopefully they will do better for Q2.
They do not have LEAPS but we can use the February strike.
Long Feb $40 call @ $2.55, 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 6/24: Paypal said it was acquiring a fraud prevention startup called Similty for $120 million. This is the third major acquisition in the last month. They are buying iZettle for $2.2 billion and HyperWallet for $400 million.
Update 7/29: Paypal reported earnings of 58 cents that narrowly beat estimates for 57 cents. Revenue of $3.86 billion beat estimates for $3.80 billion. Total payment volume was $139 billion. The company added 7.7 million net new accounts in Q2. The company guided for 12-13% revenue growth in Q3. Factset had been expecting 14% and $3.7 billion. Shares tumbled on the weak guidance.
Long Jan $80 call @ $8.95, see portfolio graphic for stop loss.
Previously closed 4/30: Short Jan $70 put @ $6.15, exit $4.66, +$1.49 gain.
Previously closed 4/30: Long Jan $55 put @ $2.04, exit $1.12, -.91 loss.
Net gain $.58.
QCOM - Qualcomm - Company Profile
QCOM shares continued to rebound and closed at a 6-month high on Friday. This rapid advancement will end by September when Qualcomm's $10 billion Dutch Auction ends on August 27th. The highest bid they will accept is $67.50, about $2.10 over Friday's close but this is a tender where they will take $10 billion of the lowest priced shares offered. We do not know what the finally dollar will be.
Original Trade Description: July 29th
QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, and/or long term evolution standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers. QUALCOMM Incorporated was founded in 1985 and is headquartered in San Diego, California. Company description from FinViz.com.
The last 12 months have been turbulent for Qualcomm. First they tried to acquire NXP Semiconductor (NXPI). They received approvals from 7 of the 8 countries that needed to approve the transaction. While they were waiting on China's approval, Broadcom (AVGO) made a hostile offer to acquire Qualcomm for $121 billion. Qualcomm would be forced to drop the bid for NXPI if they accepted the Broadcom bid. Qualcomm fought Broadcom and finally got the government to veto the deal under a national security rationale.
Broadcom quickly made a big show of becoming a U.S. company by changing its domicile to the U.S. That was not enough to convince CFIUS they were not a threat. Eventually Broadcom dropped its bid.
Qualcomm tried to continue its acquisition of NXPI but China refused to approve the acquisition and Qualcomm was forced to abandon the acquisition attempt and pay a $2 billion breakup fee.
While Qualcomm and NXPI would have been stronger together, Qualcomm is not sitting still. They are rapidly moving forward on 5G communications, automotive chips, internet connectivity, Internet of Things, network processing, etc.
The company just announced a $30 billion stock buyback. That is one-third of the company using the funds they had set aside for the NXPI acquisition.
The next challenge for Qualcomm is settling the patent dispute with Apple. The phone company has protested the way Qualcomm collects royalties on its products. Instead of only charging a royalty on the specific parts in the phone, Qualcomm has always charged a royalty on the entire cost of the phone. In the beginning companies did not balk because without Qualcomm's parts the phone would not have been possible. After paying royalties to Qualcomm for years, Apple decided they were paying too much money to Qualcomm and sued them to change the patent. Since Apple and every other phone manufacturer had been paying Qualcomm under this structure for years, Apple does not have a very good chance of winning. They do have a lot of money and the best lawyers in the world but the law is the law and signed agreements are tough to fight.
This suit is expected to be settled later this year. Investors should be looking at Qualcomm as an outstanding investment now that the clouds have cleared.
With a 4% dividend and buying back 33% of the stock, there is no reason for Qualcomm shares not to rise in the coming months. The stock should also be somewhat immune to market movement over the coming weeks thanks to the monster buyback.
Earnings October 24th.
Long Jan 2020 $70 call @ $5.00, see portfolio graphic for stop loss.
SUN - SunRun Company Profile
No specific news. Shares are declining on the resumption of tariff headlines.
Original Trade Description: July 8th.
Sunrun Inc. engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. It also sells solar leads. The company markets and sells its products through direct channels, partner channels, mass media, digital media, canvassing, referral, retail, and field marketing. Sunrun Inc. was founded in 2007 and is headquartered in San Francisco, California.
Company description from FinViz.com.
With Tesla closing down 12 Solar City plants and ending the 800-store partnership with Home Depot, Sunrun has become the largest home solar company in the USA. Sunrun has been providing "Solar as a Service" in the U.S. since 2007 and have been doing home installations for more than 20 years. They have outlasted Solar City and a dozen lesser known companies. They are now selling out of Costco stores and other high traffic locations.
Sunrun reported Q1 earnings of 25 cents that beat estimates for 24 cents. Revenue was $144.4 million.
Solar stocks, especially Sunrun are surging since California passed a law requiring most houses built after Jan 1st, 2020 to have solar panels. Cities are seeing sharp increases in electric rates and they are passing them on to their users.
Cities are transitioning to time of day or time of use (TOD/TOU) rates. That means you will pay more for electricity you use during peak periods. In the summer if you crank up the air conditioner during the day you will pay more. If you have electric heating you will pay more in the winter for heating bills. Cities are going to charge based on the amount of electricity they are producing not a flat rate. Some users are seeing their electricity bills spike as much as 400%. One city in Colorado just passed a TOD plan where peak times will be 20 cents per KWH and off peak will decline to 4 cents. That is a tremendous difference. Prior rates were 6-11 cents per KWH. If you use more than 700KWH per month your rate goes up by another 2 cents on a tiered structure per additional KWH used.
Electrical producers have to plan for peak capacity and then be prepared for that capacity even though they may only be running at 60-70% most of the time. That peak capacity is expensive to build and maintain. In the past, they tried to factor it into the base rate but the rapidly rising costs of infrastructure and equipment put many of them into a loss position much of the time. They are going to resolve this with TOD/TOU.
Sunrun does not have leaps so I am using the longest dated option which is March. Shares have spiked since Tesla announced their closure of 12 plants making Sunrun the largest in the USA.
Long March $18 call @ $2.10, see portfolio graphic for stop loss.
SPY - S&P-500 ETF ETF Profile
The S&P fell below support at 2,800 at the open on Monday to stop us out of the SPY position. I had tightened the stop loss to prevent giving back gains in case Autust turned out to be a rough month.
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.
Closed 7/30: Long Jan $275 call @ $9.12, exit $13.70, +$4.50 gain.
Closed 7/30: Short Jan $240 put @ $6.10, exit $2.45, +3.65 gain.
Net gain $8.23.
TEVA - Teva Pharmaceuticals - Company Description
Teva reported earnings of 78 cents that beat estimates for 64 cents. Revenue of $4.7 billion matched estimates but declined $1 billion from the year ago quarter. The company guided for 2018 earnings of $2.55-$2.80, up from $2.40-$2.65 on revenues of $18.5 to $19.0 billion. Shares crashed when sales of its MS treatment declined 50% because of generic competition.
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 7/8: Teva said it was moving its headquarters from North Wales Pennsylvania to north New Jersey. They will move 843 jobs and expand the NJ office/plant to 350,000 sqft. This is part of their plan to cut costs. Analysts believe other U.S. plant sites are also in jeopardy as the consolidation continues. Shares closed at a 10-month high the prior Thursday.
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.
UTX - United Technologies Company Profile
No specific news. No material movement.
Original Trade Description: June 24th.
United Technologies Corporation provides technology products and services to building systems and aerospace industries worldwide. Its Otis segment designs, manufactures, sells, and installs passenger and freight elevators, escalators, and moving walkways; and offers modernization products to upgrade elevators and escalators, as well as maintenance and repair services. The company's UTC Climate, Controls & Security segment provides heating, ventilating, air conditioning, refrigeration, fire, security, and building automation products, solutions, and services for residential, commercial, industrial, and transportation applications. This segment also offers building services, including audit, design, installation, system integration, repair, maintenance, monitoring, and inspection services. Its Pratt & Whitney segment supplies aircraft engines for commercial, military, business jet, and general aviation markets; and provides aftermarket maintenance, repair, and overhaul, as well as fleet management services. The company's UTC Aerospace Systems segment provides electric power generation, power management, and distribution systems; air data and aircraft sensing systems; engine control, intelligence, surveillance, and reconnaissance systems; engine components; environmental control systems; fire and ice detection, and protection systems; propeller systems; engine nacelle systems; aircraft lighting and seating, and cargo systems; actuation and landing systems; space products and subsystems; and aftermarket services. United Technologies Corporation offers its services through manufacturers' representatives, distributors, wholesalers, dealers, retail outlets, and sales representatives, as well as directly to customers. United Technologies Corporation was founded in 1934 and is headquartered in Farmington, Connecticut. Company description from FinViz.com.
UTX is acquiring Rockwell Collins (ROK). An analyst at Morgan Stanley said the acquisition of Rockwell Collins is proceeding and should close in Q3. The acquisition increases the potential for restructuring and the potential spin off of non-core assets in order to concentrate on the profitable divisions. The analyst believes Rockwell Collins will help lift earnings to $7.60 in 2019 and $8.20 in 2020. The stock was resumed at Morgan Stanley with an overweight rating and $160 price target. Shares closed at $127. Barclays has an overweight rating and $157 price target.
UTX just won a $2 billion deal for the propulsion systems on the F-34 joint strike fighter. This is the 11th award and will support all three variants of the fighter. The award is for 135 engines, production support, program management, engineering support, spare modules and spare parts. This contract is expected to reduce the price of the engines by as much as 3.39% compared to the 10th award.
In Q1 United's revenue rose 18% on the commercial segment and 13% on the military segment.
Earnings July 24th.
Update 7/29: UTX reported earnings of $1.97 that beat estimates of $1.86. Revenue ros e9% to $16.71 billion and beat estimates for $16.27 billion. They raised their full year guidance from $6.95-$7.15 to $7.10-$7.25. They raised revenue guidance from $64.0-$64.5 billion to $63.5-$64.5 billion. Shares spiked on the news.
Long Jan $130 call @ $4.31, see portfolio graphic for stop loss.
Optional: Short Jan $145 call @ $.92, see portfolio graphic for stop loss.
Net debit $3.39.
Previously closed: Position 6/18:
Long Jan $130 call @ $5.60, exit $4.85, -.75 loss.
Optional: Short Jan $145 call @ $1.08, exit .84, +.24 gain
Net loss $.51.
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