The major indexes are going to post major gains at the open on Monday. This should be very beneficial for our portfolio because we have index ETFs, tariff sensitive stocks and those with broad market appeal. I expect a good day.
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
AbbVie announced a global patent license with Pfizer on Humira starting on Nov 20th, 2023. Pfizer will pay royalties to AbbVie. Pfizer can market a biosimilar in the EU when approved by the European Medicines Agency. AbbVie is getting ahead of the curve by doing these deals with other countries years in advance. This protects their current cash flow and provides royalties later.
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 11/7: AbbVie reported earnings of $2.14 that beat estimates for $2.01. Revenue rose to $8.236 billion and narrowly beat estimates for $8.233 billion. Sales of Humira rose 9% to $5.124 billion. The company raised full year guidance from $7.76-$7.86 to $7.90-$7.92. They raised their dividend from 96 cents to $1.07. The company said earnings in 2019 would grow by double digits despite the launch of biosimilars to Humira in Europe. The company said the strong pipeline and coming product launches would allow AbbVie to "grow through" the impact of generics overseas. AbbVie has made multiple agreements to numerous drug companies that prevent the competition from selling the generic Humira in the USA until 2023. AbbVie has as many as 10 drugs with billion dollar potential in the pipeline.
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.
ADBE - Adobe Systems - Company Profile
No specific news. Adobe rebounded from $207 to $250 after SalesForce.com posted blowout earnings.
Original Trade Description: Aug 19th
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. Its flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, audience management, and video delivery and monetization solutions to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as e-learning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. The company was founded in 1982 and is headquartered in San Jose, California. Company description from FinViz.com.
Adobe reported earnings of $1.66 compared to estimates for $1.54. Revenue of $2.20 billion beat estimates for $2.16 billion. They guided for the current quarter for earnings of $1.68 on revenue of $2.24 billion. Analysts were expecting $1.61 and $2.23 billion. Adobe said it would have a 7% tax rate in Q3/Q4. They guided for 25% growth in Q3 in the Digital Media division, which contributes 70% of revenue. Analysts were expecting 23.4%.
Shares declined after the company said Q3 is seasonally weak but Q4 is seasonally strong. The new acquisition, Magneto, is expected to contribute $40 million in revenue in those two quarters.
They recently partnered with Microsoft and this is expected to provide a significant boost to revenue and earnings in the coming year.
Earnings are September 13th. I hesitated to jump into this position ahead of earnings less than a month out but the stock is depressed and expectations are low. There is a chance for a positive surprise.
Adobe options are very expensive and I am only going to reach out to January. We have to take small bites in this stock over the next 18 months.
Update 9/16: Adobe (ADBE) reported earnings Thursday evening of $1.73 and analysts were expecting $1.69. Revenue of $2.29 billion beat estimates for $2.25 billion. Shares fell $2 in afterhours but exploded higher on Friday to gain $6.
Update 9/23: Adobe said it was acquiring Marketo for $4.75 billion. Marketo makes business marketing software. The company was public but was acquired by Vista Equita for $1.8 billion in 2016. That is a great return for Vista. Adobe will put the Marketo products in their Experience Cloud. The deal could close this fiscal quarter. This is the largest purchase in Adobe's history. Marketo had $320 million in revenue in 2017 and expects 20% revenue growth in 2018. This acquisition was to help Adobe better compete with Salesforce.com. Shares declined on the idea that Adobe paid too much.
Long Jan $260 call @ $11.54, see portfolio graphic for stop loss.
Short Jan $285 call @ $5.60, see portfolio graphic for stop loss.
Net debit $5.94.
Closed 10/8: Long Jan $260 call @ $12.25, exit $19.45, +$7.20 gain.
Closed 10/8: Short Jan $285 call @ $5.00, exit $4.29, +.71 gain.
Net gain $7.91.
APA - Apache Corp - Company Description
No specific news. Falling oil prices are still impacting the stocks.
Original Trade Description: Nov 11th.
Apache Corporation, an independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids (NGLs). The company has operations in onshore assets located Permian and Midcontinent/Gulf Coast onshore regions; and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt's Western desert; and offshore assets in the North Sea region, including the United Kingdom. As of December 31, 2017, the company had total estimated proved reserves of 1.2 billion barrel of oil equivalent, including 583 million barrels of crude oil, 204 million barrels of NGLs, and 2.3 trillion cubic feet of natural gas. Apache Corporation was founded in 1954 and is based in Houston, Texas. Company description from FinViz.com.
In September 2016, Apache announced a monster discovery in Texas that could contain 75 Tcf of "rich" gas and 3 billion barrels of oil. This "was" a primarily wet gas play decades ago and companies overlooked it while they were searching for "dry" gas. The "Alpine High" play is in Reeves County of the Southern Delaware basin. Apache drilled some test wells and silently acquired nearly all the acreage in the entire play for an average cost of $1,300 per acre. This compares to prices recently paid in the Permian of $9,000 to $42,000 an acre. After Apache acquired nearly all the available acreage they drilled 19 wells to prove out the reserves.
Apache said it was raising capex from $200 million to $2 billion to reflect their anticipated activity in this area. Well costs are $4-$6 million for 4,100 foot laterals. They have an estimated 3,000 drilling locations in the Woodford and Barnett formations alone.
The Alpine High has 4,000 to 5,000 feet of stacked pay in up to five distinct formations including the Bone springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.
Apache said they also discovered oil at the Garten Prospect in the North Sea. The initial well found more than 700 feet of net pay with expectations for 10 million barrels of recoverable oil. This was the 2,500th exploration well off the UK coast. Apache owns 100% of the discovery. This is the 4th discovery in the Beryl region in the last three years and all wells will be tied back to the Beryl Alpha platform.
Apache and Enterprise Product Partners (EPD) signed an agreement to accept 205,000 bpd of NGL from Apache's Alpine High play. The 658-mile EPD pipeline is expected to be completed in Q2-2019 with an initial capacity of 550,000 bpd. Apache also has the option to acquire a 33% equity stake in the pipeline once it is completed. This is a great deal for Apache and allows them to export their NGLs from the Permian while others are still backlogged.
Apache partnered with investment firm Kayne Anderson to form a $3.5 billion Permian Basin pipeline firm. Apache will contribute $1 billion of assets and Kayne will contribute $900 million after a private placement offering. When the deal closes, Apache will own 71.1% of the company and it will be called Altus Midstream. There are three other companies that will participate in the private placement. Altus will operate Apache's assets in the Alpine High field and have options to buy Apache's stakes in five other planned pipeline projects from the Permian to the Gulf Coast. Apache will be able to shift about $170 in pipeline capex in Q4 to Altus and $250 million in 2019. The Altus results will be consolidated with Apache's.
Apache said it was selling its 35% operating interest in the Seagull development in the North Sea and 50% of the Isabella prospect to Neptune Energy for $1 billion. Apache intends to use the proceeds to pay down debt and invest in the Alpine High project.
On Halloween, Apache reported earnings of 63 cents that rose 29% and beat estimates for 43 cents. Revenues of $2.0 billion beat estimates of $1.9 billion. Apache declared a quarterly dividend of 25 cents payable Nov 21st to holders on Oct 22nd.
Q3 production averages 476,255 Boepd with 64% of that was liquids, a gain of 6% from the year ago quarter. Oil and NGL production averages 305,436 bpd. Production in the Permian rose from 201,832 to 222,259 Boepd. They received an average of $69.12 per barrel for oil and 2.56 per Mcf for gas.
They guided for US production to increase from 262,000 to 260,000 by the end of December.
Apache is sitting on a gold mine. Black goal. The Alpine High discovery is just now accelerating into production as the initial infrastructure has been completed. As the pipelines begin operation their production is going to soar. They have been drilling like crazy and the production will catch up once the pipelines open.
Oil prices are at nine-month lows and energy equities are nearly that bad. Apache has declined from $50 to $36 and has held there for the last two weeks despite the continued decline in crude.
There are multiple factors that pushed oil prices lower and they are all temporary. I believe oil prices are going to rebound and lift the sector. We are able to buy APA leaps cheaply because of the crude decline.
Update 11/18: Apache and Kayne Anderson Acquisition Corporation (KAAC) completed the transaction to create the Altus Midstream Company (ALTM) Permian Basin midstream pipeline company. Upon closing KAAC changed its name to Altue Midstream. Apache owns 79% of the company. Upon closing Altus entered into a credit arrangement for an $800 million unsecured five-year revolving credit facility with the ability to upsize it to $1.5 billion. The interest on this commitment is capped at LIBOR +1.425%. The new company has options to acquire stakes in five top tier Permian pipeline projects. The company currently has no debt and a substantial cash position.
Long Jan 2020 $40 LEAP Call @ $5.05. see portfolio graphic for stop loss.
BB - BlackBerry Company Profile
No specific news. Shares of BB are volatile with the Nasdaq. This is a 2020 LEAP.
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 10/7: BlackBerry said they had added a quantum-resistant code signing server to its array of cryptography tools. Quantum computers are only in the testing stages but BlackBerry said if you want your hardware and software developed today to still be secure 10-15 years from now you have to use a quantum resistant tool. Quantum computers are expected to be a evolutionary leap from today's technology and be able to crack today's encrypted data. Developers will have to use a significantly larger key to keep data safe.
Update 11/18: Blackberry did acquire Cylance for $1.4 billion. Cylance develops AI products to prevent cyber attacks and has more than 3,500 enterprise customers.
Long Jan 2020 $12.50 LEAP Call @ $2.32, see portfolio graphic for stop loss.
C - Citigroup - Company Profile
No specific news.
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 10/14: Citigroup reported earnings of $1.73, up from $1.42 that beat earnings of $1.69. However, that was helped by share buybacks that reduced outstanding shares by 8%. Revenue of $18.39 billion was in line with estimates and slightly below last year at $18.42 billion. Fixed income revenues rose 9% and securities service revenue rose 11%. Investment banking revenue declined -8%. Operating expenses fell -1% to $10.3 billion. Loans rose 5%, and deposits increased 4% to $1.01 trillion. Shares rebounded $1.46 on the report.
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. Shares rebounded on expectations of a trade deal. Monday could be a big day.
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 11/18: CAT said the three-month rolling sales growth for the October period rose 18%. That was still good but down from the 21% in September. Total industry sales rose 46% after a 47% rise in September and 35% in August. Energy and transportation retail sales were up 7%, with oil and gas up 20%. The report showed some slight moderation but it was still a good month despite the tariffs.
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.
Long Jun $160 call @ $6.45, see portfolio graphic for stop loss.
CGC - Canopy Growth - Company Profile
No specific news. These is a 2021 position.
The Farm Bill is heading for passage and this contains a provision for legalizing hemp and CBD. This is a big deal for CGC because Hemp CBD could be a $22 billion industry in three years.
We closed the short call for a $7.50 gain and now we have 14 months until expiration on our long call with no ceiling.
Original Trade Description: Sept 23rd.
Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands. The company was formerly known as Tweed Marijuana Inc. and changed its name to Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Company description from FinViz.com.
The cannabis sector is on fire and nobody knows how to play it because of the volatility. There will be downs as the rules are drawn and additional countries go all in on recreational use. Canada has approved recreational use starting in October for the entire country. Numerous U.S. states have passed new laws approving the use. Multiple countries have been legal for years but dozens are considering it today.
Tilray (TLRY) has been getting all the news because of its wild swings on only 17.8 million shares outstanding. Tilray is actually the smallest of the big three marijuana producers.
The other two are Canopy Growth (CGC) and Aurora Cannabis (ACBFF). Aurora also traded 15 million shares on Friday but they have 950 million shares outstanding. Canopy traded 11 million against 228 million outstanding.
Aurora is expected to produce 570,000 kilos of weed in 2019 and Canopy is expected to produce more than 500,000 kilos. Tilray said it would only produce 76,000 kilos in 2018 and 150,000 in 2019.
All three of these companies are primarily in weed today but they are rapidly moving to the CBD oils, which have a more mainstream use. Coke is looking at making drinks with CBD oil. Constellation Brands (STZ) is looking at making drinks and edibles with THC, the active ingredient in marijuana. Constellation made a $4.1 billion investment in Canopy with the option to buy more. With big money and big marketing behind Constellation and Canopy I am picking them to be the long term winner.
Look how far the legalization of marijuana has come in just the last two years. Where will the business be two years from now? This is truly a "sky's the limit" potential. The tobacco companies have not yet entered the sector and the most likely entry would be the acquisition of one of these companies. There is eventually going to be a land rush as everyone interested tries to get a piece of this sector starting with the growers.
If yo look at the chart is is going to scare you. The recent spike was the $4.1 billion investment by Constellation. I would not be surprised to see the stock pull back to the uptrend around $40 and if it does we will close the short call for a gain.
Because of the interest in the sector, Canopy has LEAPS out in 2021. That is very long-term and should get us past all the initial volatility. Ideally, I would like to eliminate that short call at some point in the future if we see a material decline in the sector.
Update 10/7: Canopy has secured supply contracts for about 35% of expected demand in Canada. Marijuana for recreational uses becomes legal on October 17th. The current US Farm Bill will legalize CBD and Canopy is one of the largest CBD producers in the world. Two additional states have marijuana legalization on the ballot in November and 8 states have already made it legal. Constellation Brands currently owns 38% of Canopy and has warrants that will allow them to take control with more than a 50% stake over the next three years.
Update 10/26: Shares fell on a sell the news trade after marijuana became legal in Canada. That decline was accelerated by a bad market. Support appeared when news from Canada said that 50-75% of inventories were sold out. In Quebec the government run stores were only open 4 days a week because they ran out of product. Some brick and mortar retail locations were expected to remain closed until further notice because of supply shortfalls by producers. One online store, Ontario Cannabis made more than 100,000 sales in the first 24 hours. Various government run stores said they were only receiving about 40% of the products they ordered. The supply shortage is likely to last. New licenses to produce marijuana are taking about 341 days to process which will then be followed by the grow time to develop mature plants ready to harvest.
Update 11/18: Canopy reported a loss of $1.52 against no estimates. Revenue rose 33% to C$23.3 million and well below estimates for C$60.0 million. The biggest challenge is that Canada's legalization did not occur until the middle of October and after this reporting quarter ended. Sales of oils made up 34% of product sold, up from 18%. Kilos of cannabis harvested rose 265% to 15,127 but kilos sold rose only 9% to 2,197 because of the legalization deadline. The average price per gram rose 24% to C$9.87. The number of active registered patients in their medical program rose 34% to 84,400. It was actually a good report with the exception of the date issue.
Long Jan 2021 $50 LEAP Call @ $20.30, see portfolio graphic for stop loss.
Closed 11/26/18: Short Jan 2021 $75 LEAP Call @ $14.80, exit $7.30, +7.50 gain.
Net debit $5.50.
CSCO - Cisco Systems - Company Profile
No specific news. Shares moving with the Nasdaq.
Original Trade Description: Aug 26th
Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology industry worldwide. The company offers switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points, and servers; and next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice, and video applications. It also provides collaboration products comprising unified communications products, conferencing products, collaboration endpoints, and business messaging products; data center products, such as blade and rack servers, series, fabric interconnects, and management software solutions; wireless products consisting of wireless access points, WLAN controllers, cloud and appliances based services, and integrated software services. In addition, the company offers security products, including network and data center security, advanced threat protection, Web and email security, access and policy, unified threat management, and advisory, integration, and managed services; and other products, such as emerging technologies and other networking products. Further, the company offers a distributed file system for hyperconvergence that enables server-based storage systems; service provider video software and solutions; and technical support services and advanced services. It serves businesses of various sizes, public institutions, governments, and service providers. The company sells its products directly, as well as through channel partners, such as systems integrators, service providers, other resellers, and distributors. The company was founded in 1984 and is headquartered in San Jose, California. Company description from FinViz.com.
It appears that everyone is moving to the subscription model for software after the success of companies like Adobe in moving from a sales to a license subscription model. Microsoft Office, Autodesk, even BlackBerry is moving to a subscription model.
Cisco is moving to a subscription model on their highest capacity routers and switches. These devices cost from tens of thousands of dollar to hundreds of thousands. These are Cisco's highest capacity and smartest devices. However you need a masters in device programming to make them work correctly. With cyber security threats growing daily, enterprise users want to be able to stop the majority of the threats at the router level.
Cisco now sells multiyear software as a service (SaS) subscriptions for these top of the line devices. The CEO said the unbilled revenue for SaS subscriptions was their fastest growing revenue line item even though it is not on their books. If someone signs a 3-year service contract, Cisco can only recognize the revenue from the current quarter, and then defers revenue for the rest of the fiscal year. The revenue in future years is not disclosed. Deferred and unbilled revenue was up 28% for the quarter and she said unbilled portion was the largest component.
The reported earnings of 70 cents compared to estimates for 69 cents and earning only 48 cents in the year ago quarter. Revenue rose $700 million to $12.84 billion. Analysts expected $12.77 billion. For the current quarter they guided for 70-72 cents on revenue of $12.74-$12.99 billion. Analysts were expecting 69 cents and $12.58 billion.
I believe Cisco is on the verge of a breakout and a long awaited move higher. Cisco has been dead money all year after a surge in Q3/Q4 last year. This consolidation period may be about over.
Because of the 4.7 billion outstanding shares, the options are inexpensive and we can reach out to 2020 and capture all of the 2019 gains.
Update 9/23: Cisco announced a quarterly dividend of 33 cents payable Oct 24th to holders on Oct 5th. Shares rallied into Friday's close because of the increased weighting in the reformatted XLK ETF after the removal of Google, Facebook and Netflix. Microsoft and Cisco both saw big weighting revisions.
Update 11/18: Cisco reported earnings of 75 cents that beat estimates for 72 cents. Revenue of $12.14 billion missed estimates for $12.86 billion. The company guided for Q4 earnings of 71-72 cents on revenue of $12.48-$12.72 billion. Analysts were expecting 2 cents on $12.54 billion. Shares rallied on the news but fell back with the Nasdaq on Friday.
Long Jan 2020 $50 Call @ $3.25, see portfolio graphic for stop loss.
HD - Home Depot - Company Description
No specific news. Shares up with the market and more to come.
Original Trade Description: Oct 21st.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.
Home Depot shares have been crushed by the six consecutive months of declining home sales. The rising mortgage rates are also taking a toll. Analysts are worried the remodel boom will stall. This is simply not the case. When homeowners want to move they do buy materials from HD to fix up the house before they sell. However, when they decide they can no longer afford to sell because home prices and interest rates are too high to justify a move they still fix up their homes because they are going to stay there for a while. I cannot quantify the numbers attributable to both scenarios but they are probably not far off. We saw this in the last housing downturn when those not moving decided to remodel instead because it was cheaper.
Analysts should not be worried about Home Depot earnings. The entire Southeast was hit by multiple hurricanes and that means many months of repairs that are far more costly than what homeowners would be spending just to fix up homes prior to selling. There is massive destruction and damage across multiple states and will require millions of pieces of sheetrock, shingles, siding, home appliances, 2x4s, tools, etc. Hurricane Sandy added between $300-$500 million to Home Depot revenue in the short term and we have two different hurricanes in the same area today. This will add to earnings for quarters to come.
Earnings November 13th.
Support at $172 is solid. If I knew without a shadow of a doubt I would just say enter the position at $172. Unfortunately, nobody knows if that level will be tested again. I am going to recommend we enter now and then add to the position it we reach $172.
Update 10/26: HD continued to decline and closed at critical support at $172 on Friday. In the play description I said we would add to this position if HD reached $172. I do not want to blindly catch a falling knife but this is pretty strong support. Morgan Stanley reiterated an overweight position with a $200 price target. Several analysts have written that the Sears bankruptcy will benefit Home Depot and Lowe's because of the overlap in store footprints. Since Home Depot sells tools, appliances, household items, lawn and garden, etc, they will pickup any Sears customers looking for a new outlet.
Update 11/18: The company reported earnings of $2.51 compared to estimates for $2.27. Revenue rose 5.1% to $26.30 billion and narrowly beat estimates for $26.242 billion. Same store sales rose 4.8% and beat estimates slightly. They guided for full year revenue to rise about 7.2% with 5.5% same store sales. They guided for earnings of $9.75. Shares will recover.
Long Jan 2020 $190 LEAP Call @ $14.76, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $5.54, see portfolio graphic for stop loss.
Net debit $9.22.
Long Jan 2020 $190 LEAP Call @ $11.70, see portfolio graphic for stop loss.
Short Jan 2020 $220 LEAP Call @ $4.27, see portfolio graphic for stop loss.
$190 Call = $13.25
$220 Call = $ 4.90
Net debit = $8.35
HPQ - HP Inc - Company Description
HP reported earnings of 54 cents that matched estimates. Revenue of $15.4 billion rose 10% and beat estimates for $15.1 billion. The company guided for current quarter earnings of 50-53 cents and full year earnings of $2.04-$2.14. Analysts were expecting 53 cents. Shares rallied on the news but faded on Thursday.
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 9/16: HPQ announced the world's most advanced 3D metal printing system. They claim the system is now 50 times more productive at a significantly lower cost. They also announced their new Metal Jet Production Service to allow manufacturers to upload their CAD designs and have the parts printed on HP equipment. This is a major breakthrough for HPQ and shares should continue higher. They have partnered with GKN and their various divisions. They produce more than 3 billion component parts per year and expects to print MILLIONS of HP Metal Jet parts in 2019.
Update 10/7: On Wednesday after the close HPQ issued guidance for 2019 for earnings of $2.12-$2.22 and said they were raising the dividend by 15%. Analysts were expecting $2.15. They expect to return 50% to 75% of 2019 free cash flow to shareholders as dividends and share buybacks. They said 2018 had been a strong year for HP and 2019 was expected to be even better. They said demand was strong in the PC sector and across all their other product lines. Shares spiked to a new high at $27 then fell back to earth at $25 on the Nasdaq crash.
Long Jan 2019 $25 call @ $2.13, see portfolio graphic for stop loss.
Long Jan 2019 $25 call @ 85, average cost now $1.49.
IBM - IBM Inc - Company Description
No specific news. Moving in the right direction again.
Original Trade Description: Nov 4th.
International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. This segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. International Business Machines Corporation was founded in 1911 and is headquartered in Armonk, New York. Company description from FinViz.com.
IBM announced last week they were acquiring Red Hat (RHT) for $34 billion. Shares were crushed and fell to $115 and a 9-year low. "They paid too much," "what were they thinking?" They were thinking about changing the playing field for cloud computing.
Some analysts praised the deal saying "this is as transformative as it gets." Some analysts warned that IBM could be forced to take on billions in new debt just as interest rates were rising. IBM generates about $12 billion in free cash flow per year and Red Hat also kicks off a lot of cash. IBM alone could fund this deal using only free cash flow in three years. The IBM said the deal would be accretive in year one and would boost free cash flow and margins in year one. IBM also has $15 billion in cash on its balance sheet.
IBM has been penalized for constantly falling revenue for years. The prior IBM business model was producing profits but the decline in hardware costs and move away from single clouds to multiple clouds per enterprise meant a constantly shrinking services base.
To solve this problem they acquired the largest hybrid cloud provider on the planet. Not only that Red Hat dominates the open source software component of the cloud. Red Hat grows revenue each quarter at double digit rates with 85% gross margins and 20% plus operating margins. IBM has flat revenue and 50% gross margins and 20% operating margins. IBM is acquiring a revenue generating machine and they do it at high margins.
More than 90% of Fortune 500 companies are Red Hat users with more than 100,000 Red Hat customers in total. The opportunity to cross sell products in the future is unbelievable. This is a marketing bonanza.
In cloud alone this will boost IBMs regular cloud business. The combination of IBM and Red Hat will eventually take market share from Amazon, Google and Microsoft. With IBM shares trading at a PE of 8 this is a this is an outright bargain. It may take several months for the reality to overcome the acquisition shock but once investors realize IBM is going to be a major power player in the cloud the stock will rise and $150 could be just a pause point.
Lonf Jan 2020 $125 LEAP Call @ $6.85, see portfolio graphic for stop loss.
Long Jan 2021 $125 LEAP Call @ $10.80, see portfolio graphic for stop loss.
IBM shares could be $200 by the time this call expires.
INTC - Intel - Company Description
No specific news. Shares closed just over resistance at $49. Monday could be a big day.
Original Trade Description: Nov 18th.
Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, desktops, and wireless and wired connectivity products; enterprise, cloud, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, military, and automotive markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has collaboration with Tata Consultancy Services to set up a center for advanced computing that develops solutions in the areas of high performance computing, high performance data analytics, and artificial intelligence. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.
Intel has bucked the trend in the chip sector by beating on earnings and giving decent guidance. Shares have resisted any material decline in November and appear to be poised to break through resistance at $49.
On Thursday Intel announced a $15 billion share buyback program. Intel had $4.7 billion remaining under a prior authorization putting them just shy of $20 billion. This represents almost 10% of the outstanding shares. Six years ago Intel had 6.5 billion shares outstanding. If they complete this buyback program they will have just over 4 billion shares outstanding.
Intel is poised to profit from the coming 5G revolution. Apple has already said they are going to use Intel's 5G model in their 2020 phones. Intel has participated in more than 25 5G trials with potential partners. In the last quarter Intel said revenue from communications service providers rose 30%. The company said in August it is pursuing the $24 billion communications infrastructure segment of the market and expects to gain significant market share by 2022. Intel is not just a PC and server processor company any more.
Earnings January 24th.
Long Jan 2020 $55 LEAP Call @ $3.85, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF - Company Description
The Russell rebounded to short-term resistance but the move was lackluster. Russell futures are up 23 points on Sunday evening.
Original Trade Description: Oct 7th.
The IWM is the Russell 2000 iShares ETF. The ETF offeres exposure to 2,000 small cap U.S. companies. The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
The Russell 2000 and the IWM have declined to the 200-day average, which has been strong support in prior market declines. There is no guarantee the index will rebound from this level because of the current fear of rising rates. Small cap stocks are especially sensitive to rate issues.
If the index is going to rebound into the Q3 earnings cycle this is where it should bottom. If we have a Q3 earnings rally, I would expect to see new highs by mid December.
Long Jan $168 Call @ $2.77, no initial stop loss.
Long (2) Jan $168 calls @ .80, no initial stop loss.
Average cost now $1.46 per contract.
KR - Kroger - Company Profile
No specific news. Minor decline on Friday. Earnings this week.
Original Trade Description: Sept 16th.
The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food products for sale in its supermarkets. The company operates supermarkets, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty care departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys; and convenience stores comprise a limited assortment of staple food items and general merchandise, as well as sells fuel. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of March 8, 2018, the company operated 2,800 retail food stores under various banner names, as well as an online retail store. The Kroger Co. was founded in 1883 and is based in Cincinnati, Ohio.
Company description from FinViz.com.
Kroger reported Q2 earnings and beat by a penny but revenue barely missed estimates. Kroger reported earnings of 41 cents compared to estimates for 29 cents. Revenue of $27.9 billion rose 1.8% but was just below estimates for $30.0 billion. Same store sales rose 1.6% but missed estimates for 1.8%. Shares were knocked for a 12% drop. Really, were the results that bad? No.
Kroger is only two quarters into their "Restock Kroger" restructuring program where they are remodeling the majority of the stores, changing the product mix and making the stores more inviting. They are spending a lot of money to prepare for the future.
Here is a key point. Online sales rose 50%. How many other retailers can make that claim? They are now selling their organic Simple Truth brand in Asia through Alibaba's Tmall. They just launched Kroger Ship and expanded their Instacart offering.
They guided conservatively for gull year same store sales to rise 2.0-2.5% and for earnings of $2.00-$2.15. Analysts were expecting $2.12 and that is where the stock crash was created.
For a company that is remodeling 2,800 stores and spending money to improve its future results, I think this decline was overkill.
Fortunately, it deflated the option prices significantly. We can buy a 2020 call for $2.57 that was in the money early last week. Kroger is not a chart ripper and it will not be $50 in January but it could be over $50 in Jan 2020 or higher as these merchandising efforts begin to bear fruit.
Update 11/4: Kroger teamed up with Toys-R-Us to create Geoffrey's Toy Box at 600 Kroger locations. Kroger will offer 35 toys using the Toys-R-Us brands like Animal Zone and Imaginarium. The company's giraffe mascot, Geoffrey will be prominently displayed. Since there are a lot of kids in Kroger stores this should be a lucrative arrangement for Kroger.
Long Jan 2020 $30 LEAP Call @ $2.70, see portfolio graphic for stop loss.
Long Oct $27 put @ 48 cents, see portfolio graphic for stop loss.
MCD - McDonalds Company Profile
No specific news. New high close on Thursday. Morgan Stanley upgraded from equal weight (neutral) to overweight (buy) and boosted the price target from $173 to $210. Shares closed at $188.
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 10/28: McDonalds reported outstanding earnings with 5% revenue growth internationally and 2.4% domestically. The company said it was spending $1.6 billion to remodel 12,000 stores and add digital menu screens and ordering kiosks. Stores already updated are seeing significant upticks in ordering and average ticket size. McDonalds is currently doing 1,000 stores a month.
The company reported earnings of $2.10 compared to estimates for $1.99. Revenue of $5.37 billion beat estimates for $5.30 billion. Both numbers were down from the 2017 quarter because of the downtime in each store for the remodel. Taking 1,000 stores a month offline reduces a lot of sales. Revenue in the year ago quarter was $5.75 billion.
Long Jan $170 call @ $8.52, see portfolio graphic for stop loss.
Previously closed 8/20: Short Jan $190 call @ $2.79, exit .43, +$2.36 gain.
MRK - Merck & Co - Company Description
No specific news. Shares hit another new high after the company received approval for two additional HIV medicines.
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 10/28: Merck shares imploded after the company reported earnings of $1.19 that beat estimates for $1.14. Revenue of $10.79 billion rose 4.5% but missed estimates for $10.88 billion. They raised guidance for the full year from $4.22-$4.30 to $4.30-$4.36. Revenue guidance was narrowed but stayed in the same range. Shares fell $4 on the earnings but recovered all of it by Friday's close.
The company raised its dividend 15% to 55 cents. It is payable January 8th to holders on December 17th. They also announced a $10 billion share buyback.
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
No specific news. Shares back to resistance and we should see a breakout this week. Microsoft is now the largest market cap stock, exceeding Apple.
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 10/28: Microsoft reported earnings of $1.14 that beat estimates for 94 cents. Revenue rose 19% to $29.08 billion. The Azure cloud revenue rose 76%. The intelligent cloud platform saw revenues rise 24% to $8.6 billion. To support the rapidly growing cloud Microsoft spend $3.6 billion in the quarter on servers and data center leases. Gaming revenue rose 44% to $2.74 billion and Linkedin revenue rose 33% to $1.53 billion.
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.
QCOM - Qualcomm - Company Profile
No specific news. The trade truce with China will be positive for the stock. Trump said if Qualcomm tried to buy NXP Semi again now, President Xi would approve it.
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.
Update 11/11: Qualcomm reported earnings of 90 cents that beat estimates for 83 cents. Revenue of $5.80 billion also beat estimates for $5.52 billion. However, the company guided for Q4 revenue of $4.5-$5.3 billion and earnings of $1.05-$1.15. Analysts were expecting $5.57 billion and 95 cents. The decline was due to a lack of Apple sales. Apple normally buys 35-50 million chips in Q4 but they have dropped Qualcomm as a supplier until the royalty fight is concluded in court. Shares lost $7 post earnings.
Update 11/18: Cowen reiterated a buy rating and $73 target. Canaccord Genuity reiterated a buy and $75 target. Bank of America reiterates a neutral and $67 target. Shares closed at $56.
Long Jan 2020 $70 call @ $5.00, see portfolio graphic for stop loss.
SPY - S&P SPDR ETF - ETF Profile
Very strong rebound and the S&P is poised to open 45 points higher on Monday.
This is a VERY long-term play on the market with a 2020 LEAP.
Original Trade Description: Sept 30th.
The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world.
The SPY has pulled back to the 30-day average and actually a steeper decline than the S&P-500. The SPY is near support at the 30-day average.
I believe the market is going to move higher during the Q3 earnings cycle. Even if we do not see a Q3 earnings rally the long term outlook is positive.
The 12 months after mid-term elections have seen the S&P gain an average of 15% for the last 18 midterms. That is 72 years and the S&P has gone up every time. There are almost no trends in the market that repeat 100% of the time. By recommending this position I have probably jinxed the coming year.
However, with the economy growing at more than 4% GDP, unemployment at record lows and Q3 earnings expected to show 20% growth or better, this should be a good opportunity for the trend to repeat.
If we do get a 15% rally over the next 12 months that would be 45 SPY points. The options are expensive for obvious reasons. I do not want to make it a spread and give up a significant portion of our eventual gains. I am going to recommend an offsetting short put to defray the cost of the call. If you cannot write cash secured puts then you should turn it into a spread by selling the call of your choice.
Long Jan 2020 $300 Call @ $16.80, see portfolio graphic for stop loss.
Short Jan 2020 $270 Put @ $10.61, see portfolio graphic for stop loss.
Net debit $6.19.
TEVA - Teva Pharmaceuticals - Company Description
No specific news. Teva's biosimilar for Rituxan received FDA approval for Non-Hodgkin Lymphoma.
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 11/4: Teva reported earnings of 68 cents that beat estimates for 54 cents. Revenue of $4.53 billion beat estimates for $4.46 billion. The company has achieved cost reductions of $1.8 billion in the first nine months of its restructuring program. They raised guidance for the full year from $2.55-$2.80 to $2.80-$2.95. Analysts were expecting $2.73. Shares spiked 6% on the news.
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.
TGT - Target - Company Description
Bank of America said buy Target because their online sales were growing faster than Amazon's.
Original Trade Description: Nov 25th.
Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and decor comprising furniture, lighting, kitchenware, small appliances, home decor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday decor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Cafe, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota.
Company description from FinViz.com.
Bloody cleanup isle 5! Target shares were beaten severely when they missed estimates by 2 cents on their Q3 earnings. The company reported earnings of $1.09 that missed estimates for $1.11. Revenue rose to $17.59 billion but that missed estimates of $17.81 billion. Same store sales rose 5.1%, a 3.2% improvement but missed the 5.5% consensus. Digital sales rose a whopping 49% and now contribute 2% to overall revenue.
They guided for the full year for earnings of $5.30-$5.50 and analysts were expecting $5.42. They guided for 5.0% same store sales.
Analysts picked on them for a 17% rise in inventory. Target said with the demise of Toys-R-Us they had stocked up heavily on toys and planned on a big holiday. They want to grab as much of the market share from Toys-R-Us as possible and will be advertising heavily. That will draw more people into the stores and lead to more sales of other merchandise as well. They pointed out that 2018 had the maximum number of sales days on the calendar between Thanksgiving and Christmas.
The guidance was the same as they issued at the end of Q2. They did not back off. The 5.0% same store sales was higher than the 4.4% the street was expecting.
Target has also beefed up their more than a dozen private label brands that have a larger profit margin and that will help in the December quarter. Keybanc estimates the Toys-R-Us exit, Sears bankruptcy and other store closings has put $17 billion in retail market share up for grabs in areas where Target is expected to compete well and add multiple percentage points to their growth. Keybanc maintained their $100 price target. Target shares have fallen to $67 post earnings and are now trading at a PE of 13 compared to 18 for Walmart. That means Target is on sale at the right price.
Long Jan 2020 $75 call @ $5.60, see portfolio graphic for stop loss.
UTX - United Technologies Company Profile
UTX confirmed its plan to split into three companies. Otis Elevator, Carrier Climate Systems and UTX Aerospace. The split will not occur until 2021 because of the complexity. Shares fell on the news because of a $2 billion price tag.
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-35 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.
Update 10/28: UTX reported earnings of $1.93 that beat estimates for $1.82. Revenue of $16.51 billion beat estimates for $16.15 billion. They guided for the full year for earnings of $7.20-$7.30, up from $7.10-$7.25. Revenue guidance rose from $63.5-$64.5 billion to $64.0-$64.5 billion. Shares rose sharply on the news but then cratered in the anti-industrial market crash on Thursday.
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.
XLC - S&P Communication Services ETF - ETF Profile
Shares starting to recover with the Nasdaq but FB is still a major drag.
Original Trade Description: Sept 23rd.
The Communication Services Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Communication Services Select Sector Index (the "Index"). The Index seeks to provide an effective representation of the communication services sector of the S&P 500 Index. Seeks to provide precise exposure to companies from the media, retailing, and software & services industries in the U.S. and allows investors to take strategic or tactical positions at a more targeted level than traditional style based investing. Description from State Street Global Advisors.
With FB, Alphabet, ATVI, NFLX, EA, TWTR, TTWO and TRIP all moving to the previously dormant XLC sector ETF, the odds are good that a lot of portfolio managers will shift investments to the ETF in order to be exposed to those stocks.
The downside to this theory is the 15 or so unwanted telephone, newspaper and TV stations in the same ETF. Fortunately, those stocks I listed above make up 59.5% of the ETF so they should control the direction. After seeing the big cap techs decline for no particular reason over the last two weeks it seems obvious now that they were victims of the S&P/MSCI index/ETF restructuring.
There are no leaps so I am using the longest dated option and maybe we will be rewarded with a Q3 earnings rally.
Long March $50 Call @ $2.30, see portfolio graphic for stop loss.
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Prices Quoted in Newsletter
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