A lot happened over the last week that removed some market barriers.
Last week the market was all stressed out over the North Korean H-bomb test. There were strong concerns they would launch a new ICBM over the weekend. The market was weak on Friday on fears of weekend event risk.
Last week everyone was worried over the pending budget battle and debt ceiling crisis. The urgent need for Hurricane Harvey relief money caused a compromise between Trump and the democrats and the deadlines were extended until December 15th.
The monster storm Irma with 185 mph winds was heading for the US. Floridians were panic stricken over the potential damage. Irma appeared and caused damage but it was not in Miami and it was far less than expected.
The S&P futures were up +15 before the open on Monday and a monster relief rally and short squeeze was born. The Dow gained 259, S&P 27 and Nasdaq 72. The S&P closed at a new high by 8 points and the Nasdaq only missed by 3 points. The Dow needed an additional 62 points.
The removal of the political hurdles is a big deal for the markets. Analysts also saw the lack of a Korean missile test over the weekend and some softening of rhetoric from the US as a potential sign there were some back channel negotiations in progress. This also boosted market sentiment.
The UN passed additional sanctions late Monday and that prompted some criticism from NK but it was also muted. Several analysts suggested China had finally reached the point where they threatened NK in private and that was keeping Kim Jong-Un in check. The UN came very close to cutting off oil shipments to NK and that would have been very painful. Since China supplies 90% of their oil, there were probably some heated discussions with NK behind the scenes.
We should not kid ourselves. Monday was mostly short squeeze rather than new buying. That squeeze did boost sentiment by reversing the prior four days of declines. Now investors will have to decide if they want to buy the market top or short it.
There is a distinct lack of negative catalysts in our future. Only the Fed meeting on the 20th remains a problem but it may only be a minor blip depending on their statement. Fundamentals remain good and a new high on the Dow this week could draw more people into the market.
The next hurdle for the S&P is 2,500 and strong psychological resistance. A move over that level would be a powerful signal.
The Dow was strongly lopsided to advancers on Monday with multiple stocks contributing double digits to the Dow's gains. Home Depot was down because of the lower damage estimates for Florida but it should only be temporary.
If the Dow can stretch past the new high level at 22,118 it would be very good for market sentiment.
The Nasdaq rally was mostly big cap techs but the A/D line was better than 2:1 positive. Volume was only moderate at 1.7 billion shares compared to 1.82 billion last Thursday.
Apple reversed its losses from Friday with a $2.87 gain ahead of the product announcement on Tuesday. If the announcement disappoints we could see a larger than normal decline over the next three weeks. Apple shares typically decline slightly in the first three weeks after an announcement.
The record intraday high for the Nasdaq is 6,460.84. That will be the next target for the tech index followed by 6,600.
The Russell 2000 reversed its losses from the last week but came to a dead stop at resistance at 1,415. This could be a hurdle for the small caps.
The only material earnings event this week is Oracle after the close on Thursday.
The Apple product announcement is the big event this week with the price indexes coming in second and third. This is a quadruple witching expiration week so volume will be higher as the week progresses.
I sincerely hope this short squeeze can trigger some follow on buying and North Korea does not suddenly decide to launch another missile just to prove they can and could care less about sanctions. The last two Korean events have been severely market negative.
September is normally the most volatile month of the year because of the political deadlines at month end. Now that those deadlines and threats of government shutdowns have been pushed out to December, there is really nothing left in the wall of worry except for the Fed meeting on the 20th.
Portfolio managers do tend to restructure portfolios in September so it remains to be seen how they will act this year.
Dips have been bought so any dip remains a buying opportunity until that trend changes.
Enter passively, exit aggressively!
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NEW DIRECTIONAL CALL PLAY
It is really hard trying to find stocks to recommend after a 260 point gain on the Dow and a new high on the S&P. All of the stocks we would want to play were up $3-$5 and premiums were out of sight. I feel good about Dollar Tree and their pending breakout.
DLTR - Dollar Tree - Company Profile
Dollar Tree, Inc. operates variety retail stores in the United States and Canada. It operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates under the under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as blankets, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. As of January 28, 2017, the company operated 14,334 stores in 48 states and the District of Columbia, and 5 Canadian provinces.
Company description from FinViz.com
Dollar Tree reported earnings in late August that rose 36.1% to 99 cents and beat estimates for 87 cents. Revenue of $5.28 billion rose 5.7% and beat estimates for 5.24 billion. Same store sales rose 2.4%. They guided for the full year for revenue of $22.07-$22.28 billion, up from $21,95-$22.25 billion. Earnings guidance of $4.44-$4.60 rose from $4.17-$4.43.
Shares spiked $6 on the earnings and then went through a week of post earnings depression. Shares have firmed and are right on the verge of breaking through resistance to a 9 month high, and probably higher.
Next earnings Nov 23rd.
After earnings Raymond James upgraded them from market perform to strong buy. Bernstein upgraded from underperform to market perform. Telset Advisory reiterated an outperform.
Dollar Tree is Amazon proof. With everything in the store $1 or less even Amazon cannot sell and ship items that cheap. Since their acquisition of Family Dollar they now operated 14,334 stores. This is a retail powerhouse and even if the economy weakens, their business will thrive because of the low price point.
Shares are right at resistance at $83.50 and a 5-month high. They are poised for a breakout with the next resistance at $90.
The November options expire several days before earnings so I am going with the January strikes so there is some earnings expectations in the premium when we exit before the event.
Buy Jan $87.50 call, currently $3.40, initial stop loss $77.50.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
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Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
CERN - Cerner Corp
The long call position was entered at the open on Tuesday.
WDC - Western Digital
The long call position was stopped at $86.65 on Friday.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
This stock has gone to the moon. AbbVie filed two new drug applications with the FDA and reported positive results on two drug trials. Shares have gained $12 in a week. On Monday they reported studies on rheumatoid arthritis with the drug Upadacitinib had met all primary and secondary endpoints. In testing two different doses 40% of patients reported clinical remission after 12 weeks and 50% reported the same after 24 weeks, without any unforeseen side effects. These were patients that had failed to respond to conventional treatments. More than 23 million people are afflicted with this disease. This will be a blockbuster drug for AbbVie and they have many more in the pipeline.
Given the strong gains, I would expect from profit taking. I am going to tighten the stop loss significantly to protect our gains.
Original Trade Description: August 7th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.
Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11. AbbVie reported Q2 earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.
Next expected earnings Oct 27th.
Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.
The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.
The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.
The company received a favorable opinion on MAVIRET, a once daily Hep-C drug, from the European Medical Agency and the CHMP. This is an 8-week cure for Hep-C that will compete with Gilead's products.
Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings drop is a buying opportunity and shares are rebounding.
Update 8/21/17: AbbVie said its all genotypic drug for Hep-C was approved in Canada. This is an 8-week treatment with a 97% cure rate. It is the only drug approved for all patients across all stages of the disease.
Options are very cheap.
Long Nov $72.50 call @ $1.90, see portfolio graphic for stop loss.
AKAM - Akamai Technologies - Company Profile
No specific news. The rebound has stalled. I raised the stop loss again. Akamai will present at the IBC conference on Sept 16th. For the first time IBC will feature a dedicated forum on cybersecurity.
Original Trade Description: July 31st.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com
Expected earnings Oct 24th.
Akamai beat on earnings and revenue for Q2 but analysts thought the guidance was a little light. Shares were crushed for an $8 loss. The company posted earnings of 62 cents that beat estimates for 60 cents. Revenue rose 6.4% to $608.9 million and beat estimates for $604.5 million.
The company guided for Q3 earnings of 57 to 60 cents and analysts were expecting 61 cents. Revenue guidance was $604-$616 million and expectations were $619.4 million.
Akamai is losing business from the "Big Six" including Apple, Amazon and Netflix as those companies refine their "do it in house" strategies to keep from having to pay so much to Akamai. The income from the big six fell 9% to $178.9 million. Akamai has reported on this metric for the last two years and this was the 7th quarter of decline. Akamai is still the largest content delivery service and total revenues are still rising.
Revenues in their new cyber security business rose 32% and the web performance business rose 15%. Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.
I believe the big drop in the shares was an overreaction and their new businesses are growing so rapidly that revenue will continue to expand. They are forecasting 6% growth in Q3 and 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.
If the market is going to be weak, these shares in companies that have already been punished will look like value stocks to investors looking for a safe haven after they exit the FAANG stocks.
Update 8/28/17: Akamai collaborated with Google, Cloudfire, Flashpoint, RiskIQ and the RBI to squash a botnet named WireX that had infected 120,000 Android phones in early August. The bot was generating 20,000 page requests a second against a set of targeted servers in a DoS attack.
Long Nov $50 call @ $2.28, see portfolio graphic for stop loss.
AMED - Amedisys - Company Profile
No specific news. Resistance has formed at $52.50 but shares are not shying away from it.
Original Trade Description: August 7th.
Amedisys, Inc., together with its subsidiaries, provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The Home Health segment offers a range of services in the homes of individuals for the recovery of patients from surgery, chronic disability, or terminal illness, as well as prevents avoidable hospital readmissions through its skilled nurses, physical and speech therapists, occupational therapists, and aides for its patients to complete their important personal tasks. The Hospice segment offers care that is designed to provide comfort and support for those who are dealing with a terminal illness, including heart disease, pulmonary disease, Alzheimer's, HIV/AIDS, and cancer. The Personal Care segment provides assistance for patients with the activities of daily living. As of March 1, 2017, the company owned and operated 420 care centers in 34 states. Amedisys, Inc. was founded in 1982. Company description from FinViz.com
On July 26th, the Centers for Medicare and Medicaid Services (CMS) said it may reduce reimbursements for home healthcare in 2018 by 0.6$. This was less than the 0.7% reduction in 2017 but shares imploded. On July 27th, the company reported earnings of 63 cents that beat estimates for 50 cents. Revenue of $378.8 million missed estimates for $380.6 million. The combination of the two events knocked $15 off the stock.
Amedisys has 385,000 home health, hospice and personal care patients in 34 states. In Q1, home health was responsible for $271 million of the total $370 million in revenue. Medicare paid 73.4% of the billing for those services. Obviously a -0.4% drop in reimbursements would be painful, it was less than the -0.7% decline in 2017. Amedisys understands this annual reimbursement process and they deal with it. The news was not worth a $15 drop in the stock price.
Next expected earnings October 25th.
I would normally go for the $50 strike price but since we are entering the normally weak Aug/Sep period, I am bumping the recommendation to the $55 strike and the 50% cheaper option. There is not a November option series so the December $55 gives us plenty of time for a decent rebound.
Update 9/3/17: Amedisys announced a definitive agreement to acquire Intercity Home Care. Intercity's entire asset base will be taken over by Associated Home Care. Amedisys will gain access to the 19,000 patients serviced by Intercity.
Long Dec $55 call @ $2.12, see portfolio graphic for stop loss.
CERN - Cerner Corp - Company Profile
No specific news. Shares broke out to a new two-year high.
Original Trade Description: September 3rd.
Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. In addition, the company offers a portfolio of clinical and financial health care information technology solutions, as well as departmental, connectivity, population health, and care coordination solutions; and various complementary services, including support, hosting, managed, implementation, and strategic consulting services. Further, it provides various services, such as implementation and training, remote hosting, operational management, revenue cycle, support and maintenance, health care data analysis, clinical process optimization, transaction processing, employer health centers, employee wellness programs, and third party administrator services for employer-based health plans; and complementary hardware and devices for third parties. It serves integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments, and public health organizations.Company description from FinViz.com
Cerner reported earnings of 61 cents that met analyst expectations. Revenue of $1.29 billion missed estimates for $1.3 billion. They guided for Q3 for earnings of 61-63 cents and revenue of $1.26-$1.33 billion. Analysts were expecting $1.29 billion. For the full year, they guided for earnings of $2.46-$2.54 and revenue of $5.15-$5.25 billion. Shares declined $4 on the report. The earnings were not bad, they just were not exciting.
Expected earnings October 26th.
On August 14th, MIT Medical selected Cerner's integrated healthcare technology and shares reversed their slide. On August 30th, IBD upgraded their rating from 69 to 73 saying internal metrics were improving and to watch for a breakout over prior resistance highs.
Last week Cerner announced a partnership with HealthSouth to create the Post-Acute Innovation Center. The center is planned to develop enhanced tools to manage patients across the continuum of care. Full press release
Shares have rebounded to the old resistance highs ay $68.50 and this time I expect a breakout that could easily add $10 to the price. There was a double top in June but triple tops normally lead to breakouts.
Long Dec $70 call @ $2.70, see portfolio graphic for stop loss.
FL - Foot Locker - Company Profile
No specific news. The rebound stalled as Finish Line and Nike continue to get pounded in the analyst commentary.
Original Trade Description: August 21st.
Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of April 29, 2017, this segment operated 3,354 stores in 23 countries in North America, Europe, Australia, and New Zealand. The Direct-to-Customers segment sells athletic footwear, apparel, equipment, and team licensed merchandise for high school and other athletes through Internet and mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com. In addition, the company had 62 franchised Foot Locker stores in the Middle East and South Korea, as well as 15 franchised Runners Point stores in Germany. Company description from FinViz.com
Foot Locker shares were crushed in mid August when they announced earnings of 62 cents compared to estimates for 90 cents. Revenue fell -4.4% to $1.7 billion and missed estimates for $1.8 billion. Same store sales declined -6% compared to estimates for a 1% decline.
According to Foot Locker the miss was due to some premium sneaker brands that failed to perform. Nike was the offending provider. The CEO also said, there was "limited availability of innovative new products in the market." This goes along with Nike's pullback of some high profile offerings that were not selling. You can only have so many Steph Curry styles and adding 20 other similar models by lesser known names, did not appeal to the buying public.
Foot Locker shares were already down since May after Nike said it was going to sell directly on Amazon. That is not as big a threat as it seems since they are going to limit their sales to about 30% of their product line. I would view Amazon sales as liquidating surplus inventory.
Foot Locker fell 25% on the missed earnings. They were hammered by five downgrades by UBS, RW Baird, Canaccord Genuity, Wells Fargo and Telsey Advisory Group. However, the average target price from those analysts is still $62. Shares fell to $32 on the earnings.
Buckingham Research, Jefferies and Susquehanna reiterated buy ratings. They acknowledged the temporary weakness caused by Nike but also reminded that Adidas sales were surging. They said Foot Locker tends to stay on top of trends in athletic footwear fashion and lead the industry by adapting to consumer shifts in sports dominance. Sporting trends change. Basketball may have been hot last year but running shoes may be hit this year. The analysts reminded that FL generates a lot of free cash flow that will enable them to sustain a negative trend while they leverage new trends for the future.
Given the market conditions and the place on the calendar, I was looking for a stock that has already been crushed and has little downside while still giving us some decent upside. I would be surprised if FL dipped back below $32 without a 10% correction in the market and I do not see that happening.
Earnings Nov 17th.
Long Nov $38 call @ $1.70, see portfolio graphic for stop loss.
WDC - Western Digital - Company Profile
On Friday afternoon, Apple warned Toshiba it would no longer buy Toshiba chips if WDC was successful in taking control of the half of Toshiba it does not own. Shares of WDC fell sharply and stopped us out of the position for a breakeven. I had tightened the stop loss just in case they lost the bid and shares imploded.
Monday night Reuters reported WDC was successful in winning the bid and Toshiba would announce the results later this week. Shares rallied $5 in afterhours.
Original Trade Description: August 21st.
Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com
WDC shares have been depressed over the last month because of the battle underway with Toshiba over the sale of the Toshiba chip business. WDC, through its acquisition of SanDisk has a 50% ownership in the chip business and reportedly has to approve any sale. WDC has blocked the sales by Toshiba to a consortium led by Bain Capital. WDC has filed for arbitration and that case will take well into 2018 to resolve. Toshiba has to complete the sale in late August or very early September in order to close the sale by March and avoid being delisted. They need the $19 billion to fill the hole caused by the Westinghouse bankruptcy and time is growing short.
WDC has made Toshiba 6 different offers over the last two months and even offered to match the offer made by Bain. We learned last the head of Toshiba, WDC, members of the Ministry of Economy, Trade and Industry will meet in the coming days to try and resolve the impasse. Since WDC has the legal hammer with 50% ownership, the partnership agreement and the binding arbitration case already in progress, analysts believe it will be resolved in favor of WDC gaining ownership of the 50% of the business they do not currently own. Since Bain has said their group will not make payment until all the legal questions have been resolved, that means the only qualified buyer is WDC because they can keep it tied up in court for a year. Worst case, WDC could agree to join the Bain consortium with a majority stake and leave WDC in charge of the business.
It appears we are headed for a successful solution and that will remove the cloud over WDC shares.
Earnings Oct 26th.
I am recommending we play WDC for the resolution of the Toshiba sale, which has to happen over the next several weeks in order to close by March and avoid Toshiba being delisted. We have the choice of October or January options. There are no Nov/Dec strikes. I am going with October because of the cost. That should be plenty of time for a resolution.
Update 8/28/17: Reuters is claiming a deal to acquire Toshiba's memory business will be announced on Thursday after the Toshiba board meeting. Reportedly, WDC will contribute $1.4 billion in a consortium with KKR, the Development Bank of Japan and the Innovation Network of Japan. This would be a great deal for WDC if it happens.
Separately, WDC announced the asset acquisition of UpThere, a startup cloud storage company. The company stored photos, videos, documents and music for individuals. The platform is agnostic and works with iPhone, iPad, MacOS, Windows PCs and Android operating systems. WDC and cloud storage makes a lot of sense when they have all the disk storage they could ever want at a rock bottom price.
Closed 9/8: Long Oct $87.50 call @ $3.35, exit $3.45, +.10 gain.
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