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Wednesday, March 04, 2015 7:47:59 PM EDT
Stocks See Overdue Pullback
by James Brown
Click here to email James Brown
Editor's Note:
After surging to new highs stocks were due for a little profit taking. The market produced widespread losses for the second day in a row. Disappointing data from the ADP report offset a generally positive tone in the Fed's Beige Book today.
AET hit our entry trigger today.
Our plan was to exit ZMH this morning. IWM and SBUX hit our stop loss.
Current Portfolio:
CALL Play Updates
Aetna Inc. - AET - close: 101.75 change: +1.96
Stop Loss: 98.85
Target(s): To Be Determined
Current Option Gain/Loss: +8.1%
Average Daily Volume = 2.2 million
Entry on March 04 at $101.15
Listed on March 02, 2015
Time Frame: 8 to 12 weeks
New Positions: see below
03/04/15: Initial weakness in the healthcare names faded. There may have been some concern regarding headlines that the U.S. Supreme Court heard arguments today regarding a case that could kill Obamacare. Those concerns evidently faded. The court is not expected to render a decision until June.
Shares of AET surged to a new closing high. In doing so the stock hit our suggested entry point at $101.15.
Trade Description: March 2, 2015:
Healthcare stocks have been extremely strong performers from the market's mid October 2014 lows. Investors have continued to buy the dips and that's especially true in shares of AET. This stock has been outperforming the market in 2015 and currently up +12.0% for the year.
Who is AET? According to the company, "Aetna is one of the nation's leading diversified health care benefits companies, serving an estimated 46 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, and medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products and services. Aetna's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates."
Investors have been bullish on big healthcare names because of the Affordable Care Act (a.k.a. Obamacare). Initially this industry was resistant to the deal. Obamacare did get off to a rocky start. Yet now a couple of years after its launch most of the wrinkles have been ironed out. Obamacare has generated millions of new health insurance customers for the industry.
Earnings have been strong. AET's most recent earnings report was February 3rd. The company delivered a Q4 profit of $1.22 a share. That was in-line with estimates. Revenues were up +12.5% to $14.77 billion, which was above expectations. More importantly AET raised their 2015 guidance from $6.90 a share to $7.00. That's actually below Wall Street's estimate but it's moving the right direction. Multiple analysts raised their price target on AET following the Q4 report. Meanwhile the point & figure chart is bullish and forecasting at $119 target.
The healthcare providers got another boost last week on February 23rd after the government issued new proposals to raise the rate they pay insurers for Medicare/Medicaid. Shares of AET have not seen that much profit taking from its February high and traders are already buying the dip.
We want to jump on board if this rally continues. Tonight we're suggesting a trigger to buy calls at $101.15. We'll try and limit our risk with an initial stop loss at $98.85.
- Suggested Positions -
Long Apr $105 CALL (AET150417C105) entry $1.36
03/04/15 triggered @ 101.15
Option Format: symbol-year-month-day-call-strike
Alaska Air Group - ALK - close: 65.77 change: -0.39
Current Option Gain/Loss: Unopened
Entry on March -- at $---.--
New Positions: Yes, see below
03/04/15: ALK reported its February data. Traffic was up +7.9% with capacity up +9.4% in February versus a year ago. Revenue passengers jumped +9.6%. The stock didn't react much to the news and continues to consolidate sideways just below short-term resistance at $66.00. Our suggested entry point to buy calls is $66.35.
The collapse in the price of crude oil has been a huge windfall for the airline industry. As a result airline stocks have soared from the market's October 2014 lows. That's because air fares remain near 11-year highs while fuel prices have dropped to five-year lows, boosting profit margins. Today analysts are expecting jet fuel to average less than $2.00 a gallon in Q1 2015. According to the U.S. Transportation Department jet fuel dipped this low back in December and before that it hasn't been this low since 2009.
ALK is a regional airline. The company is more than 80 years old and currently has a fleet of more than 180 planes. According to the company, "Alaska Airlines, a subsidiary of Alaska Air Group (ALK), together with its partner regional airlines, serves more than 100 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked 'Highest in Customer Satisfaction Among Traditional Carriers' in the J.D. Power North American Airline Satisfaction Study for seven consecutive years from 2008 to 2014. Alaska Airlines' Mileage Plan also ranked highest in the J.D. Power 2014 Airline Loyalty/Rewards Program Satisfaction Report."
ALK has shown consistent earnings growth and beat Wall Street's EPS estimate the last four quarters in a row. Their most recent earnings report was January 22nd. ALK reported Q4 earnings of $0.94 a share. That's a +70% increase from a year ago thanks to a -32% drop in fuel prices. Management has also cut non-fuel expenses. Meanwhile ALK's traffic, measured in revenue passenger miles, was up +9.5%. ALK's full-year 2014 results saw passenger revenues rise +7%. They reported a record income of $571 million (+49%). They also saw a record full-year adjusted pretax margin of 17.2% versus 12.4% in 2013.
The company has decided to return a lot of that money back to shareholders and boosted their quarterly cash dividend by +60% to $0.20 a share. After such positive results several analysts raised their price target on ALK's stock (into the $71-85 range).
Crude oil prices remain a hot topic on Wall Street. Oil will likely see another drop to new lows thanks to vanishing storage in the U.S. Currently oil inventories are at 80-year highs. There is a growing chance that we could actually run out of storage. You know what happens where there is too much supply - prices normally fall.
Airline stocks got ahead of themselves back in January and most of the group experienced a pullback last month. It looks like the correction is over. Traders are back to buying the dips in ALK. Technically shares have found support at the rising 50-dma. The breakout past $65.00 this week looks bullish. A move above $67.00 would generate a new P&F buy signal. Tonight we are suggesting a trigger to buy ALK calls at $66.35.
Trigger @ $66.35
Buy the APR $70 CALL (ALK150417C70)
Cavium, Inc. - CAVM - close: 70.83 change: -0.04
Current Option Gain/Loss: +10.5%
Average Daily Volume = 737 thousand
Entry on February 27 at $68.75
Listed on February 26, 2015
03/04/15: Wednesday turned out to be a quiet session for CAVM. The stock spent it consolidating sideways just above the $70.00 mark. I don't see any changes from my recent comments. More conservative traders may want to start raising their stop loss.
Earlier Comments: February 26, 2015:
Semiconductor stocks have been showing relative strength this year. The SOX semiconductor index is already up +4.3%. CAVM is outperforming its peers with a +10.6% gain.
If you're not familiar with CAVM, Investors.com described the company as "a specialty niche designer of network security processors 14 years ago" that has grown into "a mainstream player challenging the likes of Intel, Broadcom, and Freescale Semiconductor."
The company describes itself as "Cavium is a leading provider of highly integrated semiconductor products that enable intelligent processing in enterprise, data center, cloud and wired and wireless service provider applications. Cavium offers a broad portfolio of integrated, software-compatible processors ranging in performance from 100 Mbps to 100 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access and service provider equipment. Cavium's processors are supported by ecosystem partners that provide operating systems, tool support, reference designs and other services. Cavium's principal office is in San Jose, CA with design team locations in California, Massachusetts, India and China."
The last four quarterly earnings reports have been better than expected. CAVM has consistently beat analysts' estimates on both the top and bottom line. Revenue growth has slowly accelerated from +19.7% in Q1 2014, +22.2% in Q2, +23.6% in Q3, and +25% in Q4 2014.
CAVM's CEO Syed Ali is optimistic on 2015 saying, "This will be the single biggest year of new product introductions in our history."
Meanwhile analyst Christopher Rolland, with FBR Capital Markets, commented on the company, saying, "innovative design team, solid pipeline of new products and ability to increasingly tap into a fast-growing hyperscale customer base should provide a solid backdrop of growth for the next few years."
Wall Street expects CAVM revenue growth of +20% in 2015 and earnings growth of +26%. The point & figure chart is very bullish and forecasting a long-term target of $96.00. Technically shares spent the last few days consolidating sideways but today's display of relative strength is a bullish breakout. We are suggesting a trigger to buy calls at $68.75. (FYI: April and May options are not available yet so we chose June)
Long JUN $75 CALL (CAVM150619C75) entry $3.80
02/27/15 triggered @ $68.75
Criteo SA - CRTO - close: 43.70 change: -0.89
Current Option Gain/Loss: -43.3%
Entry on March 02 at $45.85
03/04/15: A bullish day for European markets did not help shares of CRTO. The profit taking continued and shares underperformed with a -2% decline. This is the first close below its 10-dma in several days. Odds are growing that we could see CRTO hit our stop loss at $42.85 soon. I am not suggesting new positions at this time.
Online advertising has evolved over the years. Today we see advertisements on our smartphone, tablet, social media platforms, and our desktop computers. One firm that is reporting surging sales growth in this area is CRTO.
According to the company, "Criteo delivers personalized performance marketing at an extensive scale. Measuring return on post-click sales, Criteo makes ROI transparent and easy to measure. Criteo has over 1,300 employees in 23 offices across the Americas, Europe and Asia-Pacific, serving over 7,000 advertisers worldwide with direct relationships with over 9,000 publishers."
Last year was pretty rocky for shares of CRTO. The stock saw a lot of ups and downs. At the end of the year CRTO shares ended with a +17.6% gain on the year. I'm surprised it wasn't higher.
The company has beaten Wall Street's bottom line earnings estimates three out of the last four quarters. They have reported revenues above expectations four quarters in a row. Plus, CRTO has raised their guidance four quarters in a row. Their sales in 2014 saw sales growth of more than +60%.
CRTO's most recent earnings report was February 18th. They reported Q4 earnings of €0.37 a share, which was €0.13 above expectations. Revenues, excluding traffic acquisition costs (a.k.a. ex-TAC), soared +76% to €96 million. CRTO said their sales in the Americas surged +121% from a year ago (ex-TAC). They also reported a +10% jump in clients to an all-time high of 7,190. Management raised their Q1 revenue guidance up to €96-99 million compared to analysts' estimates of €87.7 million. They also raised their 2015 revenue guidance to €433-440 million versus Wall Street's estimate at €400 million.
Following this Q4 earnings report and bullish guidance the stock has been upgraded by at least two analysts with new price targets at $54 and $65. The point & figure chart is bullish and forecasting a long-term target of $66.00.
Looking at the last several days CRTO's stock has been consolidating just below the $45.00 level. Friday's display of relative strength (+2.3%) appears to be a breakout. Tonight we are suggesting a trigger to buy calls at $45.85.
Long Apr $45 CALL (CRTO150417C45) entry $3.35
Lear Corp. - LEA - close: 109.30 change: -1.47
Stop Loss: 107.75
Entry on February 24 at $110.65
03/04/15: LEA followed the market lower today. Actually shares underperformed with a -1.3% decline. For the moment LEA still has a bullish trend of higher lows but the stock is in jeopardy of breaking it. I am not suggesting new positions at this time.
Last year was a great one for the auto industry. According to Autodata we saw 16.5 million new cars and light trucks sold in the U.S. in 2014. That's almost one million more than 2013. The momentum continues.
Vehicle sales rose +11% in December 2014. That surged to +14% in January 2015 (from a year ago). Ford said their January sales were up +15% and General Motors reported +18% increase. Globally IHS Automotive is forecasting more than 88 million vehicles sold in 2015.
That means a lot of car seats need to be manufactured. LEA is in the consumer goods sector. They make auto parts. According to the company, "Lear Corporation (LEA) is one of the world's leading suppliers of automotive seating and electrical distribution systems. Lear serves every major automaker in the world, and Lear content can be found on more than 300 vehicle nameplates. Lear's world-class products are designed, engineered and manufactured by a diverse team of approximately 132,000 employees located in 34 countries. Lear currently ranks #177 on the Fortune 500. Lear's headquarters are in Southfield, Michigan."
Last year the company consistently beat Wall Street's earnings estimates. Their most recent earnings report (2014 Q4) was announced on January 30th. Net income soared from $72.8 million to $261.8 million (+259%). LEA's adjusted earnings per share rose +47% to $2.27. That was 19 cents above expectations. Revenues rose +6.9% to $4.55 billion, which also beat estimates. The boost was driven by a +10% surge in the sale of car seats.
Currently LEA expects 17.4 million automobiles will be manufactured in North America this year. That's a gain of about +3% from 2014. LEA does a lot of business in China and they estimate 22.9 million cars will be built in China. IHS automotive is estimating 25.2 million cars will be made in China in 2015. Considering the current pace of car sales, LEA is guiding 2015 revenues in the $18.5-19.0 billion range. That compares to current Wall Street estimates in the $18.65-18.99 zone.
Another factor driving the stock higher is an activist investor that suggested LEA split up to unlock shareholder value. This story hit on February 3rd and sent shares of LEA soaring. LEA management said they're always willing to listen to shareholders. LEA responded with a reminder that "Since 2011, Lear has returned more than $2.1 billion to shareholders in the form of share repurchases and dividends. Since 2010, Lear has achieved a total shareholder return of 203%, which is approximately double the return for the S&P 500 over the same time period. In 2014, Lear's total shareholder return of 22% outperformed the S&P 500's return of 14%. Building sustainable shareholder value is a foremost priority for Lear."
Two weeks later LEA followed that up with an announcement they were bumping their stock buyback program up to $1 billion. At the end of 2014 their stock repurchase program was down to $339 million. The Board of Directors also raised their quarterly cash dividend +25% from $0.20 to $0.25 a share.
Technically shares of LEA have been consolidating sideways for almost three weeks. That changed today. The stock has broken through resistance at the $110 level. Tonight we are suggesting a trigger to buy calls at $110.65.
Long JUN $115 CALL (LEA150619C115) entry $3.75
02/28/15 new stop @ 107.75
02/26/15 caution: today's decline could signal a failed breakout (potential bearish reversal) pattern.
NXP Semiconductors - NXPI - close: 99.47 change: +0.74
Current Option Gain/Loss: +340.7%
03/04/15: The first 20 minutes of trading saw some profit taking in NXPI. It didn't take long and traders were buying the dip. The stock managed to outperform the major indices with a +0.74% gain. NXPI is poised to break through the $100 mark. We are raising the stop loss up to $96.25.
According to Apple Inc. CEO Tim Cook 2015 will be the year of Apple Pay. That's good news for NXPI. Apple launched its Apple Pay mobile payment system last September. In just the last four months it has taken off. About 8% of retailers already support it and estimates suggest that 38% of retailers will support Apple Pay by year end.
Tim Cook discussed the growth of Apple Pay in his company's recent conference call. Every $3 spent using mobile payments with Visa, Mastercard, and American Express, about $2 of that is used through Apple Pay. Panera Bread said that 80% of its mobile payment usage is through Apple Pay. Whole Foods noted that customers using mobile payments surged +400% once Apple Pay started.
All of this is good news for NXPI because they make the key chips necessary for Apple Pay to work.
The company describes itself as "NXP Semiconductors N.V. (NXPI) creates solutions that enable secure connections for a smarter world. Building on its expertise in High Performance Mixed Signal electronics, NXP is driving innovation in the automotive, identification and mobile industries, and in application areas including wireless infrastructure, lighting, healthcare, industrial, consumer tech and computing. NXP has operations in more than 25 countries, and posted revenue of $4.82 billion in 2013."
Earnings have been good. NXPI managed to beat Wall Street's estimates on both the top and bottom line the last five quarters in a row. Back in July NXPI raised their guidance. Influential hedge fund manager David Tepper, who runs Appaloosa Management, launched a new position in NXPI back in the third quarter of 2014. In early December shares of NXPI were upgraded with a $100 price target by Oppenheimer.
NXPI's most recent earnings report as February 5th. Revenues surged +18.9%. Management delivered bullish earnings guidance for the first quarter. Since this report at least four analyst firms have raised their price targets on NXPI (most of them into the mid $90s).
Today NXPI just hit all-time highs. The stock had been consolidating sideways in at $75-82.50 trading range. This breakout looks like an entry point. I'm suggesting a trigger at $84.15 to buy calls.
Long Apr $90 CALL (NXPI150417C90) entry $2.36
03/04/15 new stop @ 96.25
03/02/15 new stop @ 94.85, NXPI soars after announcing acquisition of FSL
02/12/15 triggered @ 84.15
PUT Play Updates
Michael Kors - KORS - close: 67.14 change: -1.20
03/04/15: The initial spike higher in KORS failed just below the $69.00 mark. The stock reversed and underperformed the market with a -1.75% decline. This looks like a new bearish entry point to buy puts.
Luxury retail brand names like KORS and Coach (COH) have seen their stocks get crushed over the last several months. Shares of KORS were big performers for the bulls the first two plus years from its late 2011 IPO. Unfortunately the stock peaked in 2014. Investors worried about over exposure and slowing growth.
According to the company, "Michael Kors is a world-renowned, award-winning designer of luxury accessories and ready-to-wear. His namesake company, established in 1981, currently produces a range of products through his Michael Kors and MICHAEL Michael Kors labels, including accessories, footwear, watches, jewelry, men's and women's ready-to-wear and a full line of fragrance products."
Make no mistake, KORS is still growing. Last August they reported a strong earnings report that beat on both the top and bottom line. While management guided lower short-term they raised guidance for 2015. A few months later when KORS reports earnings in November 2014 they beat estimates again with revenues soaring +42% and KORS announced a $1 billion stock buyback program. However, their outlook on 2015 had tarnished a bit and they lowered comparable store sales growth from the high teens to mid teens.
KORS most recent earnings report was February 5th. Earnings per share grew +32%. Their results of $1.48 per share beat estimates by 15 cents. Revenues grew +30.9% to $1.26 billion but that actually missed Wall Street estimates thanks to foreign currency issues.
What troubles investors is the slowdown in KORS' growth. Globally their comparable store sales grew +8.6%. Most companies would probably be excited for that number. Yet analysts were expecting +12.6%. The slowdown appeared to accelerate in North America. Same-store sales plunged from +24% growth to +6.8%. KORS is also facing margin pressure with both gross margin and its operating profit sliding.
KORS management will tell you that the company is doing great and just reported its 35th quarter in a row of same-store sales growth. However, the number crunchers on Wall Street will point out that it was the first time in five years that same-store sales growth did not rise by double-digit percentages.
A big concern among analysts is that KORS could be losing its appeal because it's growing so fast. Last year they added 114 new stores and ended 2014 with 509 retail locations. They're starting to become too common. KORS is losing its cachet.
Management also lowered their guidance for Q4 (current quarter) to $0.89-0.92 a share versus estimates of $0.94. They also see revenues below expectations.
This concern over slowing growth has produced a bear market in the stock. KORS is definitely not participating in the market's rally. Tonight we are suggesting a trigger to open bearish positions at $67.90.
Long May $65 PUT (KORS150515P65) entry $2.10
CLOSED BULLISH PLAYS
iShares Russell 2000 ETF - IWM - close: 122.36 change: -0.38
Average Daily Volume = 41 million
Time Frame: 10 to 12 weeks
03/04/15: The U.S. market declined for the second day in a row. The IWM hit our recently adjusted stop loss at $121.65. If this market dip continues the nearest support is probably the $118-120 area.
MAY $125 CALL (IWM150515C125) entry $2.50 exit $1.85 (-26.0%)
03/04/15 stopped out
Starbucks Corp. - SBUX - close: 93.06 change: -0.94
03/04/15: Shares of SBUX were long overdue for some profit taking. Traders seemed to be in a rush to take profits with a plunge in the first 15 minutes of the session. Shares dipped to $92.00 before paring its loss to -1%. Our stop loss was hit at $92.85.
Apr $95 CALL (SBUX150417C95) entry $1.03 exit $1.25 (+21.4%)
Zimmer Holdings - ZMH - close: 118.76 change: -0.29
03/04/15: After yesterday's breakdown below support we decided to close this play at the opening bell today. The stock opened lower at $119.15. Shares dipped to their 40-dma before paring their losses.
JUN $125 CALL (ZMH150619C125) entry $4.40 exit $3.80 (-13.6%)
03/04/15 planned exit
03/03/15 prepare to exit tomorrow morning
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