“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, March 27, 2017

by Ian Harvey

IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.


Option Trade – BlackBerry Ltd (NASDAQ:BBRY) Puts

Thursday, March 30, 2017

** OPTION TRADE: Buy the BBRY APRIL 21 2017 7.000 PUT at approximately $0.25. Sell price is left to your own judgment.

Canadian handset manufacturer BlackBerry Ltd (NASDAQ:BBRY), a provider of mobile communications solutions, is slated to release fourth-quarter fiscal 2017 results tomorrow, Mar 31, before the market opens. The Street is betting on breakeven non-GAAP earnings and sales of $288.5 million.

In the last quarter, the company reported a loss of 1 cent per share, narrower than the Consensus Estimate of a loss of 4 cents. Meanwhile, total revenue of $301 million declined 47.3% year over year. The top line missed the Consensus Estimate of $331 million. Quarterly operating loss came in at $114 million.

With all other things going on, BlackBerry Limited has been on a free fall — declining -8.69 percent in just three months. The stock has actually made sharp losses in the past year, as the company has gathered a -11.34% return in the past twelve months. The company’s share price is down -20.17% from previous highs of around $8.46 per share on September 28, 2016.

It looks like traders are not happy with the stock, and analysts now consider BlackBerry Limited a sell.

 As well, the technical analysis of the stock is setting a somewhat neutral outlook.

Influencing Factors

Cash Flow: Persistently Unprofitable -- BlackBerry has been struggling to stay cash flow positive on a trailing 12-month basis over the past few quarters.

For the company to stand a chance of engineering a sustainable turnaround, it must first stop the cash bleeding. BlackBerry has a sizable pile of cash in its bank accounts that amounts to $1 billion net of debt and represents 27% of market cap. The cash reserves should be enough to keep the company afloat for several more quarters. But BlackBerry will not be viable until it can, at a minimum, produce the cash that it needs from operating activities once again.

Blackberry last made an operating annual profit in 2012. At this point, it only infrequently even posts positive EBITDA on a quarterly basis after stripping out adjustments. Yes, the company has massively slashed costs to stem the bleeding, but revenue has fallen even faster.

In FY 2010, Blackberry brought in $19.9 billion in revenues. This is down to just $1.5 billion over the last 12 months. Sure, there is talk of a turnaround now with the business pivoting away from smartphones. But we've heard plenty of turnaround plans for BBRY stock over the last half decade, and none have produced results. The fact that Jim Mackey, the company's head of corporate strategy, left in February should do nothing to reassure investors.

Software Business: Momentum Lacking -- Last quarter, CEO John Chen announced that the company's software business (the only one that has any potential of dragging BlackBerry out of the gutter) was projected to grow 30% in FY17. These are encouraging results that might have been lost or overshadowed by the rapid but expected unwinding of the Mobility Solutions and SAF businesses.

Also, more work is needed to get those offerings into the healthcare and automotive industries and other sectors that it hopes will power future growth.

Licensing May Not Amount to Much: Part of the new strategy is to license Blackberry's name out to phone manufacturers. BlackBerry secured a deal in December to license its name and security software out to Chinese phone manufacturer TCL Communications.

Unfortunately for BBRY stock, the company didn't announce the terms of the deal with TCL. That's probably because the terms weren't compelling. TCL already sells a huge volume of Alcatel phones. Yet, for a 13-year license to use the Alcatel name, TCL paid them just $40 million. Otherwise stated, the license went for just $3 million a year. There's little reason to expect BlackBerry got a better deal. And the company's licensing arrangement in India appears equally unpromising.

Security Focus May Not Work: BBRY has long maintained its reputation as a leading security company within the smartphone space. While consumers bailed to flashier phones years ago, security-focused clients such as sensitive government departments stuck with BlackBerry until the end.

Lately, BlackBerry has acquired a bunch of small niche security software companies. They've starting to package everything together in BlackBerry Secure. This product could pick up traction both as a standalone option and as a feature that goes into the BlackBerry-branded smartphones. However, the hype for security companies appears to be fading.

Chief Executive Officer John Chen, who took over the helm of BlackBerry in late 2013, said in December the company would likely take another four or five quarters to halt the steady decline in its overall revenue, with software sales growth projected to slow to around 15 percent in the fiscal year that began in March.

Short interest has been on the rise lately, gaining 11% during the most recent reporting period. As a result, some 53.7 million BlackBerry shares are now sold short, representing a sizable 10.2% of the stock's total float. While a short-squeeze situation could come into play, it would take a rather impressive quarterly report and ensuing rally to force these shorts to be in any hurry to buy back their positions.

Analysts Opinions

Zacks Investment Research lowered shares of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) from a buy rating to a hold rating in a research note released on Tuesday morning.

According to Zacks, “We are positive on BlackBerry's decision to end all internal hardware development and outsource the same to its partners.The company's new guidance with respect to the bottom line for fiscal 2017 is also encouraging. The company expects to return to profit in fiscal 2017. Results for the fourth quarter of fiscal 2017 will be revealed on Mar 31. Recently, the company entered into a deal with Chinese handset manufacturer TCL Communications to produce BlackBerry handsets for certain countries across the globe. The deal with Indian telecom enterprise, Optiemus Infracom Ltd is also encouraging. Inspite of these positives, shares of BlackBerry have underperformed the broader industry over the past one year. Moreover, the company continues to grapple with headwinds like adverse foreign currency movements.”

Credit Suisse Group AG reissued an underperform rating and issued a $6.00 price target on shares of BlackBerry in a research report on Wednesday, December 7th.

Canaccord Genuity dropped their price target on shares of BlackBerry from $7.50 to $7.00 and set a hold rating on the stock in a research report on Monday, January 30th.

Two research analysts have rated the stock with a sell rating, eleven have issued a hold rating, three have issued a buy rating and one has assigned a strong buy rating to the company’s stock. The stock presently has an average rating of Hold and an average target price of $7.98.

Summary

Although BlackBerry has extricated itself from the smartphone handsets that weighed on its recent fortunes, the Canadian firm faces a tough slog to convince skeptics it can return to its glory days through an enlarged software business.

BlackBerry Limited is presently in sell territory, with the Stochastic %K at 71.29, and the 14-day Williams %R moved to around 38.1.

BlackBerry has a 1-year low of $6.23 and a 1-year high of $8.46. The company’s 50 day moving average is $7.09 and its 200 day moving average is $7.34. The stock’s market cap is $3.69 billion.

The Waterloo, Ontario-based company is expected to barely break even in the fourth quarter and likely notch revenue of less than $1.4 billion in its fiscal year ended Feb. 28, 2017, according to Thomson Reuters I/B/E/S estimates. At its peak, the smartphone pioneer was raking in more than $5.5 billion a quarter.


Option Trade – Lululemon Athletica inc. (NASDAQ:LULU) Puts

Tuesday, March 28, 2017

** OPTION TRADE: Buy the LULU APRIL 21 2017 60.000 PUT at approximately $1.20. Sell price is left to your own judgment.

Lululemon Athletica inc., an athletic apparel and accessories maker, will report its fiscal fourth-quarter earnings on March 29. The company will post its quarterly results after the market close, with the consensus calling for earnings of $1.01 per share on revenue of $784.7 million.

During the same period last year the company had earnings of $0.85 on sales of $704.3 million. The activewear company beat its earnings estimates last quarter (Q3) and shareholders enjoyed a quick 10% price increase. However, shares have been trending lower since the beginning of 2017 as headwinds appear to be growing stronger, having fallen 5.6% since the start of the year.

Also, several analysts have recently turned more bearish on Lululemon outlining that competition has pushed inventory levels higher and margins lower.

Influencing Factors

  • Same-store Sales: Store comps are in the low single digits, especially since the store fleet is very young.
  • Margin Disclosure: The level of disclosure around the gross margin continues to decrease.
  • Margin Sapping Businesses: Men’s and ivivva are both growth drivers yet they are margin dilutive.
  • Too many stores in the U.S.: Prior management outlined many times the TAM of 300-350 stores in North America -- Lulu is reaching saturation.
  • U.S. Store Profitability: It’s much lower than in Canada.
  • Marketing: Not enough of it, especially compared to Nike (NKE), Adidas (ADDYY), and Under Armour (UAA).
  • Not a tech company: On its third-quarter conference call, Lululemon said it was a quasi-tech company -- It’s not.
  • Competition: Outside of shifting consumer preferences, Lululemon also faces stiff competition from established activewear providers like Athleta, Columbia Sportswear (NASDAQ:COLM), Gildan (NYSE:GIL), Nike (NYSE:NKE) and Under Armour (NYSE:UA).
  • In addition, the company will have to compete with new entrants like Ivy Park which is a new activewear brand co-founded by Beyoncé in 2016.
  • High costs: When comps turn negative this will pressure earnings, and there is an estimated high fixed SG&A costs.
  • Inventories: Days in inventory remain elevated at 112 vs historical 3Q rate of 90.

Analysts Opinions

On March 9th, Canaccord Genuity warned investors that the company's apparel strategy could become less effective, citing new consumer preferences in denim. The investment bank conducted a survey which found that 18% of respondents expected to buy fewer pairs of Lululemon pants this year.

More recently, Macquarie's Laurent Vasilescu highlighted reasons investors should worry about Lululemon ahead of earnings.

Summary            

The fading popularity of athleisure wear is likely to take a toll on the company's performance as denims are back in vogue. Stiff competition from other players, along with currency woes and macroeconomic challenges also remains a headwind.

With these mixed factors at play, this options trade seems appropriate for this Vancouver-based athletic apparel company in the quarter to be reported.


Option Trade – Snap Inc. (NYSE:SNAP) Calls

Tuesday, March 28, 2017

** OPTION TRADE: Buy the SNAP APRIL 21 2017 25.000 CALL at approximately $1.05. Sell price is left to your own judgment.

Shares of Snap Inc. (NYSE:SNAP) surged on Monday after various banks that had a hand in the company's initial public offering rated the stock positively – and this is expected to continue. Snap had previously received largely negative ratings from other analysts, which contributed to the stock's poor post-IPO performance.

With the 25-day quiet period following Snap's IPO, the positive commentary poured in yesterday. Analysts from Citi, Morgan Stanley, Goldman Sachs, RBC, Credit Suisse, and Jefferies, all underwriters of Snap's IPO, gave the stock buy ratings, with price targets as high as $31 per share.

Ultimately, Snap has become an innovation leader – for both consumers and advertisers – in arguably the single fastest advertising medium today – Mobile. It has also emerged as one of the leading Media Platforms for Millenials. It is believed that if it sustains its current level of innovation, it can sustain premium growth for a long time and scale to profitability.

Analysts Opinions

Snap stock peaked around $27 per share soon after its IPO, then fell below $20 per share due in part to a deluge of negative analyst sentiment. Common complaints included an eye-popping valuation, inexperienced management, and the complete lack of voting rights for investors buying the common stock.

With a flurry of analyst upgrades, Snap stock has partially recovered. The company is now valued at around $26 billion, despite producing just $404 million of revenue last year, along with a $514 million net loss.

Top analyst Mark Mahaney at RBC Capital, who sees that in a game of copycat, Facebook and Instagram’s move to mirror Snap’s inventive ways further prove that the company is in full, fierce “crackle” mode.

Highlighting massive market potential, with global advertising gearing up to hit $767 billion within 3 years and mobile advertising to land on $196 billion, as well as a unique, “engaging” appeal to consumers and advertisers alike, the analyst offers his first note on Snap with enthusiastic conviction in its possibilities. As such, the analyst initiates coverage on SNAP with an Outperform rating and a price target of $31, which implies a just under 34% upside from where the stock is currently trading.

From Mahaney’s eyes, the popular Snapchat app parent company is “One Of The Best Innovation Machines On The ‘Net Today,” as he believes, “Product innovation has been arguably the most important success ingredient across the ‘Net sector. And the level of product innovation from SNAP has been extremely impressive, on both the consumer & advertiser side. We believe SNAP has taken steps to ensure robust product innovation going forward. And we see the company’s current limited DAU base (158MM or ~1/10th the size of FB) and its current low ARPU ($1.05 or ~1/7th that of FB) as creating substantial growth opportunities. Also, we see FB & TWTR’s history providing evidence of SNAP’s ability to scale profitably.”

Also, Cowen's John Blackledge initiated coverage of the company with an Outperform rating and $26 price target.

According to Blackledge, Snap's daily active user (DAU) growth hasn't been all up and a source of concern, particularly in the third and fourth quarter of 2016. However, this prompted the company to release twice as many new products and services in 2016 than all of 2014 and 2015 combined. In addition, Snap's employee headcount ramp will further boost the speed and execution of new product roll-outs.

Meanwhile, Snap's user base is “highly engaged” and visits the app around 18 times per day on average and spends a total of 25 to 30 minutes a day on the app. Perhaps more important, users under the age of 25 spend over 30 minutes a day, which is a "huge draw" for advertisers and critical to the long-term success of the social media platform.

As well, Oppenheimer initiated coverage on Snap Inc. with a Perform rating. Analyst Jason Helfstein commented, "We are initiating coverage of Snap Inc. with a Perform rating on valuation. Today, mobile phones primarily perform peripheral tasks. Snapchat has begun to reorient the use-case of the mobile phone back toward communicating, using the camera. By doing so, Snapchat has blurred the lines between entertainment and communication. Competitors will copy the lenses, filters and video formats, but the network's unique social graph is equally important to the user experience; platforms already tainted by "over-friending" will always be imperfect imitators. Snap Inc. will now attempt to bring "real-life" interaction to older demographics. While unsuccessful at garnering older users thus far, we believe Snapchat's mission of reintroducing emotional integrity to digital communication is a universally applicable use-case. We view $21-$26 as fair value."

Also, Goldman Sachs initiates coverage on Snap Inc. with a Buy rating and a price target of $27.00.

Analyst Heath Terry comments "Snap is a venture stage investment in the public markets, something unseen in recent years where nearly all internet companies waited until later stages of growth and profitability to go public. While this clearly carries a higher risk profile, we believe it also comes with higher reward potential. With Snap’s large, valuable, and highly engaged user base generating ad inventory and the monetization path in mobile now well worn, we believe the potential for outperformance as the company continues to innovate against the growing mobile opportunity outweighs those early stage risks."

Terry expects SNAP to lose $0.64 per share in FY 2016 on $404.5 million in revenues. He expects SNAP to lose $2.31 in FY 2017 on $980.2 million in revenues. He expects SNAP to lose $0.59 in FY 2018 on $1.959 billion in revenues. In FY 2019 Terry sees SNAP losing $0.36 per share on $3.228 billion in revenues.

And, Stifel initiated the ephemeral photo and video sharing company at a Hold. The firm has a $24 price target for the shares. Meanwhile, JMP Securities initiated coverage of the company with a Market Outperform rating and a price target of $28.

Summary            

Snap has room to grow through increasing ad spend from existing advertisers, adding new brands, ramping the Direct Response ad channel and potentially monetizing the long-tail.


Option Trade – Lamb Weston Holdings Inc (NYSE:LW) Calls

Monday, March 27, 2017

** OPTION TRADE: Buy the LW APRIL 21 2017 45.000 CALL at approximately $0.90. Sell price is left to your own judgment.

Lamb Weston Holdings Inc (NYSE:LW), a supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the world, is an interesting player in the Consumer Goods space, with a focus on Food – Major Diversified – and is up 48% since its IPO in November.

The stock has been active on the tape, currently trading at $42.67, steadily climbing. Given the stock’s recent action, it seemed like a good time to take a closer look at the company and apply an options trade to benefit from this growth.

Lamb Weston Holdings, Inc. is expected to report earnings on 04/06/2017 before market open. The report will be for the fiscal Quarter ending Feb 2017. Based on 4 analysts' forecasts, the consensus EPS forecast for the quarter is $0.54.

For this year, Lamb Weston Holdings, Inc. is up 12.7%. Over the past five trading sessions it is 0.19%; 7.12% for the month; 23.72% for the last quarters. The last close places the company’s stock about $1.04 off its 52 week high of $43.48 and $13.69 above the 52 week low of $28.75.

Analysts and Hedge Funds Opinions

Allianz Asset Management AG bought a new stake in Lamb Weston Holdings Inc during the fourth quarter, Holdings Channel reports. The fund bought 8,699 shares of the company’s stock, valued at approximately $329,000.

Jefferies Group LLC reaffirmed a “top pick” rating and issued a $45.00 target price on shares of Lamb Weston Holdings in a research note on Tuesday, January 31st.

Goldman Sachs Group Inc began coverage on shares of Lamb Weston Holdings in a research note on Wednesday, February 8th. They issued a “neutral” rating and a $38.00 target price for the company.

Finally, Stifel Nicolaus reaffirmed a “buy” rating and issued a $38.00 target price (up from $34.00) on shares of Lamb Weston Holdings in a research note on Wednesday, January 11th. Three equities research analysts have rated the stock with a hold rating and four have given a buy rating to the stock. The company currently has a consensus rating of “Buy”.

Summary                                                                     

Lamb Weston Holdings Inc has a 50-day moving average of $40.55 and a 200 day moving average of $37.49. The stock has a market cap of $6.23 billion and a PE ratio of 19.70. Lamb Weston Holdings Inc has a one year low of $29.62 and a one year high of $43.48.


Option Trade – Red Hat Inc (NYSE:RHT) Calls

Monday, March 27, 2017

** OPTION TRADE: Buy the RHT APRIL 21 2017 90.000 CALL at approximately $0.90. Sell price is left to your own judgment.

Red Hat Inc (NYSE:RHT), a global provider of open source software solutions, using a community-powered approach to develop and offer operating system, middleware, virtualization, storage and cloud technologies, is scheduled to report fourth-quarter fiscal 2017 results today, Mar 27, after market close. In the last quarter, the company delivered positive earnings surprise of 13.51%. On an average, the company has delivered a positive earnings surprise of 8.74% in the trailing four quarters.

Analysts expect adjusted earnings of 61 cents a share, up 17% from the year-earlier quarter, with revenue rising 13.8% to 618.7 million.

Red Hat projects revenues of $614 to $622 million and non-GAAP earnings of 61 cents per share. Non-GAAP operating margin is expected to be 24%. The top line is expected to benefit from the closure of several large federal deals that the company won in third-quarter fiscal 2017.

The year so far has been quite good for Red Hat. The stock has outperformed the Computer-Software industry on a year-to-date basis. While the stock has gained 18.4%, the industry advanced 9.2% in the same time frame.

Analysts are looking for traction in Red Hat's public cloud business as customers shift computing workloads to cloud service providers such as Amazon Web Services, part of Amazon.com (AMZN) and a Red Hat partner.

Red Hat, similar to Dow component Microsoft (MSFT) and VMware (VMW), aims to leverage its existing customer base as cloud computing gains momentum. More companies are outsourcing business workloads to cloud providers such as AWS.

Influencing Factors to Consider                                                                

Red Hat has been gaining market share and its Linux servers are well positioned to drive top-line growth. We believe that the company also has significant growth potential through cloud actions, especially in the public segment. Additionally, increasing demand for offerings like OpenShift and OpenStack is a positive.

Further, Red Hat's strong product pipeline, continuing investments to expand product portfolio and key partnerships with the likes of IBM Corp. IBM, Dell and Ericsson ERIC will continue to drive overall growth.

Red Hat has the second highest Composite Rating, a CAN SLIM investing metric, of the eight companies in IBD's Computer Software-Desktop group. Adobe Systems (ADBE) has a CR of 95 out of a possible 99, while Red Hat's CR is 93. The group ranks No. 79 out of 197 industry groups.

Analysts and Hedge Funds Opinions

Price T Rowe Associates Inc. MD boosted its position in Red Hat by 24.3% in the third quarter. Price T Rowe Associates Inc. MD now owns 20,244,633 shares of the open-source software company’s stock valued at $1,636,374,000 after buying an additional 3,954,374 shares in the last quarter.

Also, BlackRock Institutional Trust Company N.A. boosted its position in Red Hat by 16.2% in the third quarter. BlackRock Institutional Trust Company N.A. now owns 5,407,019 shares of the open-source software company’s stock valued at $437,049,000 after buying an additional 753,192 shares in the last quarter.

Evercore ISI raised shares of Red Hat from a “hold” rating to a “buy” rating and set an $88.00 price objective on the stock in a research note on Saturday, January 14th.

Wells Fargo & Company assumed coverage on shares of Red Hat in a research note on Wednesday, January 11th. They issued an “outperform” rating on the stock.

William Blair reaffirmed an “outperform” rating on shares of Red Hat in a research note on Thursday, January 5th.

One investment analyst has rated the stock with a sell rating, eight have issued a hold rating and twenty-two have given a buy rating to the company’s stock. The stock currently has an average rating of “Buy” and a consensus price target of $86.40.

Summary

Red Hat has a one year low of $68.54 and a one year high of $85.01. The company’s 50 day moving average price is $81.05 and its 200 day moving average price is $77.42. The stock has a market capitalization of $15.07 billion, a P/E ratio of 64.51 and a beta of 1.44.

Red Hat stock has bounced back from the late December sell-off, rising nearly 19% in 2017 and moving above its 50-day moving average. The stock hit a high of 84.86 on Feb. 24, clearing a buy point of 82.83, and has been consolidating.





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