“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, July 03, 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 - Intel Corporation (NASDAQ:INTC) Calls

Thursday, July 06, 2017

** OPTION TRADE: Buy the INTC AUG 18 2017 35.000 CALL at approximately $0.70. Sell price is left to your own judgment.

Intel Corporation (NASDAQ:INTC), a designer and manufacturer of digital technology platforms, a large-cap value stock and member of the Dow Jones Industrial Average, have seen management make some horrendous mistakes in the past; but now, seem to have given it a better focus and better chances to succeed. Management has finally has lost a lot of its arrogance, and Intel's strategic vision has become better focused.

Intel is not just a chipmaker anymore. Rather, it is fast becoming one of the world's most sophisticated companies that deal with modern computing technologies. With a new era of computing unfolding rapidly, Intel is changing itself to lead the industry from the front. HPC (high-performance computing) and AI (artificial intelligence) are the future of computing, and Intel is a pioneer in these areas. However, the stock price doesn't reflect this. Instead, it continues to languish in a range – but there seems to be plenty of optimism that this is changing, and soon – particularly with the next earnings report coming up in a couple of weeks.

Intel Corporation shares have been stuck in the doldrums for the better part of three years now, but a bullish breakout could be in the works soon, according to a historically reliable options indicator – from the McMillan Analysis Corp., noting their computer generated Put-Call Ratio Buy Signal has been visually confirmed.

INTC’s put-call ratio has surged over the past couple of weeks, and is now at the highest levels seen in nearly a year. This means that bearish options bets (puts) on a volume basis are dominating those on the bullish (calls) side. This kind of imbalance usually ends with a big correction the other way. As the crowded trade unwinds, a sharp rally could result for Intel.

Intel has been a tremendous stock in terms of capital returns in the past several years. Renewed focus on the dividend and buybacks has led to tremendously high levels of capital being sent to shareholders in one form or another as Intel continues its maturing process.

Intel is in good shape and judging by the fact that its interest expense is still less than 6% of its operating income, Intel can afford a bunch more debt than what it currently has.

This means that Intel continues to have tremendous flexibility in terms of financing both acquisitions and buybacks going forward over and above its ability to produce FCF, which is quite strong in its own right.

Intel's low level of debt servicing costs relative to its operating income levels means that it can afford to reasonably double or triple the amount of interest expense it pays without undue stress on its earnings, provided that whatever it spends its proceeds on produces some sort of meaningful return.

Many analysts have provided their estimated foresights on Intel Corporation Earnings for July 19, with 32 analysts believing the company would generate an Average Estimate of $0.68. They expect $0.68 EPS, up 15.25% or $0.09 from last year's $0.59 per share. INTC's profit will be $3.18 billion for 12.50 P/E if the $0.68 EPS becomes a reality.

Influencing Factors

The restructuring of Intel has left the company in a better position and allowed them to reassess the company business model. The desktop PC model is in decline as users turn to mobile, and Intel is not really concerned about battling a small fry for a declining market when it can go win the war in untapped ones. Recent investor presentations highlight the company's desire to move further into exciting new growth areas such as autonomous vehicles and 5G connected 5G devices.

Management is now focusing on three parts; Internet of Things (IoT), autonomous driving, and non-volatile storage solutions…..

1.       Intel was undaunted by the slow market take on IoT, and now is seeing solid growth. In Q1 2017, IoT revenue was up 11% to $721 million, year to year.

The company also saw revenue growth of 15% for the full year from 2015 to 2016, with revenue of $2.6 billion. This is now a very considerable business for Intel and a high growth business as well. Intel getting entrenched early will continue to drive growth because of the nature of IoT; it is not just physical hardware but also protocol to get things from the end device to a server where it can be easily accessed by another device, which can either display the data or help control the device.

Intel is a big winner in a big market that is continuing to grow.

2.       Autonomous driving is also where Intel is putting a lot of hope. The recent purchase of Mobileye (MBLY) for $15.3 billion shows how serious Intel is in pursuing this.

It seems clear at some point that autonomous driving will become the norm in the future. It also seems clear this will be a lucrative and very substantial market. By getting in early and having experience with Mobileye, Intel will be uniquely qualified to lead and benefit from this market.

3.       Non-volatile storage is where Intel is showing massive revenue growth, albeit it is losing money in this segment. This includes 3D NAND, which is doing very well, but more importantly, Intel's 3D XPoint (or Optane).

Intel plans to integrate Wi-Fi into its next-generation Coffee Lake processor platform for mainstream personal computers and into its Gemini Lake platform targeted at low-cost personal computers.

The company had been undertaking a costly restructuring process, however the bulk of this is now done and Intel saw revenue up in 5 of its 6 key business units, with only its security division down 1%. These gains should be an indicator that the restructuring has improved the company’s operating efficiency and the path ahead is clearer for maximizing opportunities.

Analysts and Hedge Funds Opinions

Several analysts have recently commented on the company…..

  • Susquehanna Bancshares Inc restated a “positive” rating on shares of Intel Corporation in a report on Tuesday, March 28th.
  • Robert W. Baird restated a “buy” rating and set a $42.00 price target on shares of Intel Corporation in a report on Tuesday, March 14th.
  • Canaccord Genuity restated a “hold” rating and set a $38.00 price target on shares of Intel Corporation in a report on Thursday, March 16th.
  • Finally, Loop Capital restated a “buy” rating and set a $42.00 price target on shares of Intel Corporation in a report on Wednesday, March 15th.

Five analysts have rated the stock with a sell rating, fifteen have assigned a hold rating, twenty-five have issued a buy rating and one has issued a strong buy rating to the company’s stock. Intel Corporation presently has a consensus rating of “Buy” and a consensus target price of $40.28.

As well, several institutional investors have recently made changes to their positions in the stock…..

Piedmont Investment Advisors LLC purchased a new stake in Intel Corporation during the third quarter worth approximately $46,984,000.

D.A. Davidson & CO. increased its position in Intel Corporation by 33.8% in the third quarter. D.A. Davidson & CO. now owns 723,780 shares of the chip maker’s stock worth $27,318,000 after buying an additional 182,910 shares during the last quarter.

Summary

There is a powerful pattern of optimism and momentum in Intel Corporation stock right before an earnings report.

One of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, which sets in the two-weeks before an earnings announcement.

There is a powerful pattern of optimism and momentum in Intel Corporation stock right before an earnings report.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Intel Corporation; so be prepared to exit early if a sizable profit has already been made.

Intel Corporation has a 1-year low of $32.38 and a 1-year high of $38.45. The stock’s 50 day moving average price is $35.45 and its 200 day moving average price is $36.07. The firm has a market cap of $161.71 billion, a price-to-earnings ratio of 14.87 and a beta of 1.00.


Option Trade - Yum China Holdings Inc (NYSE:YUMC) Calls

Tuesday, July 04, 2017

** OPTION TRADE: Buy the YUMC JULY 21 2017 42.5000 CALL at approximately $0.75. Sell price is left to your own judgment.

Yum China Holdings Inc (NYSE:YUMC), a firm in the Retail – Restaurants industry, will report earnings, for the fiscal Quarter ending Jun 2017, tomorrow after the market closes, and is likely to beat earnings again.

Analysts expect Yum China Holdings Inc to report $0.23 EPS, with profit being $87.59 million giving it 43.96 P/E if the $0.23 EPS is correct.

AB analysts on Friday raised their Yum China earnings-per-share estimate by 2 cents to 25 cents, "reflecting slightly higher revenue expectations.”

Yum China Holdings, Inc is a restaurant company. The Company’s segments include KFC, Pizza Hut Casual Dining, and All Other Segments, including Pizza Hut Home Service, East Dawning, Little Sheep and Taco Bell. As of December 31, 2016, the Company had over 7,500 restaurants in China. Its restaurant base consists of various restaurant concepts.

Two quarters ago, YUMC expected to post 12 cents per share, while it actually produced 17 cents per share, a beat of 41.7%. Meanwhile, for the most recent quarter, the company looked to deliver 37 cents per share, when it actually saw 44 cents per share instead, representing an 18.9% positive surprise.

The company’s share price is down -6.82% from previous highs of around $42.12 per share on June 08, 2017. On the bright side, the company’s share price has been on the rebound, up more than 63.93% since hitting lows of $23.79 on November 01, 2016.

Finally, from a technical perspective, there’s a strong possibility that the stock could enter into a new bull market after finding strong support between $38.34 and $38.88. In terms of pullbacks, $39.8 level is the first resistance point.

Influencing Factors

Yum China was spun off by Yum Brands Inc. (YUM) in October. Like Yum Brands, Yum China is headquartered in the U.S., which is good, because of “Western accounting, meaning transparent accounting.”

Unlike Yum Brands, which is moving toward a franchising model for its KFC, Pizza Hut and Taco Bell restaurants, Yum China directly owns all of its 7,600 restaurants in China.

Another major difference for Yum China is that they were the first to enter China in 1987. That is a significant fact, because unlike in the States, where fast food companies rely on Sysco Corp. (SYY), to get their food, Yum Brands (now Yum China) had to build out its own distribution infrastructure.

This makes Yum China unique in the country, and underpins a competitive advantage.

The three restaurants have more varied menus than in the U.S., and that the company’s Chinese customers are not going for a fast meal. “You are dining out when you feel prosperous.”

The company’s customer loyalty in China is incredible, with 100 million fans on social media.

Shares of Yum China have returned an astounding 51% so far in 2017. The shares closed at $39.38 Monday and trade for 24.2 times the consensus 2018 earnings estimate of $1.63 a share. That may seem like a high valuation, but that it is not too much to pay for a company with rapidly increasing earnings. Analysts expect EPS to increase 14% in 2018 and another 12% in 2019.

Analysts and Hedge Funds Opinions

Yum China Holdings Inc had its target price boosted by Morgan Stanley from $35.00 to $41.00 in a report published on Monday morning. They currently have an overweight rating on the stock.

Zacks Investment Research raised shares of Yum China Holdings from a hold rating to a buy rating and set a $39.00 target price on the stock in a report on Friday, May 19th.

As well, several institutional investors have recently made changes to their positions in the stock…..

Morgan Stanley raised its stake in shares of Yum China Holdings Inc by 24.3% during the first quarter, Holdings Channel reports. The fund owned 2,454,913 shares of the company’s stock after buying an additional 480,565 shares during the period. Morgan Stanley’s holdings in Yum China Holdings were worth $66,775,000 as of its most recent SEC filing.

Lazard Asset Management LLC raised its stake in shares of Yum China Holdings by 32.1% in the first quarter. Lazard Asset Management LLC now owns 141,502 shares of the company’s stock valued at $3,848,000 after buying an additional 34,400 shares during the last quarter.

Credit Suisse AG raised its stake in Yum China Holdings by 6.2% in the first quarter. Credit Suisse AG now owns 1,858,034 shares of the company’s stock valued at $50,537,000 after buying an additional 108,477 shares in the last quarter.

Finally, Marshall Wace North America L.P. acquired a new stake in shares of Yum China Holdings during the first quarter valued at about $37,585,000.

Summary

Yum China Holdings traded up 2.13% during trading on Monday, hitting $40.27. The stock had a trading volume of 2,015,076 shares. The firm’s 50-day moving average price is $38.56 and its 200-day moving average price is $30.87. The company has a market cap of $15.48 billion and a price-to-earnings ratio of 28.56. Yum China Holdings has a 52-week low of $23.79 and a 52-week high of $42.12.


Option Trade - Micron Technology, Inc. (NASDAQ:MU) Calls

Monday, July 03, 2017

** OPTION TRADE: Buy the MU JULY 21 2017 30.000 CALL at approximately $1.20. Sell price is left to your own judgment.

As you realize an option trade on Idaho-based Micron Technology, Inc. (NASDAQ: MU), a memory chip manufacturer, was recommended last Tuesday. After reporting on Friday, MU dropped 5% even after strong earnings. This dip is too good of an opportunity to pass up – therefore the case for this new options trade.

Micron stock was pointed 1.9% higher ahead of the open on Friday, thanks to a strong showing in the earnings booth, which would have marked the third straight quarter the shares had gained in the session after earnings. Plus, a number of brokerage firms had raised their outlooks, including Stifel, which upped its price target to $60 from $47 -- territory not seen since September 2000.

Micron Technology Inc.’s fiscal third quarter and outlook again surpassed Wall Street’s estimates, thanks to the continuing healthy demand for memory chips, including upcoming autumn launches of new smartphones.

Micron’s stock has been on a tear in the past year, and is up about 44% since January, outperforming the S&P 500 Index SPX as memory-chip prices have continued to rise amid a tight supply and broad-based demand, including in servers for cloud computing and data centers.

Micron’s new chief executive, Sanjay Mehrotra, cited the coming introduction of new mobile phones in the fall quarter as one of several catalysts in its outlook, which exceeded current estimates. Micron said it is looking for revenue in its fiscal fourth quarter to range from $5.7 billion to $6.1 billion, up from the current consensus of $5.6 billion.

“We expect increased demand ahead of anticipated flagship smartphone introductions planned for the fall,” Mehrotra told analysts Thursday on a conference call. He said upcoming features in the new mobile phones, such as multiple camera systems, augmented-reality applications and higher-resolution displays are dictating greater memory-chip densities, from four to six gigabytes.

But even with all the positive news, Micron shares first stumbled and then came back slightly in after-hours trading. Micron executives told investors it is still growing faster than the industry as a whole, and reminded investors that they were expecting DRAM (dynamic random access memory) bit supply growth for the industry in 2017 to fall below its own projected demand.

For calendar 2017, we expect DRAM industry bit supply growth of between 15% and 20%, slightly below our view of demand growth,” Mehrotra said. “For NAND, we expect 2017 industry supply growth in the high 30% to low 40% range, constraining what would otherwise be higher demand,” Mehrotra said, referring to the type of memory in flash-memory devices like USB drives.

Gudance for the fourth quarter of fiscal 2017 is upbeat. Micron expects revenues in the range of $5.7-$6.1 billion. The Consensus Estimate is pegged at $5.53 billion. The company expects earnings per share in the range of $1.73-$1.87 per share. The Consensus Estimate is pegged at $1.37 per share.

Management expects gross margin in the range of 47-51% in fiscal fourth-quarter 2017. Operating expenses are expected to fall within $575-$625 million and operating income is likely to be in the range of $2.1-$2.4 billion.

Going forward, Micron expects favorable supply and demand dynamics to continue in 2017.

Summary

The fundamentals and technicals confirm buy signals for MU despite the drop in price after earnings.

MU has a very low forward P/E and good P/B, P/S, and P/C. The short ratio is relatively low and the earnings were good. All of the fundamentals are supporting the uptrend in price for the last year.

As you would expect from the fundamentals, the chart looks great with a strong, one year uptrend. Both the 50 and 200 day moving averages are in strong uptrends. MU is strongly outperforming the index. The weekly chart below shows these strong technical signals.






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