Black Friday shoppers and lots of housing data will be closely watched in the week ahead for signs of a strengthening economy. U.S. banks and stock markets will be closed Thursday for the Thanksgiving holiday.
The focus will be very much on economic data, crammed into Tuesday and Wednesday, ahead of the Thanksgiving holiday. There are durable goods, jobless claims, home prices, income and spending, and consumer confidence readings—all of which will be followed carefully for what they might say about the economic outlook and how the Fed will react to it.
There will also be 47 companies releasing results, including 5 S&P 500 members. The Q3 earnings season is mostly over, with results from 489 S&P 500 members, or 97.8% of the index’s total membership, already known. Most of this week’s reports are coming out on Tuesday, including Hewlett-Packard (HPQ), Tiffany (TIF), and Hormel Foods (HRL). By the end of this week, we will have seen Q3 results from 494 of the S&P 500 members.
Here are some options trades for your consideration in the week ahead:-
Hewlett-Packard Company (NYSE: HPQ)
So dim is the outlook for traditional desktop PCs these days that even a slight improvement in dismal earnings expectations would likely send Hewlett-Packard Co.’s shares on a tear.
HP reports its fourth-quarter financial results on Tuesday after markets close. Hewlett-Packard is expected to report fourth quarter EPS of $1.00 on revenue of $27.87 billion, compared to last year’s EPS of $1.16 on revenue of $29.96 billion. That would be roughly a 14-per-cent drop from the same quarter last year.
It has been a tough few quarters for the technology giant, as earnings continue to fall and revenue from virtually every one of the company’s business divisions is either down or unchanged from a year prior.
Yet HP’s share price has done very well this year, having started 2013 at about $15 and currently hovering at $25. That’s at least in part because, as bad as the company’s earnings have been, investors and analysts consistently expected even worse.
Since taking over the top spot in 2011, CEO Meg Whitman has worked to cut costs and realign priorities at the struggling PC maker. However, even as the company explores new business opportunities in servers, security and similar enterprise-focused areas, Ms. Whitman has made it clear that revenue declines may continue into 2014, before HP makes a full turnaround.
The company is pinning its hopes on new and growing business markets – chiefly, cloud computing and data analytics.
Goldman Sachs gave Hewlett-Packard a Sell rating, with a $17.00 price target on Nov. 19th, noting the company’s October quarter was likely promising but that the future will be shaky.
On Nov. 18, however, JP Morgan had a more upbeat outlook for Hewlett-Packard -- and gave the stock a Neutral rating with a $29.00 price target. The analysts at JP Morgan noted PC and printing market conditions were uncertain at best, but said that Dell going private could be a positive catalyst.
Hewlett-Packard has done a ground-breaking deal with Salesforce.com to extend its cloud reach and loop in its extremely valuable printer franchise. Also, the company boosted its dividend recently and continues to take costs out. This sounds very positive as H-P is now up 77% for 2013 and it seems that the advance is not done yet.
**OPTIONS TRADE: Buy the HPQ Jan 2014 25.000 call (HPQ140118C00025000) at or under $1.50, good for the day. Place a protective stop limit at $0.60 and a pre-determined sell at $2.50.
Nuance Communications Inc. (NASDAQ: NUAN)
Nuance Communications is a provider of voice and language solutions for businesses and consumers globally. The company has a market capitalization of $5.03 billion. It is expected to report a loss of 11 cents a share in the fourth quarter of fiscal year 2013 on revenue of $489.56 million, compared with a profit of 36 cents a share on revenue of $490.09 million in the year-ago period. Nuance Communications Inc. is trading at around $16.05 a share. So far this year, the stock has lost 28.3 percent.
Deutsche Bank gave Nuance a Buy rating, with a $24.00 price target on Nov. 4, noting the company’s shares’ recent loss presents a unique opportunity.
“NUAN shares have shed 30% of their value YTD vs. the NASDAQ gaining 30 percent," it said. "This divergence has caught the attention of value investors, after earlier interest from event-driven funds on the back of Carl Icahn's firm accumulating a 17 percent stake in the company since February."
"Our view on the stock remains constructive," it added, "as we believe NUAN's market opportunity and competitive position are still relatively strong. This note aims to frame the revenue model transition, competitive landscape and what metrics investors should look for, as we approach earnings on Nov. 25 and the annual analyst day in early December. We reiterate our Buy rating on valuation and near-term catalysts.”
Wedbush gave Nuance Communications an Outperform rating with a $22.00 price target. The analyst team at Wedbush said Nuance is in a great position for long-term opportunities, but remained cautious about management’s FY14 guidance.
“We are slightly cautious on F4Q and initial FY14 guidance," they said, "as we expect management to set conservative expectations to start the new fiscal year after forecasting challenges in FY13. While we expect a modest adjustment to consensus estimates, we remain constructive as Nuance is well positioned to capitalize on the long-term opportunities in speech recognition and natural language understanding."
"We acknowledge that the catalysts (improving sales execution in mobile and healthcare, healthcare coding/ICD-10, and potential divestitures) will take longer to materialize than we originally anticipated, but we expect them to take hold during the course of the upcoming FY. We are maintaining our Outperform rating and $22 target. Nuance is scheduled to report next Monday Nov 25 after the market close.”
After reviewing the tech company's latest 10-Q there are some concerns presented. Year-over-year (YoY) revenue increased by 8.8% in the third quarter; however, the two biggest costs and expenses rose at a much faster pace: general and administrative expenses hiked 17.99% higher and professional services and hosting increased 21.91%. Total cost of revenues plus total operating expenses jumped by 12.52%, which is not good for margins when sales moved forward by the already mentioned 8.8%.
Also of some concern is that revenue could be a little light as search volume intensity for the flagship Dragon software are down 18.46% YoY, according to Google Trends. Meanwhile, Wall Street is expecting a decline on sales of just 0.10%; in other words, flat compared to 2012's fourth quarter.
While earnings have typically been better than forecasted, NUAN's stock price fell more often than not in the three-days surrounding earnings announcements. The software company's shares fell nine of the last 16 by an average of -9.48%. That's an uncomfortable figure. A lucky seven times, shareholders were rewarded with an average gain of 6.14% with a range of 0.20% to 12.20%.
**OPTIONS TRADE: Buy the NUAN Jan 2014 16.000 put (NUAN140118P00016000) at or under $1.00, good for the day. Place a protective stop limit at $0.40 and a pre-determined sell at $1.70.
Workday Inc (NYSE: WDAY)
Workday Inc. will be in the spotlight Monday, due to release earnings after the market close. Workday is expected to report a third-quarter loss of 17 cents a share on sales of $117.8 million. Shares of Workday, which offers cloud applications for human resources and finance, have surged around 43% over the past 12 months.
Workday has an ambitious nature offering a cloud alternative for human capital management companies, something that's currently the domain of Oracle for many a large enterprise.
However, Workday stock trades at a very high valuation largely because management has been very successful. One slip up and the stock will get hammered. This seems to be occurring already as Workday has fallen ahead of earnings due to a downgrade by Cowen. They have downgraded the cloud HR/ERP software vendor to Market Perform, and lowered its PT to $75 from $93.
Also, many on the sell-side have been on edge about Workday's steep multiples, even as they generally praise its market growth and large base of blue-chip enterprise clients. Shares currently trade at 18x a consensus FY15 (ends Jan. '15) revenue estimate of $673.7M (FY15 billings will likely be higher).
A recent article in Barron’s raised concerns about a bubble forming in certain pockets of technology, such as social media and cloud-related companies. “Highfliers like Twitter TWTR, LinkedIn LNKD and Workday all look overextended,” according to the Barron’s article.
**OPTIONS TRADE: Buy the WDAY Jan 2014 70.000 put (WDAY140118P00070000) at or under $2.50, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $3.50.
Palo Alto Networks Inc (NYSE: PANW)
Palo Alto Networks will be posting its Q1 quarterly earnings results after the market closes on Monday, November 25th. Analysts expect Palo Alto Networks to post earnings of $0.07 per share and revenue of $120.81 million for the quarter.
Palo Alto Networks last announced its earnings results on Monday, September 9th. The company reported $0.06 earnings per share (EPS) for the quarter, meeting the consensus estimate of $0.06. The company had revenue of $112.40 million for the quarter, compared to the consensus estimate of $108.98 million. During the same quarter in the previous year, the company posted $0.03 earnings per share. The company’s revenue for the quarter was up 48.7% on a year-over-year basis. On average, analysts expect Palo Alto Networks to post $0.41 EPS for the current fiscal year and $0.74 EPS for the next fiscal year.
Palo Alto Networks, Inc. offers a network security platform in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan. The company's platform comprises Next-Generation Firewall that delivers application, user, and content visibility and control. Currently there are 11 analysts that rate Palo Alto Networks a buy, no analysts rate it a sell, and 9 rate it a hold.
The average volume for Palo Alto Networks has been 993,900 shares per day over the past 30 days. Palo Alto has a market cap of $3.1 billion and is part of the technology sector and computer hardware industry.
Negativity surrounds PANW….these include:
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Communications Equipment industry. The net income has significantly decreased by 244.3% when compared to the same quarter one year ago, falling from -$4.60 million to -$15.84 million.
• The share price of Palo Alto has not done very well: it is down 19.46% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
• Palo Alto has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, Palo Alto reported poor results of -$0.41 versus -$0.06 in the prior year. This year, the market expects an improvement in earnings ($0.41 versus -$0.41).
• Compared to other companies in the Communications Equipment industry and the overall market, Palo Alto's return on equity significantly trails that of both the industry average and the S&P 500.
• The gross profit margin for Palo Alto is currently very high, coming in at 75.45%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -14.09% is in-line with the industry average. • The company is facing a potential patent lawsuit.
• Insider trading -- VP Rajiv Batra sold 12,600 shares of Palo Alto Networks stock in a transaction dated Friday, November 15th. The stock was sold at an average price of $42.50, for a total value of $535,500.00.
**OPTIONS TRADE: Buy the PANW Dec 2013 45.000 put (PANW131221P00045000) at or under $2.80, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $4.50.
Barnes & Noble, Inc. (NYSE: BKS)
Book retailer Barnes & Noble (BKS) will report its fiscal second quarter results before the market opens on November 26. Analysts expect the company to report a loss for the quarter of 11 cents per share. In August the stock took a big hit when it reported disappointing earnings and a 20% year over year drop in revenues for its Nook segment, but has managed to find support and trend higher over the last two months. With its recent recovery, the stock is currently up 4.9% year to date.
Barnes & Noble opened at 15.81 on Monday. Barnes & Noble has a one year low of $12.59 and a one year high of $23.71. The stock’s 50-day moving average is $14.58 and its 200-day moving average is $16.71. The company’s market cap is $942.9 million.
Barnes & Noble operates as a content, commerce, and technology company in the United States. The company operates in three segments: B&N Retail, B&N College, and NOOK.
Owning the specialty retailer has been dangerous for shareholders in the days surrounding the earnings announcement. The stock has dropped by an average of 12.55% in the three-days at the ending of 11 of the last 16 quarterly checkups. The EPS-driven red range is -1.90% to -27.20%.
Meanwhile, the handful of happy days for BKS averaged a gain of 6.20%, maxing out at 10.70%; nowhere near enough to make up for Wall Street's overwhelmingly negative responses to the Nook maker's earnings announcements.
The company has delivered four straight second quarter bearish surprises of -950%, -214.29%, -33.33% and -30.43%. Needless to say, Q2 ain't been a good one. Somehow, the stock only backed up three of those four, losing an average of -9.63% with a gain of 9.30% mixed in.
For the company to get back on track, sales have to start growing, and costs/expenses to fall as a percentage of sales. In Q1, sales slid 8.03% while total operating and cost of goods sold dipped only 7.55%, which is the opposite of what we would like to see. The balance sheet looks better as accounts receivables, and inventory fell year-over-year (YoY).
Some good news for BKS with Google Trends was not forthcoming with YoY search volume intensity for "Barnes & Noble" off the table by 25.35%. The numbers aren't as bad for "Nook," but web queries declined 18.46% compared to 2012's second quarter.
Several analysts have recently commented on the stock.
• Analysts at Thomson Reuters/Verus downgraded shares of Barnes & Noble from a “hold” rating to a “sell” rating in a research note to investors on Monday, October 28th.
• On a related note, analysts at Sidoti downgraded shares of Barnes & Noble to a “neutral” rating in a research note to investors on Friday, September 27th.
• Finally, analysts at Goldman Sachs Group Inc. cut their price target on shares of Barnes & Noble to $17.00 in a research note to investors on Tuesday, September 24th.
Barnes & Noble has been trading higher over the last two months, but it’s probably going to be same old story for Barnes & Noble, Inc. (BKS) on Tuesday morning; another November disappointment endangering BKS share price.
The company’s last earnings report was a disappointment, with the company missing on both earnings and revenues, therefore expect another disappointing report for its second quarter. The stock has only managed to gain 4.9% so far this year, so expectations that this earnings report to be the catalyst it needs to really move higher is very unlikely.
**OPTIONS TRADE: Buy the BKS Jan 2014 15.000 put (BKS140118P00015000) at or under $0.95, good for the day. Place a protective stop limit at $0.40 and a pre-determined sell at $1.50.
Ecolab Inc. (NYSE:ECL)
Ecolab (ECL) could announce a higher dividend as early as this week. The stock currently has a dividend yield of 0.9%, with quarterly payments of $0.23 per share. The company typically announces its dividend increase right at the start of December. This year the stock has easily outperformed the overall market with a gain of 49.5% year to date.
Ecolab has generated consistently strong earnings growth over the past two decades. Its robust and durable competitive advantages derive from its heavy R&D focus, innovative products, and sizable highly-trained sales force.
Ecolab delivers comprehensive solutions to promote safe food, maintain clean environments, optimize water and energy use and improve operational efficiencies for customers in the food, healthcare, energy, hospitality and industrial markets in more than 170 countries around the world.
About 90 percent of its sales are recurring, which provides earnings support during economic downturns. As the largest player in highly fragmented industries, it has ample opportunities to grow its market share organically and via acquisitions.
ECL was recently trading at $106.59, down $1.75 from its 12-month high and $37.54 above its 12-month low. Technical indicators for ECL are bullish and the stock is in a strong upward trend. The stock has support above $105.00. Of the 14 analysts who cover the stock 10 rate it a "strong buy” and four rate it a "hold".
Dividend investors could start accumulating ECL shares ahead of the expected dividend increase. Since this is a shortened trading week due to Thanksgiving, we could see buying interest increase in the stock earlier than we normally would expect ahead of a dividend increase. Last year the stock announced a higher dividend on December 6, but in the two prior years the news came at the start of the month, so the buying interest may start as early as this week.
**OPTIONS TRADE: Buy the ECL Jan 2014 110.000 call (ECL140118C00110000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.20.
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