“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, January 14, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Merck & Co., Inc. (NYSE:MRK) Calls

Friday, January 18, 2019

** OPTION TRADE: Buy the MRK APR 18 2019 80.000 CALL at approximately $0.90. Place a pre-determined sell at $1.80.

Also include a protective stop loss of $0.35.

Headquartered in New Jersey, Merck & Co., Inc. (NYSE:MRK), one of the largest pharmaceutical companies by revenue, saw its shares climb 35.8% in 2018, supported by strong quarterly results and positive pipeline and regulatory updates. Continued success with its lead drug, Keytruda, was the main driver behind this stock's impressive performance last year.

And now, Merck & Co., Inc. looks well poised to continue the momentum in 2019.

The shares of Merck & Co just logged an 18-year high of $80.19 in early December, but have since taken a breather to consolidate around the $75 area. What's more, the healthcare concern just pulled back to a key trendline -- a signal that, if past is precedent, might send MRK on its next leg higher.

Specifically, the stock has just come within one standard deviation of its 80-day moving average, after a lengthy stretch above it -- a technical signal that MRK has made seven other times in the past three years. During this time MRK was higher one month later 80% of the time, and gained, on average, 5.92%. From where the stock currently sits at $75.53, a similar move would put the equity back around $80.

Merck's shares began 2018 from a low point after the company made investors nervous by pulling a European application for its PD-1 checkpoint inhibitor, Keytruda, in late 2017. It turns out there wasn't anything to worry about. By the end of 2018, it was clear that Keytruda's dominance in the lung cancer arena will drive sales into the clouds. 

About Merck & Co….. 

Merck & Co, Inc provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances. The company offers therapeutic and preventive agents to treat cardiovascular diseases, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal, intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases.

Past Performance…..

Merck’s sales rose 5% in the first nine months of 2018 while adjusted earnings per share rose almost 10%. Pharmaceutical segment sales rose 7% in nine months while that of the Animal Health unit rose 10%.

Strength in Keytruda, Bridion, Gardasil and Animal Health offset headwinds from loss of exclusivity for some products and competitive pressure for Zostavax and Zepatier. Keytruda continued its robust performance on strong demand.

Merck & Co. last issued its earnings results on Thursday, October 25th. The company reported $1.19 earnings per share (EPS) for the quarter, beating the Zacks’ consensus estimate of $1.14 by $0.05. Merck & Co., Inc. had a net margin of 8.44% and a return on equity of 34.48%. The company had revenue of $10.79 billion during the quarter, compared to analysts’ expectations of $10.87 billion. On average, equities research analysts expect that Merck & Co., Inc. will post 4.33 earnings per share for the current fiscal year.

Future Earnings…..

Equities analysts expect that Merck & Co. will report earnings of $1.04 per share for the current quarter. Two analysts have made estimates for Merck & Co., Inc.’s earnings, with the lowest EPS estimate coming in at $1.00 and the highest estimate coming in at $1.07. Merck & Co., Inc. reported earnings per share of $0.98 during the same quarter last year, which would indicate a positive year-over-year growth rate of 6.1%.

The company is expected to announce its next earnings report before the market opens on Friday, February 1st.

Influencing Factors…..

A significant part of Merck’s outperformance in the past year was driven by strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda. In a very short span of time, Keytruda has become Merck’s largest product. It is already approved for use in several indications across eight different tumor types in the United States. It is continuously growing and gaining approval for new indications and markets globally. Sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in the setting both as a monotherapy as well as combination therapy.

In fact, the Keytruda development program is also progressing rapidly. Merck is conducting numerous studies to evaluate Keytruda for more than 30 types of cancer in more than 850 studies, including more than 500 combination studies. Merck is collaborating with several companies including Amgen AMGN, Incyte INCY, Glaxo and Pfizer separately for the evaluation of Keytruda in combination with other regimens.

Key approvals for Merck in 2018 included that of Steglatro and its fixed-dose combinations for type II diabetes, two new HIV drugs — Pifeltro and Delstrigo — containing doravirine and Prevymis (letermovir) for cytomegalovirus (CVM) infection.

Merck also gained several label expansion approvals for Keytruda and another cancer drug Lynparza, which it markets in partnership with AstraZeneca AZN. For Keytruda, a key FDA approval in October was the label expansion as a first-line treatment for metastatic squamous non-small cell lung cancer (NSCLC) — a difficult-to-treat lung cancer patient population — based on data from the phase III KEYNOTE-407 study.

Lynparza was also approved by the FDA in the first-line maintenance setting in December, becoming the first PARP inhibitor to be approved as a first-line maintenance therapy for BRCA-mutated advanced ovarian cancer. These new products and line extensions should bring in additional sales in 2019 and beyond.

Merck also announced positive data from several late-stage studies, mainly evaluating Keytruda for further line extensions.

Merck also signed a co-development deal with Japan’s Eisai Co., Ltd for the latter’s tyrosine kinase inhibitor, Lenvima. It also agreed to buy Viralytics Limited, an Australian pharmaceutical company that develops oncolytic immunotherapies for a range of cancers, which should strengthen its oncology portfolio. In December, Merck announced plans to acquire privately held animal health technology provider Antelliq Group from BC Partners.

Merck & Co., Inc. announced that its board has approved a share repurchase plan on Thursday, October 25th that authorizes the company to repurchase $10.00 billion in shares. This repurchase authorization authorizes the company to repurchase up to 5.1% of its shares through open market purchases. Shares repurchase plans are often a sign that the company’s management believes its stock is undervalued.

Moving Forward…..

For Keytruda, several regulatory decisions for new indications in the United States as well as in Europe are due in 2019, which if approved can further boost sales. Key FDA decisions expected in the first half will be on regulatory filings for label expansion of Keytruda as an adjuvant therapy in patients with high-risk stage III melanoma and for patients with non-squamous or squamous lung cancer whose tumors express PD-L1 protein levels of 1 percent or greater (TPS of ≥1 percent).

Meanwhile, Keytruda, Bridion, Lynparza, Gardasil and Animal Health should continue the strong performance, driving sales and profits in 2019. This should make up for headwinds from loss of exclusivity (LOEs), softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.

Merck will also continue to focus on cost-cutting initiatives, which should drive itsbottom line.

Analysts Opinions

Analysts are generally positive on the blue-chip name. Eight of the nine analysts following MRK give it a "strong buy" or "buy" rating, and one has given a tepid "hold." On the other hand, the consensus 12-month price target of $81.41 only represents a 7.9% premium to current levels.  Should the stock resume its long-term uptrend, a wave of price-target boosts could lure more buyers to the table.

Several equities analysts have recently commented on the company…..

  • Zacks Investment Research upgraded Merck & Co., Inc. from a “hold” rating to a “buy” rating and set an $83.00 target price on the stock in a research report on Friday, January 4th.
  • Credit Suisse Group set a $86.00 target price on shares of Merck & Co., Inc. and gave the stock a “buy” rating in a report on Thursday, December 13th.
  • Morgan Stanley set a $81.00 target price on shares of Merck & Co., Inc. and gave the stock a “buy” rating in a report on Thursday, December 20th.

  • BMO Capital Markets raised their price objective on shares of Merck & Co., Inc. from $70.00 to $82.00 and gave the stock an “outperform” rating in a report on Monday, October 22nd.
  • ValuEngine upgraded shares of Merck & Co., Inc. from a “hold” rating to a “buy” rating in a research report on Thursday, October 18th.
  • Citigroup lifted their price target on shares of Merck & Co., Inc. from $79.00 to $84.00 and gave the company a “buy” rating in a report on Wednesday, October 31st.
  • Finally, SunTrust Banks lifted their price target on shares of Merck & Co., Inc. from $77.00 to $80.00 and gave the company a “buy” rating in a report on Monday, October 29th.

Merck & Co., Inc. has a 12-month low of $52.83 and a 12-month high of $80.19. The company has a quick ratio of 1.15, a current ratio of 1.44 and a debt-to-equity ratio of 0.61. The stock has a market capitalization of $200.87 billion, a P/E ratio of 18.99, a P/E/G ratio of 1.79 and a beta of 0.67.

Option Trade – Starbucks Corporation (NASDAQ:SBUX) Puts

Monday, January 14, 2019

** OPTION TRADE: Buy the SBUX MAR 15 2019 60.000 PUT at approximately $1.20. Place a pre-determined sell at $2.40.

Also include a protective stop loss of $0.50.

Starbucks Corporation (NASDAQ:SBUX)’s shares declined Friday after Goldman Sachs cut its rating on the stock to 'neutral,' citing concerns over the pace of growth in China, where the world's biggest coffee chain is targeting a significant expansion.

Goldman analyst Karen Holthouse also dropped her price target on Starbucks by $7 to $68 a share, but said she remains "reasonably confident" the group's move to drive more digital engagement can support comparable sales growth in the United States of between 3% and 4%. However, Holthouse also noted "incremental concerns" regarding slowing China growth, where the group plans to double its store footprint to 6,000 over the next four years.

Starbucks shares ended Friday at $63.73 -0.46 (-0.72%).

Last month, Starbucks, unveiled an aggressive expansion strategy in China that could be at risk from slowing consumer sales in the world's second-largest economy and guided investors to modestly softer long-term earnings growth. Starbucks has 3,600 stores in China and wants to double that number in the next four years.

Starbucks said it sees long-term earnings growth of around 10%, down from a previous forecast of around 12% and said same-store sales expansion will likely grow at a 3% to 3.4% rate even after a newly-unveiled partnership with Uber Eats.

BMO Capital Markets's Andrew Strelzik, who rates the stock at "market perform" with a $60 target, said that while the group's longer-term China strategy is "well understood" and a core growth driver, it does come with risks.

"(Starbucks') same-store sales trajectory is not as strong as it has been, given rising cannibalization and competitive factors, combined with slowing economic growth in the region, which likely will contribute to choppy same-store sales trends in the near- to medium-term," Strelzik argued in a client note Thursday.

China Risks…..

China will cut its GDP growth target for 2019 to 6 percent from 6.5 percent at a government meeting in March. The government is expected to take more monetary and fiscal measures to boost the economy this year amid weakening domestic demand and an ongoing trade battle with the U.S.

Retail sales in China rose at the weakest pace since 2003 last month, while other portions of the economy, including new car sales, have slumped to the weakest in more than a decade as the damage from the ongoing trade war between Washington and Beijing takes its toll.

Trade talks between the two countries appear to be progressing well, but investors are striking a cautious tone until a formal agreement is announced by the March 2 deadline. It's unclear what the effect of the trade battle has had directly on U.S. brands selling in the country, but many Wall Street analysts believe Apple is facing an "informal boycott" of its products by some Chinese consumers.

The recent Apple announcement (while potentially also product-driven) cited trade concerns/macro, and McDonald's acknowledged softer trends in the region at a late November event. "The GS macro team also expects a continued slowdown in GDP, at least partially driven by consumption" wrote analyst Karen Holthouse.

Starbucks is also facing intense competition from a new market entrant, Luckin, a China-based start-up that plans to have 4,500 stores in the world's biggest coffee market by the end of this year.

About Starbucks…..

Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. Its stores offer coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink beverages, iced tea, and food and snacks; and various food products, such as pastries, breakfast sandwiches, and lunch items.


SBUX stock opened at $63.73 on Monday. The company has a debt-to-equity ratio of 7.73, a quick ratio of 1.95 and a current ratio of 2.20. Starbucks has a fifty-two week low of $47.37 and a fifty-two week high of $68.98. The company has a market cap of $79.25 billion, a P/E ratio of 26.33, a PEG ratio of 1.79 and a beta of 0.53.