“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, January 15, 2018

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


Option Trade - Morgan Stanley (NYSE:MS) Calls

Wednesday, January 17, 2018

** OPTION TRADE: Buy the MS APRIL 20 2018 55.000 CALL at approximately $2.30. Place a pre-determined sell at $4.60.

Also include a protective stop loss of $0.90.

The New York City-based bank Morgan Stanley (NYSE:MS) is expected to report adjusted EPS of $0.77, up from $0.74 in the prior-year quarter, on revenue of $9.13 billion -- the Earnings Whisper  number is for $0.83 per share.

In the third quarter, Morgan Stanley reported $2.9 billion in sales and trading revenue in its institutional securities division, down from $3.2 billion compared to last year. Investment banking revenue increased to $1.3 billion, from $1.1 billion in the prior-year period. In recent quarters, the company has reported growth in its wealth management business that has helped offset declines in trading revenues.

Morgan Stanley’s stock has jumped by nearly 26% over the past 52 weeks and has the potential to rise by another 25% in 2018. Shares of the investment bank are nearing a technical breakout, with the stock currently trading around $55. The breakout could come after the company reports its fourth-quarter results for 2017 tomorrow, January 18, before the market opens.

Analysts are looking for earnings to have fallen by about 3.5% in the quarter, versus the same period a year ago to $0.78, while revenue is expected to have risen by approximately 2.5% to $9.25 billion. Investors have taken a positive view on the stock so far in 2018, with the stock up about 5%.

Short interest has decreased by 31.1% since the company's last earnings release while the stock has drifted higher by 10.9%.

Overall earnings estimates have been revised higher since the company's last earnings release.

Morgan Stanley has a twelve month low of $40.06 and a twelve month high of $55.98. The company has a market cap of $98,710.00, a price-to-earnings ratio of 15.08, a price-to-earnings-growth ratio of 0.91 and a beta of 1.65. The company has a debt-to-equity ratio of 2.68, a current ratio of 0.74 and a quick ratio of 0.74.

Influencing Factors

A technical analysis of the chart suggests shares could rise by nearly 25% to about $69 should a breakout occur. The stock is currently hovering around a resistance level near $55.25. A rise above $56 is a good sign the stock could be on its way higher.

The current resistance at $55.25 finds its roots back to the year 2008 when the stock was falling at a rapid pace due to the financial crisis. Because asset prices were falling so quickly during that time, there is a pocket between $55 and $69 with little to no resistance, giving the stock a clear path higher.

Shares are far from being overpriced (12.8x forward earnings, 0.7x long-term forward PEG, despite the 114% share price run of the past two years.

Despite being the seasonally weak quarter for equity issuances globally, fourth-quarter 2017 is expected to be an exception. Strong rally in the equity markets across the world might have propelled IPOs and follow-on offerings. So, the related fees are projected to increase for Morgan Stanley.

Further, as the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. As debt origination fees account for more than half of Morgan Stanley's total underwriting fees, this will lead to strong gains.

Morgan Stanley's cost savings plan - Project Streamline - is likely to result in lower expenses during the quarter. The company expects to lower its expenses by $1 billion in 2017.

Analysts and Hedge Funds Opinions

Keefe, Bruyette & Woods reiterated their buy rating on shares of Morgan Stanley in a research note issued to investors on Friday, December 22nd. They currently have a $63.00 price objective on the financial services provider’s stock.

Also, several other equities analysts have recently commented on the company…..

  • Zacks Investment Research upgraded Morgan Stanley from a hold rating to a buy rating and set a $59.00 price target for the company in a research note on Monday, December 11th.
  • JPMorgan Chase & Co. reiterated a “buy” rating on shares of Morgan Stanley in a report on Monday, November 20th.
  • Buckingham Research lifted their price target on Morgan Stanley from $54.00 to $57.00 and gave the company a buy rating in a research note on Wednesday, October 18th.
  • Oppenheimer reiterated a hold rating on shares of Morgan Stanley in a research note on Tuesday, October 17th.
  • BMO Capital Markets reiterated a top pick rating and set a $69.00 price target on shares of Morgan Stanley in a research note on Wednesday, October 18th.

One equities research analyst has rated the stock with a sell rating, seven have given a hold rating, seventeen have assigned a buy rating and one has assigned a strong buy rating to the stock. Morgan Stanley presently has a consensus rating of Buy and an average target price of $53.07.

Institutional investors that have recently made a change to their positions in the stock….

  • DSAM Partners London Ltd bought a new stake in shares of Morgan Stanley in the 3rd quarter worth approximately $5,273,000.
  • Calamos Wealth Management LLC bought a new stake in Morgan Stanley during the 2nd quarter valued at $1,412,000.
  • BB&T Corp raised its holdings in Morgan Stanley by 9.7% during the 3rd quarter. BB&T Corp now owns 171,122 shares of the financial services provider’s stock valued at $8,243,000 after acquiring an additional 15,162 shares during the period.
  • Finally, Stifel Financial Corp raised its holdings in Morgan Stanley by 301.3% during the 3rd quarter. Stifel Financial Corp now owns 577,918 shares of the financial services provider’s stock valued at $27,842,000 after acquiring an additional 433,920 shares during the period.

Harvey’s Options Volatility Indicator

Summary

A breakout would need a surge in volume, confirming the rise, and volume levels have remained relatively constant. This coming week's earnings report could trigger that breakout and a surging volume level would help to further support the strength.

It is worth noting that should the shares not be able to break out because earnings disappoint, it could be a drag on the stock, sending it about 8% lower to support at $50.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the MS APRIL 20 2018 55.000 CALL at approximately $2.30. Place a pre-determined sell at $4.60.

Also include a protective stop loss of $0.90.


Option Trade - American Express Company (NYSE:AXP) Calls

Tuesday, January 16, 2018

** OPTION TRADE: Buy the AXP APRIL 20 2018 105.000 CALL at approximately $2.30. Place a pre-determined sell at $4.60.

Also include a protective stop loss of $0.90.

Payment processor American Express Company (NYSE: AXP), together with its subsidiaries, providing charge and credit payment card products and travel-related services to consumers and businesses worldwide, will report earnings Thursday, January 18, after the market closes. Analysts see EPS jumping 69% to $1.54, up from $0.91 during the same period last year, as revenue climbs 8.7% to $8.72 billion. The street has a slightly higher whisper number at $1.57.

The bottom-line increase would mark the biggest since 2010 but that excludes a $2.4 billion impact from tax cuts that reduce the value of deferred tax assets.

AXP has enjoyed strong gains over the last year, as improvements in the overall economy; and a strong jobs market have helped payment processors. The new tax plan is expected to put more discretionary income in a lot of Americans’ pockets, which will likely lead to more consumer spending, a lot of which will be done on credit cards.

The recent holiday season was strong for online retailers, which is a good indication that all the payment processors will likely post good numbers for the most recent quarter.

 AXP has posted better than expected profits the last three quarters, and the market expects another beat when the company reports its next set of numbers.

The stock has appreciated 19.6% since the end of June; and is up more than 33% year to date, crushing the S&P 500's 18% returns.

American Express Company has a 12-month low of $75.39 and a 12-month high of $101.65. The company has a market cap of $87,640.00, a PE ratio of 19.49, a P/E/G ratio of 1.46 and a beta of 1.22. The company has a debt-to-equity ratio of 2.31, a quick ratio of 1.90 and a current ratio of 1.90.

Influencing Factors

2018 will certainly be memorable and different for AmEx. It's getting a new chairman and CEO, current vice chairman and company veteran Stephen Squeri, at the beginning of February.

Squeri inherits a company on the rise. Under Chenault, American Express has held its own in the face of competition not only from eternal rivals Visa (NYSE:V) and Mastercard (NYSE:MA), but also cutting-edge 21st-century payment processors.

It's done so largely by exploiting its strength -- the exclusivity of its card, and the benefits that come with it. The company boosted its investment into cardholder (or "member" in AmEx-speak) rewards by 21% on a year-over-year basis in its most recently reported quarter, to $1.9 billion (total consolidated expenses, however, only rose by 6% to $5.8 billion).

Total loans grew a robust 14% to just over $70 billion. That filtered down into net revenue that was 9% better at $8.44 billion, and net income that grew by 19% to $1.36 billion.

Those numbers led AmEx to slightly boost its guidance for per-share profit for this fiscal year from a range of $5.60 to $5.80, to $5.80 to $5.90. That would represent modest growth of 3% to 4% from the previous year.

These tailwinds should propel it further -- on average, analysts are projecting a 15% earnings per share improvement in 2018, on a top line that should rise by around 6%. If these growth rates are achieved, they would represent at least 25-year highs for revenue and earnings per share for the company.

Upside in financial services is most likely to come from the more robust consumer loan side of the business. In that sense, American Express is positioned to perform well in Q4 2017 and throughout the New Year.

AXP has been trading in line with, even slightly richer than, the diversified financial services peer group on a forward earnings basis.

The Costco deal is now fully in the rearview mirror. And while nothing changed overnight to the business' fundamentals, it has to be acknowledged that it looks much better when the company can report, as it did last quarter, that total revenues really grew year over year as well as net income -- no adjustments needed.

J.D. Power, the consumer advisory service, recently conducted a study of almost 23,000 credit card account holders to determine which credit cards had the most satisfied customers, and American Express took the top spot.

Analysts and Hedge Funds Opinions

Equities research analysts at Oppenheimer issued their Q1 2018 earnings estimates for shares of American Express in a note issued to investors on Tuesday. Oppenheimer analyst B. Chittenden expects that the payment services company will post earnings of $1.73 per share for the quarter. Oppenheimer currently has a “Buy” rating and a $99.00 target price on the stock.

Also, several other equities analysts have recently commented on the company…..

  • Barclays set a $119.00 price target on American Express and gave the stock an “equal weight” rating in a report last Thursday.
  • BMO Capital Markets reaffirmed a “hold” rating and issued a $103.00 price target on shares of American Express in a report on Monday, January 8th.
  • Finally, Wells Fargo & Co reaffirmed an “outperform” rating and issued a $115.00 price target (up from $105.00) on shares of American Express in a report on Tuesday, January 9th.

Two investment analysts have rated the stock with a sell rating, seventeen have assigned a hold rating and thirteen have given a buy rating to the stock. The company has a consensus rating of “Hold” and an average price target of $98.96.

Institutional investors that have recently made a change to their positions in the stock….

  • Russell Investments Group Ltd. lifted its holdings in shares of American Express Company by 19.3% in the third quarter. The institutional investor owned 1,264,770 shares of the payment services company’s stock after buying an additional 204,946 shares during the period. Russell Investments Group Ltd. owned about 0.15% of American Express worth $114,398,000 as of its most recent filing with the SEC.
  • Lazard Asset Management LLC now owns 597,830 shares of the payment services company’s stock valued at $47,293,000 after purchasing an additional 322,742 shares in the last quarter.
  • BlackRock Inc. grew its position in shares of American Express by 2,686.0% in the first quarter. BlackRock Inc. now owns 44,177,867 shares of the payment services company’s stock valued at $3,494,913,000 after purchasing an additional 42,592,136 shares in the last quarter.
  • Epoch Investment Partners Inc. purchased a new stake in shares of American Express in the first quarter valued at approximately $23,057,000.

Harvey’s Options Volatility Indicator

Summary

American Express has had a good 2017. Profitability was strong and more often than not beat analyst expectations, while other crucial metrics -- revenue, loans outstanding, and net income (i.e. cardholder) -- have all improved notably of late.

With a history of beating revenue and earnings estimates seven times in the past eight quarters, American Express is likely to beat, or at least meet consensus expectations that have settled at the mid-point of the recently released EPS guidance range -- considering the $2.4 billion expected tax charge a one-off event. With strength in consumer spending and retail activity in the holiday season, Expect to see loans continuing to expand in the quarter and revenue growth landing in the high single digits at a minimum.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the AXP APRIL 20 2018 105.000 CALL at approximately $2.30. Place a pre-determined sell at $4.60.

Also include a protective stop loss of $0.90.







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