“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, January 20, 2020

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

ALSO

"Trading Capital Management"



Option Trade – Luckin Coffee Inc – ADR (NASDAQ: LK) Calls

Friday, January 24, 2020

** OPTION TRADE: Buy the LK MAR 20 2020 50.000 CALLS at approximately $6.40.

Place a high pre-determined sell at $12.80.

Include a protective stop loss of $2.55.

Luckin Coffee Inc – ADR (NASDAQ: LK) – the “Starbucks of China” - went public May 16, 2019 at $17 a share, generating a 19.9% first-day return.

Luckin is the fastest growing and second-largest retail coffee operator in China and is on track to soon become the largest player in the space.

It’s so successful in China that U.S.-based heavyweight Starbucks is copying upstart Luckin’s strategies.

Luckin shops are tiny, with just a small serving area for the one or two baristas and a few stools where customers can sit while they wait for their brew.

Customers are encouraged to place their orders ahead of time on a special company app.

Shares of Luckin Coffee, the $11 billion Chinese coffee giant, have been on a monster run in the last six months, rallying 141% and crushing rivals Starbucks, which gained about 3% over the same period, and Dunkin’ Brands, which fell 2.5%.

Coronavirus Effect.....

China stocks came under pressure again as the coronavirus crisis gripping the country deepened, with several China cities under full or partial lockdowns in an attempt to control its spread.

Earlier, Chinese markets tumbled Thursday. The Shanghai composite fell 2.75% while Hong Kong's Hang Seng lost 1.5%.

However, many of the stocks rebounded off lows, with piping-hot Luckin Coffee stock erasing losses.

Influencing Factors…..

Luckin Coffee ended the third quarter with 3,680 stores, up an astounding 209.5% from a year ago. The company has managed to grow aggressively in China by using technology to plot where to erect stores. Moreover, Luckin Coffee’s stores resemble more kiosks than a traditional retail store such as Starbucks allowing for quick builds.

Luckin Coffee’s super-charged store base growth — and new forays into tea and juice — has led those on Wall Street to bet it will turn profitable sooner than expected. Luckin Coffee CFO Reinout Schakel hinted that view in the market isn’t misguided.

“The productivity at the store level is increasing materially, we have quite a bit of leverage. With that leverage, you can see a very clear trend in terms of profitability. We have reached our store level profitability in the third quarter ahead of what I think most people were expecting. We look forward to continuing that trend and to reach our breakeven point sometime next year,” Schakel said.

Luckin Coffee’s third quarter sales surged 557.6% to RMB 1,493.2 million. Operating profits for Luckin Coffee’s stores clocked in at RMB 186.3 million versus a loss of RMB 126 million a year ago. Adjusted earnings came in at a loss of RMB 2.08 a share compared to a loss of RMB 3.52 a share.

Analysts’ Opinions.....

Gina Sanchez, founder and CEO of investment consulting firm Chantico Global sees Luckin taking over Starbucks on an important metric: growth.

“I’m not saying that Starbucks is not a well-run company. I think Starbucks is a great company. It’s just that Luckin is at a totally different place in their growth cycle. They really are going for the gold here and I think that they are going to probably be a stronger growth stock than Starbucks.”

“I would say that the fundamentals actually still favor Luckin, even over Starbucks, which is a very well-established and very well-run company,” Sanchez said. “It’s impressive to see a company with that kind of discipline this early in their cycle. They got to break even by Q3 2019 at a store level, and that just really paves the road, from a fundamental perspective, for a really interesting long-term buy.”

Prospects have improved, with the company issuing an upbeat forecast for its fiscal fourth quarter and catching a price-target boost from Keybanc analysts, who predicted last Thursday that the stock will run to $56 a share.

Todd Gordon, founder of TradingAnalysis.com said that it’s “hard to argue” with Luckin’s triple-digit rally.

“Obviously, we’ve broken through resistance, and after we broke through that ceiling, it was off to the races,” Gordon said, highlighting the near-$30 level Luckin cracked in late November.

Gordon also emphasized Luckin’s outperformance relative to Starbucks, which has been hard at work for several years expanding and refining its China business.

“Clearly, Starbucks is having no luck against Luckin,” he said.

Summary.....                

We have had a great deal of success with Luckin over the past year. For those members who have been Armchair Traders for some time, in September last year we entered a trade at $2.50; and for those that held the trade for longer; the price went to $9.80 – a potential profit of 292%.

Earlier last year, June, LK provided “Mentorship members” with 100% profit!

And recently, “Cut-to-the-Chase” members scored potential profits of 350%.

Let’s do it again!


Option Trade – Adobe Systems Incorporated (NASDAQ:ADBE) Calls

Wednesday, January 22, 2020

** OPTION TRADE: Buy the ADBE FEB 21 2020 360.000 CALLS at approximately $4.00.

Place a high pre-determined sell at $8.00.

Include a protective stop loss of $1.60.

The digital media and marketing software firm, Adobe Systems Incorporated (NASDAQ:ADBE), has seen some great gains so far in 2020 – up over 6% already and more expected as there seems to be a lot of big money buying into the stock – therefore expectations for a price increase would seem likely.

Over the past three months, Adobe's shares have climbed 28% whereas the S&P 500 has risen only 11%.

As well, several analysts are upgrading the stock recently…..

Oppenheimer analyst Brian Schwartz raised their rating on shares of Adobe Systems to Outperform from Perform on Friday. Schwartz said that Adobe is the closest supplier among those he covers to achieving the "holy grail" of the customer experience, which in his view is "having the capability to smoothly integrate customer data, workflow, analytics, compute and reporting in real-time, across all devices."

As well, Moody's Investors Service, ("Moody's") upgraded Adobe Systems Incorporated's senior unsecured rating to A2 from A3.

  • The upgrade was driven by.....
  • the increased scale,
  • recurring revenue base and cash flow profile,
  • increased product diversification outside its creative cloud portfolio and
  • Moody's expectation of continued strong growth and maintenance of conservative financial policies.

Adobe surpassed $11 billion of revenue in FY 2019 (FYE November 29, 2019) and though small relative to other A2 rated issuers, its growth rate is among the highest in the rating category, its free cash flow well above the median for the category and its credit metrics among the strongest in the category.

Leverage as defined by debt/EBITDA as of November 29, 2019 was 1.3x (and approximately 1.0x on a cash EBITDA basis).

Adobe's growth rate has averaged over 20% since 2015 driven by increasing adoption of the company's creative tools and the digital transformation of the advertising and marketing process. The ratings outlook is stable.

Also, Credit Suisse Group lifted their target price on shares of Adobe from $350.00 to $385.00 and gave the stock an “outperform” rating in a research report on Monday, January 13th.

Influencing Factors…..

Adobe has exceptional market positions across multiple product lines, conservative financial policies and significant cash generating capabilities. The company has built an enviable position providing creative software tools, and these products are the leading or one of the leading products in each of the categories the company participates in.

Adobe also has a strong position and one of the broadest sets of products in the high growth (though very fragmented) digital marketing software tools and services industry.

The company profile is limited by the heavy concentration in one product area, the Creative Cloud line, which is estimated to generate the majority of operating profit and cash flow. Adobe generates very strong levels of free cash flow (approximately $4 billion in FY2019),

Growth rates in the Digital Media (creative software) and Digital Experience (marketing software) business segments are expected to remain at double digit levels over the next several years.

Anticipate continued inorganic build out of Adobe's Digital Experience segment which the company has grown through acquisitions including sizable acquisitions of Marketo ($4.75 billion) and Magento ($1.68 billion) in 2018.

Adobe has excellent liquidity driven by its strong cash generating capabilities, large cash balances as well as its undrawn $1 billion unsecured revolver.

While the historical EPS growth rate for Adobe is 52.8%, the company's EPS is expected to grow 24.5% this year, crushing the industry average, which calls for EPS growth of 10.5%.

Right now, year-over-year cash flow growth for Adobe is 9.5%, which is higher than many of its peers. In fact, the rate compares to the industry average of 7.4%. The company's annualized cash flow growth rate has been 37.4% over the past 3-5 years versus the industry average of 8.1%.

There have been upward revisions in current-year earnings estimates for Adobe.

Summary.....                

Despite being around for years, Adobe has transformed itself into what it is today - a rapidly growing software conglomerate with a high concentration in subscriptions.

The business is a FCF machine, and its long-term prospects are attractive thanks to potential expansion of its Digital Experience segment.

Adobe has a debt-to-equity ratio of 0.09, a current ratio of 0.79 and a quick ratio of 0.74. Adobe Inc has a 1-year low of $237.27 and a 1-year high of $349.95. The company has a 50 day moving average price of $327.20 and a 200-day moving average price of $298.17. The firm has a market capitalization of $169.30 billion, a PE ratio of 58.33, and a P/E/G ratio of 2.68 and a beta of 1.11.