“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, January 22, 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 - Caterpillar Inc. (NYSE:CAT) Calls

Tuesday, January 23, 2018

** OPTION TRADE: Buy the CAT MARCH 16 2018 180.000 CALL at approximately $3.10. Place a pre-determined sell at $6.20.

Also include a protective stop loss of $1.25.

Heavy machinery maker Caterpillar Inc. (NYSE:CAT), which manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, is due with its Q4 results in the pre-market session Thursday, January 25. Analysts expect the company to report a profit of $1.78 per share, more than double year-ago profit, on revenue growth of 24.5% to $11.92 billion.

It is likely that Caterpillar will comment on whether its U.S. business is already getting a boost from the investment incentives packed into the Trump tax cuts, which will allow companies to immediately write off new and used equipment purchases.

Caterpillar has outpaced earnings and revenue estimates in all the three quarters of 2017. After suffering a 36% drop in earnings in fiscal 2016 due to weak end-user demand in most of the industries it serves, Caterpillar has delivered continuous improvement over the course of 2017. This turnaround can be attributed to a continued improvement in the construction sector, pickup in Resource Industries as well as its disciplined cost-control efforts.

Given impressive results, Caterpillar's share price has outperformed the industry in the past year. The shares gained 80.4%, ahead of the industry's growth of 78.3%. An earnings beat is likely and will help the company sustain the price momentum.

Caterpillar has a 12 month low of $90.34 and a 12 month high of $170.67. The company has a market capitalization of $101,320.00, a P/E ratio of 118.26, a P/E/G ratio of 2.09 and a beta of 1.29. The company has a quick ratio of 1.04, a current ratio of 1.44 and a debt-to-equity ratio of 1.58.

Influencing Factors

Strong fourth-quarter projections for its segments - Machinery, Energy & Transportation which garners a major chunk of revenues and earnings, will help drive results. Notably, performance will be driven by both the Construction and Resource Industries segments.

The Machinery, Energy & Transportation segment, which contributed approximately 94% of total revenues in third-quarter 2017, is expected to log year-over-year growth of 26% to $11.2 billion in the fourth quarter.

The construction sector has been on an uptrend lately as evident from its leading indicators. Construction sales in Asia Pacific have shown resilience primarily owing to increased infrastructure and residential investment in China.

Caterpillar's Resource Industries' performance has also picked up lately. Sales are being driven by continued strong demand for aftermarket parts. Further, increased capital investments by mining customers also bode well.

In September 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower annual operating costs by about $1.5 billion.

Analysts and Hedge Funds Opinions

ValuEngine upgraded Caterpillar from a hold rating to a buy rating in a report on Sunday, December 31st.

As well, JPMorgan Chase & Co. raised Caterpillar from a neutral rating to an overweight rating and raised their price target for the stock from $161.96 to $200.00 in a research report on Monday, January 8th.

Institutional investors that have recently made a change to their positions in the stock….
  • Vanguard Group Inc. lifted its position in shares of Caterpillar by 6.1% in the second quarter. Vanguard Group Inc. now owns 41,225,175 shares of the industrial products company’s stock valued at $4,430,058,000 after buying an additional 2,377,623 shares during the last quarter.
  • FMR LLC lifted its position in shares of Caterpillar by 11.7% in the second quarter. FMR LLC now owns 19,613,661 shares of the industrial products company’s stock valued at $2,107,684,000 after buying an additional 2,052,300 shares during the last quarter.
  • TIAA CREF Investment Management LLC lifted its position in shares of Caterpillar by 10.9% in the second quarter. TIAA CREF Investment Management LLC now owns 3,058,115 shares of the industrial products company’s stock valued at $328,625,000 after buying an additional 301,739 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

Looking at the upbeat estimates for the both earnings and revenues for the fourth quarter, it seems likely that the company will deliver improved year-over-year earnings on both metrics.

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

** OPTION TRADE: Buy the CAT MARCH 16 2018 180.000 CALL at approximately $3.10. Place a pre-determined sell at $6.20.

Also include a protective stop loss of $1.25.


Option Trade - Texas Instruments Incorporated (NASDAQ:TXN) Calls

Monday, January 22, 2018

** OPTION TRADE: Buy the TXN MARCH 16 2018 120.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Also include a protective stop loss of $1.05.

Semiconductor stock Texas Instruments Incorporated (NASDAQ:TXN), headquartered in Dallas, Texas, will report earnings for the fiscal Quarter ending Dec 2017 tomorrow, January 23, 2018, after the market closes.  The consensus EPS forecast for the quarter is $1.09 with sales of $3.74 billion for the current quarter.

Last year saw Texas Instruments stock soar an impressive 43%. While the semiconductor company's stock saw a slight gain in the first half of the year, the bulk of the stock's rise came in the second half of the year, powered by its better-than-expected third quarter as management's efforts to pursue growth markets paid off handsomely.

For its third quarter, Texas Instruments reported a 12% year-over-year increase in revenue and a 29% boost to its earnings per share. Both metrics handily exceeded analysts' expectations, with revenue and earnings per share of $4.12 and $1.26, respectively. On average, analysts expected revenue and EPS of about $3.9 billion and $1.12.

Texas Instruments has a quick ratio of 2.96, a current ratio of 3.89 and a debt-to-equity ratio of 0.28. Texas Instruments has a 52 week low of $74.16 and a 52 week high of $119.98. The stock has a market cap of $115,560.00, a PE ratio of 26.61, a price-to-earnings-growth ratio of 2.66 and a beta of 1.27.

Influencing Factors

Growth during the year was helped by the company's revitalized efforts in semiconductor applications in the fast-growing areas of automotive and industrials markets.

Looking ahead, management believes its automotive and industrial businesses will continue to help growth.

"We continue to focus our strategy on the industrial and automotive markets where we've been allocating our capital and driving initiatives to strengthen our position," said Dave Pahl, Texas Instruments' vice president and head of investor relations, in the company's most recent earnings call. "This is based on a belief that industrial and automotive will be the fastest-growing semiconductor markets due to their increasing semiconductor content and that they provide diversity and longevity of products."

Also, Texas Instruments is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings - with the most up-to-date information possible - is a pretty good indicator of some favorable trends underneath the surface for TXN in this report.

Analysts and Hedge Funds Opinions

Texas Instruments had its price objective lifted by Stifel Nicolaus from $98.00 to $115.00 in a research note released on Thursday morning. Stifel Nicolaus currently has a hold rating on the semiconductor company’s stock.

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

  • Royal Bank of Canada restated a buy rating and issued a $112.00 price objective on shares of Texas Instruments in a report on Thursday, January 4th.
  • Barclays lifted their price objective on shares of Texas Instruments from $85.00 to $95.00 and gave the company an equal weight rating in a report on Wednesday, October 18th.
  • Finally, BidaskClub upgraded shares of Texas Instruments from a buy rating to a strong-buy rating in a report on Thursday, December 21st.

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

  • PGGM Investments lifted its holdings in shares of Texas Instruments by 102.8% during the third quarter. PGGM Investments now owns 956,619 shares of the semiconductor company’s stock valued at $85,751,000 after purchasing an additional 484,906 shares during the last quarter.
  • Sather Financial Group Inc purchased a new stake in shares of Texas Instruments during the second quarter valued at $600,000.
  • Finally, Legal & General Group Plc lifted its holdings in shares of Texas Instruments by 1.5% during the second quarter. Legal & General Group Plc now owns 5,089,028 shares of the semiconductor company’s stock valued at $391,499,000 after purchasing an additional 73,740 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

Texas Instruments has beaten the consensus earnings and revenue estimates for the past seven consecutive quarters.  While it is in the hot semiconductor, and analog segments, the company continues to innovate as well.

The company is well positioned to take advantage of the semiconductor sector growth trend, continues to innovate new products for several industries, and they pay a solid dividend as well.

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

** OPTION TRADE: Buy the TXN MARCH 16 2018 120.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Also include a protective stop loss of $1.05.





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